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An overview of valuation techniques:

Advantages and limitations
 By Camille Bann

Introduction Box 1. Uses of Economic Valuation and Biodiversity Conservation

aluing biodiversity is of key • Raise public and political awareness of the importance of biodiversity.
policy interest. Economic val- • Set conservation priorities given a limited budget.
ues of non-marketed goods • Facilitate land use decisions.
• Guide legal proceedings for determining damages where an agent is held liable for
can draw attention to the economic biodiversity loss.
importance of biodiversity in a • Limit or ban trade in endangered species.
country’s development prospects, • Prevent new invasions.
and can provide guidance for imple- • Revise national income accounts.
• Design capture mechanisms (e.g., market creation, economic instruments, international
menting appropriate conservation transfers).
mechanisms (other uses are outlined • Revise investment decisions (e.g., infrastructure development) that might otherwise ignore
in Box 1). However, estimating the the impacts on biodiversity.
monetary worth of biodiversity is per- Source: OECD, 2002
haps the most challenging area of
environmental resource valuation. potential human uses . include:
Fundamental to any discussion There are other reasons why it is • Distributional Equity - Distribu-
of the value of biodiversity is an difficult to put a monetary estimate tional concerns are rarely in-
understanding of what precisely the on biodiversity. There is a lack of corporated into the economic
object of value is. It is necessary to consensus on the total number of evaluation framework despite
distinguish between biological re- living species (i.e., baseline measure- the fact that they are often of
sources and biological diversity. A ments for biodiversity), rate of paramount concern, especially
biological resource is a given ex- biodiversity loss, and biodiversity in poor countries.
ample of a gene, species or eco- indicators fundamental to the valu- • Discounting and Future Gen-
system. Biological diversity refers to ation process (see Box 2). There is eration - Discounting does not
the variability of biological resources. also a lack of knowledge of the true satisfactorily deal with signifi-
Biodiversity is the ‘variety of life’ value and extent of current and cant environmental costs and
whereas biological resources are the potential future uses of biodiversity. benefits occurring in the future
manifestation or embodiment of that Criticisms of Economic Evalua- (although these concerns can
variety (OECD, 2002). tion and Cost Benefit Analysis (CBA) be dealt with by other means).
Because diversity valuation re-
quires some idea of willingness to Box 2. Biodiversity Indicators and Policy Assessment
pay (WTP) for the range of species Measurement of biodiversity is very complex because diversity is multi-dimensional. There are
and habitats, it is hard to use the fundamental definitional problems relating to species and ecosystems. For example, discrete cut-off
term ‘biodiversity’ as the object of points for determining boundaries between species (Gaston and Spicer, 1998) or ecosystems is
valuation. In reality what economic still subject to research and discussion. Even if this issue was resolved, the inventory task is
monumental given the staggering number of microorganisms present at any location. The task is
studies normally measure is the even more unmanageable at that genetic level. Furthermore, science has only a limited idea of
economic value of ‘biological re- the genetic dissimilarity between species.
sources’ rather than biodiversity it- Notions of species richness, evenness and distance are the most used expressions of diversity1 .
self. Biological resource is a more Clarification of these measures has important implications for conservation policy. Solow et al 1993
anthropocentric term for biota such show that if the objective is to conserve diversity, an understanding of species distance is very
important. Solow presents an example using the pairwise distance between cranes and their
as forest and components of extinction probabilities. The conservation of the most endangered species does not in fact maximise
biodiversity that maintain current or diversity. The reason for this is that the genetic distance between the endangered species and
at least one of the ‘safe’ species is small. Minimising the probability of the number of species lost
This anthropocentric view of biological is not the same as minimising the value of lost biodiversity. In practice conservation resources
resources is much more convenient for are largely allocated to ‘exotic’ species conservation (e.g., giant pandas and tigers) without any
economic analysis compared to
alternative value paradigms such as real consideration of the diversity issue. This focus might be because the difference between
‘intrinsic values’ (values in themselves biological diversity and biological resources is unrecognised, or because conservation policy responds
and, nominally, unrelated to human to the high values attached to scarce species. Nonetheless, if the stated aim is to conserve
use). Intrinsic values are relevant to diversity, those policies may not be soundly based.
conservation decisions, but they generally
cannot be measured (Pearce and Moran, Source: OECD, 2002

• Intrinsic vs. Instrumental Value Box 3. Categories of Valuation Techniques
- There are different philo- Approaches Based on Market Values
sophical viewpoints on ‘value’.
• Observed Market Value and the Related Goods Approach –market prices for
CBA is founded on the instru- environmental goods and services can be combined with quantity information to derive
mentalist view, whereas it is estimates of value. The related goods approach uses information on the relationship
argued that the ‘true’ notion of between a marketed and non-marketed good or service to estimate the value of the
non-marketed good (e.g., barter exchange approach, direct substitute approach, indirect
biodiversity value is intrinsic. substitute approach).
• Relative vs. Absolute Value - • The Productivity Approach – uses market prices to value environmental services in
CBA embodies the situations where environmental damage or improvement shows up in changes in the
quantity or price of marketed inputs or outputs.
economist’s notion that value • Cost-Based Methods – use some estimate of the costs of providing or replacing a
is relative, i.e., the value of good or service to approximate its benefit (e.g., opportunity cost, indirect opportunity
something is always relative to cost, restoration cost, replacement cost, relocation cost, preventive expenditure).
something else. Critics argue Cost-based methods are second best techniques and must be used with caution.
that biodiversity has absolute Revealed Preference Approaches - use information about a marketed commodity to infer the
value of a related, non-marketed commodity (e.g., travel cost method, hedonic pricing
value in itself, and hence it method).
cannot be measured relative
Stated Preference Approaches - elicit directly, through survey methods, consumers’
to other things. willingness to pay for non-marketed environmental values (e.g. contingent valuation method).
• Incremental vs. Total Values -
CBA values discrete changes ample, to estimate ‘option values’ Valuation approaches can be
in the stock of biodiversity. It for future uses. Also, the baseline broadly categorised according to
is argued that CBA might information allows setting of man- market values, revealed preference
judge each small loss of agement and research priorities approaches and stated preferences
biodiversity as being justified, (Huber et al, 1997). approaches (OECD, 2002) . Valua-
while overlooking the fact that tion approaches based on market
each small change contributes An Overview of Valuation values rely on the availability of
to the risk that the total stock Techniques2 market price and quantity informa-
will be lost (Norton, 1988). A range of techniques is avail- tion to derive total values. Revealed
Despite these drawbacks there is able for the estimation of biological preference valuation techniques seek
considerable scope for at least se- resource values (see Box 3). A com- to determine preferences for the
curing minimum values for biologi- prehensive valuation would capture environment from actual, observed
cal diversity through the use of the Total Economic Value (TEV) of market based information. Often,
approaches focused on the market the resource (i.e., use and non-use when no market price exists for an
values of the sustainable uses of values). Different valuation ap- environmental good or service,
biodiversity (e.g., ecotourism, and proaches are applicable to the dif- peoples’ preferences for the envi-
the collection of medicinal plants and ferent components of TEV. Direct ronment can be ‘revealed’ indirectly
other non-timber forest products use values are relatively straightfor- by examining their behaviour in
[NTFP]). Measuring these direct use ward to measure, and usually in- markets that are linked to the envi-
values of biodiversity conservation is volve the market value of produc- ronment. Some goods and services
extremely important since biodiversity tion gains. Since environmental func- are complements to environmental
will be more prone to loss when these tions are rarely exchanged in mar- quality, while others are proxies,
are not appreciated. Furthermore, kets, measurement of indirect use surrogates or substitutes for it. There-
estimates of direct use values pro- values typically entails more com- fore, by examining the prices paid
vide an important benchmark for plex techniques such as the change in environment-related markets,
other, less easily quantified, uses. in productivity approach, travel cost peoples’ environmental preferences
While most of these other uses are method, and hedonic pricing can be uncovered (Pearce and
still associated with some particular method. Non-use values can only Moran, 1994). An advantage of
current or future use (such as be defined from surveys of people’s these techniques is that they rely on
bioprospecting or amenity), the preference about their WTP (e.g., actual choices rather than on the
uncertainty associated with valuing Contingent Valuation). Non-use creation of a hypothetical market to
these goods and services is often values tend to be important in cer- uncover the value of the environmen-
orders of magnitude greater than the tain contexts, notably when the good 2
This paper provides a non-technical
uncertainty associated with the in question has few substitutes. Since overview of valuation techniques. For a
simple direct (but often untraded) many biological resources are by detailed account on methodologies, see
Freeman, 1994; Johansson, 1994.
uses. The availability of such baseline definition unique, their non-use value 3
Many authors categorise valuation
information is necessary, for ex- is likely to be significant. techniques differently.

tal good or service in question as Table 1. Observed Market Prices and Related Goods Approach – Advantages and Limitations
stated preference approaches do. Advantages Issues / Limitations
The correct measure of value is an
Relatively simple. Market values tend to reflect actual use and
individual’s maximum WTP to pre- hence ignore non-use values.
vent environmental damage or
High intuitive appeal. Does not capture consumer surplus.
realise an environmental benefit
Likely to require the undertaking of market surveys and
(represented by the area under the direct use surveys (However such surveys are simpler
demand curve). Economic values and less costly to conduct than those required by more
comprise both the price paid in sophisticated approaches).
markets and the consumer surplus Large data requirements may be necessary to estimate
that users obtain. Consumer surplus theoretically correct values.
indicates the excess of what the
consumer would have been willing values should be recorded and or service. By using information
to pay over what he or she actually reported. Such information will con- about this relationship and the price
had to pay. This concept is particu- tribute to priority setting. of the marketed product, the analyst
larly important when estimating the may be able to infer the value of the
benefits of environmental goods and Observed Market prices non-marketed product. For ex-
services that have a low, or no market Where market prices exist they ample, the direct substitute approach
price. In such cases, the entire area can be combined with quantity in- bases the value of a non-marketed
under the demand curve represents formation to estimate the value of a good such as fuelwood, on the price
the benefit of the good. To estimate resource. The use of market prices of its closest marketed substitute (e.g.,
economic value, we therefore need is undoubtedly the most straightfor- charcoal) and the rates of exchange
to be able to derive the demand ward of the valuation approaches between them.
curve. Valuation approaches based and provides a relatively cheap and
on market values do not allow us to quick estimate of value. However, Application to Biodiversity
do this and so will always underes- few studies report theoretically cor- Many natural resource products
timate the true value of the resource. rect estimates due to data constraints. have market prices that can be used
Strictly speaking efficient prices in the valuation exercise, for ex-
Valuation Approaches should be used, i.e., they should ample, non-timber forest products,
The following section provides a account for any distortions such as and genetic material for agricultural
brief description of the individual externalities, taxes and subsidies. products and drugs. Empirical stud-
valuation approaches. For each tech- Values used should be net of pro- ies demonstrating the values of
nique a Table is provided summarising duction costs. They should also be naturally occurring products are
its advantages and limitations, and its based on optimal harvesting levels, common (see Bann 1998, Pearce
application to biodiversity valuation is and account for seasonal changes and Pearce, 2001 for review).
outlined. In reality, decisions on what in production and prices. Market
valuation approach to use will depend analysis may also be necessary to The Production Function Approach
on the nature of the study plus the understand the likely effects of market The production function approach
availability of resources (funds, time expansion, shifts in demand and in- is a common economic technique,
and expertise). ternational price fluctuations. which relates output to different lev-
els of inputs of the so-called factors
Approaches Based Related Goods Approach of production (land, labour, capital,
on Market Values The related goods approach raw materials). It is often thought of
There are three valuation ap- consists of three similar valuation as the most straightforward way to
proaches based on market values: techniques: barter exchange, direct valuing the environment .
• Observed market value and substitute, and indirect substitute More formally, the production
related goods approach approach. These relatively simple, function for a single output may be
• Productivity approach intuitive approaches are often useful given by:
• Cost based methods includ- for estimating products in develop- y = F (X, Z)
ing replacement cost. ing countries that are largely used
Approaches using market prices by rural communities for subsistence 4
Variously called the change in produc-
offer the most pragmatic route to purposes or traded informally. These tion approach, the input-output or dose
response approach. All involve an
the monetisation of environmental approaches are based on the fact attempt to relate the incremental output
use values. Therefore, economic that often a non-marketed good or of a marketed good or service to a
measurable change in the quality and
values such as they exist in market service is related to a marketed good quantity of a natural resource.

10 APRIL-JUNE 2002
where X is a set of inputs (e.g., is clear and can be observed, or Cost-Based Valuation
land, capital) and Z is the input of tested empirically; and, markets Cost-based valuation techniques
the un-priced environmental re- function well, so that price is a good assess the costs of different measures
source. Let us assume that we can indicator of economic value (OECD, that would ensure the maintenance
measure output y that has a market 1995). of the benefits provided by the
price. If prices of inputs X are not Specifying the physical effect of environmental good or service be-
expected to change when supply of a change in environmental quality, ing valued. These cost estimates are
the environmental resource (Z) and the resulting impact of the then used as proxies for the non-
changes, then the economic value physical effect on the economic market environmental benefit in
of the change in the supply of Z is activities can be difficult and data question. Cost-based valuation
the value of the production change intensive in practice. These functions approaches include: opportunity
associated with the change in Z at may be estimated or derived from cost-based approaches; ap-
constant inputs of the other factors existing literature, but ideally expert proaches that measure environmen-
(X) (Pearce and Moran, 1994) . scientific studies are required. tal values by examining the costs of
For example, assume that an Where environmental change has reproducing the original level of ben-
ecological function of a tropical forest a sizeable effect on markets, a more efits (e.g., the replacement, restora-
is support for downstream fisheries complex view needs to be taken of tion and relocation cost methods);
by ensuring a regular flow of clean the market structure, elasticities, and and, the preventative expenditure ap-
water to spawning grounds for fish supply and demand responses. proach, which examines the up front
and nurseries for fry. The forest area Consumer and producer behaviour payments made to prevent environ-
in the watershed (S) may therefore needs to be introduced into the mental degradation.
have a direct influence on the catch analysis as behaviour may alter in A practical difficulty is ensuring
of some fish species dependant on response to changes in the environ- that the cost of maintenance will
the area, Q, which is independent ment. In addition, the impacts of provide a benefit equivalent to the
from the standard inputs of commer- market conditions and regulatory benefit of the original good. A
cial fishery, Xi...Xk. Including forest policies affecting production deci- potential cause of overestimation
watershed area as a determinant of sions need to be taken into account. occurs if the benefits of maintenance
fish catch may therefore ‘capture’ Unless these factors are accounted do not exceed the costs of main-
some element of the economic con- for, the production function approach tenance. If this is the case, then the
tribution of this ecological support may produce unreliable information. investment is not a profitable use of
function (Barbier 1992). economic resources and the cost of
Application to Biodiversity Valuation maintenance activities may be
Q = F(Xi...Xk, S) The production function ap- larger than the WTP for the original
proach has strong intuitive and prac- environmental benefits 7 . Con-
The approach is most appropri- tical appeal and has been used versely, if the benefits generated by
ate where: the environmental change frequently in developing regions to the maintenance activity exceed that
directly causes an increase or de- estimate the indirect functions of of the original environmental ben-
crease in the output of a good (or ecosystems. For example, the im- efits, then the costs of maintenance
service) which is marketed; the effect pact of deforestation on soil erosion activity may surpass the WTP for the
This approach can also be applied to and water production and quality, 6
The preventative expenditure approach is
output which is not marketed but where and the impact of the loss of man- also referred to as the ‘defensive
an actual market exists for similar expenditure approach‘ ‘mitigation
substitutes or goods. grove area on fish productivity. approach’ or ‘avertive behaviour
approach’. There are two different
Table 2. Production Function Approach – Advantages and Limitations approaches to this type of analysis and
only one of them is truly a cost-based
Advantages Issues / Limitations valuation technique. If estimates of what
people are willing to pay to prevent
Strong intuitive and practical Specifying biophysical relationship can be complex and/or damage to the environment or them-
appeal, therefore popular with data intensive. selves are elicited through the use of
constructed markets, or by the examina-
policy/decision makers. tion of past events in similar circum-
Market values tend to reflect actual use and hence ignore
stances through the use of revealed
non-use values. preferences exhibited through actual or
Does not capture consumer surplus. surrogate markets, first based estimates
of value will be derived.
Market prices need to be corrected for market and policy 7
In certain cases, such as estimating the
distortions. costs of relocating communities affected
by land use changes, satisfying this
Where the environmental change has a sizeable impact condition may not be critical. Concerns
on the market, a more complex view of market structure over equity (ensuring just compensation)
is necessary. may override any economic criteria being
placed on the cost of relocation.

Table 3. Cost Based Valuation – Advantages and Limitations estimate the number of trips visited
Advantages Issues / Limitations to a site or sites over some period
of time, perhaps a season. Random
A practical approach where Considered to be second best techniques as they are
resources (time, data, likely to be inaccurate because they use costs as a utility models consider the specific
money) are lacking. measure of ‘benefit’. decision of whether to visit a recre-
Less data intensive and time Market values tend to reflect actual use and hence ignore ational site, and if so, which one
consuming than the more non-use values. (see Freeman, 1994).
sophisticated approaches. The TCM is applicable when:
Does not capture consumer surplus.
the study site is accessible for at
original environmental benefits. vantages of using more exact but least part of the time; there is no
Further, because they bear no re- costly techniques. direct charge or entry fee for the
lation to demand or WTP for en- good or service in question, or
vironmental goods and services, Application to Biodiversity Valuation where such charges are very low;
cost estimates fail to reflect con- Despite their theoretical shortcom- and, where people spend a sig-
sumer surplus (and may also un- ings, such approaches are widely nificant time, or incur other costs,
derestimate producer surplus) thus used. The replacement or restora- to travel to the site.
tending to underestimate environ- tion cost is, for example, used to The TCM techniques have im-
mental values. value various ecosystem services and proved considerably since the ear-
The replacement cost method has is implicit in the ‘public trust’ doctrine liest studies were carried out but a
recently been used to estimate the in the USA as it relates to certain number of reservations as to its use
values of ecosystem services natural resource damage costs. remain. Of particular concern is the
(Costanza et al 1997; Pimentel et al large amount of data required,
1997 and Ehrlich and Ehrlich 1996). Revealed Preference Approaches which is expensive to collect and
However, the Costanza et al study is Revealed preference methods process. Furthermore difficulties with
criticised on theoretical grounds (see include traditional travel cost mod- estimation and data analysis remain.
Pearce, 1998). It is argued that the els of recreational use, random util- The method is likely to work best when
replacement cost is only valid if three ity models, hedonic models, and applied to the valuation of a single
conditions are met (Bockstael et al averting behaviour models. These site, its characteristics and those of
[2000]): methods rely on a surrogate market other sites remaining constant. The
1) the human-engineered system that provides a ‘behavioural trail’ to method has limited use for valuing
provides functions that are identify the environmental value of anything other than parks and char-
equivalent in quality and interest. They may be considered ismatic species that can provoke
magnitude to the natural func- ‘true’ valuation approaches in the travel behaviour. The most credible
tion; sense that they facilitate estimation applications to date have involved
2) the human-engineered solu- of demand curves and hence con- national parks, recreational sites and
tion is the least cost alternative sumer surplus. Generally, these international travel behaviour when
way of performing the func- approaches are favoured over stated visiting wildlife parks and reserves
tion; and, preference approaches by many (Tobais and Mendelsohn, 1991;
3) the individuals in aggregate economists and policy makers be- Maille and Mendelsohn 1993;
would be willing to incur these cause these values are revealed in Hanley and Ruffell 1993).
costs if the natural function real, rather than hypothetical, mar-
were no longer available. kets. However, they are limited in the Application to Biodiversity
sense that they are unable to ac- Where feasible, TCM is impor-
These conditions are rarely count for non-use values and have tant when evaluating the demand
achieved hence use of replacement large data requirements. for recreational facilities. The infor-
costs is rarely accurate. mation derived from a TCM study
Due to the inaccuracies inherent Travel Cost Method can be used to: set appropriate en-
in cost-based valuation approaches, With the travel cost method trance fees to national parks and
they are generally regarded as (TCM), it is assumed that travel costs reserve areas; allocate national rec-
second best valuation techniques. to a site can be regarded as a proxy reation and conservation budgets
However, they can be extremely for the value of the non-market asset. between different sites; and inform
useful when there are limitations on The TCM is commonly applied to land use decisions – for example
the time and resources for detailed recreational areas and national whether it is worth preserving a site
research or when data sets are so parks. Two perspectives are possible. for recreational use or a rival land
questionable as to reduce the ad- Simple travel cost models attempt to use.

12 APRIL-JUNE 2002
Table 4. Travel Cost Method – Advantages and Limitations Application to Biodiversity Valuation
Advantages Issues / Limitations The application of HPM to
biodiversity is extremely limited. Few
Provides estimate of demand General
curve therefore possible to The method has limited use for valuing anything other biodiversity-related attributes are
estimate consumer surplus. than parks and charismatic species that can provoke likely to show up systematically in
travel behaviour. the complementary market prices -
Where feasible, can provide
estimates of value of parks and Does not account for non-users, off-site benefits and non- the WTP for housing in most cases,
recreational facilities. use values. and even when they do, accurate
Theoretical data to describe them is rarely avail-
Time Costs – determining the value to be attached to able to undertake robust analysis.
travel time. Studies relating to the value of
Dealing with multi-purpose visits. forestry, shoreline and landscape
How to deal with substitute sites. have relied on these attributes being
Treatment of utility or dis-utility from travelling. significant in local property markets
(e.g., Garrod and Willis 1992).
Truncation or sample selection bias in dealing with site
visitors, and neglecting non-visitors. A closely related application is
Difficulties with the estimation and data analysis techniques.
the valuation of plant genetic re-
sources for agriculture – e.g., plant
Practical breeding and crop improvement
Survey based and large amounts of data required, (Evenson 1990; Gollin and Evenson
therefore expensive and time consuming.
1998). The steps for conducting this
Requires trained interviewers to carry out survey work
and statisticians and/or econometricians to carry out
research are similar to its analogue
analysis. in the housing sector although the
data requirements are just as oner-
Table 5. Hedonic Pricing – Advantages and Limitations ous. In this context the ‘external’
Advantages Issues / Limitations value of interest is a naturally occur-
The hedonic approach is It relies on the assumption of a freely functioning and efficient ring material germplasm or genetic
founded upon a sound property market. trait, which is an attribute of an
economic theory base and is original crop landrace prior to crop
Huge data requirements.
capable of producing valid
estimates of economic The approach only reflects impacts to the extent that individuals improvement. The original raw
benefits. are aware of them. material or trait is ultimately one
A number of statistical problems may hinder its feasibility. attribute of a final product. If the
It is essentially an ex post valuation and does not contribution of that trait can be iso-
capture non-use value. lated from the other production
factors, then its resource value can
Hedonic Pricing Method other things constant. In other words, be estimated. The steps necessary
The Hedonic Price Method the value is revealed from within the for undertaking such an analysis are
(HPM) is another revealed value value of the property. The method summarised in Box 4.
technique that relies on market prices is data demanding and there are Clearly this methodology has
(typically property prices or wages) few applications available in the important implications for the is-
to embody the value of the envi- published literature. sues of benefit sharing and intel-
ronmental attribute (or job risk) of
interest. The property value ap- Box 4. Estimating the Contribution of germplasm of original landraces to Rice Productivity
proach, for example, is based on Gollin and Evenson (1998) show how the HPM can be applied to the analysis of the
the assumption that the value of land productivity of alternative categories of rice germplasm in India. The key steps are:
is related to the stream of benefits • For a crop – e.g., rice, divide gains in output into gains from yield and gains from
increased area under cultivation.
derived from it. The value of a
• Disaggregate rice yield gains into gains attributable to varietal improvement, other
house, for example, is affected by technological advances and other sources of change.
many variables including size, con- • Assume varietal improvement is dependent on stocks of advanced crossing material from
struction, location and the quality different sources and other research resources.
of the environment (air quality and • Stocks of advanced material depend on the existence of traditional landraces and wild
noise pollution). With sufficient data species.
on property values, it is in theory • Link productivity to original germplasm, its origins and ownership.
possible to tease out the value of • Note finally that the data requirements are onerous. In short detailed information is required
on the productivity of all factor inputs in all the above stages.
the environmental feature holding

lectual property rights. In theory, Table 6. Stated Preferences – Advantages and Limitations
the methodology offers the poten-
Advantages Issues / Limitations
tial for the identification of key
germplasm contributions to crop An important feature of SP SP methods require carefully designed survey and
methods is that they can sampling procedures and the employment of sophisticated
development by countries and help reveal values that are data analysis (econometric modelling). Obtaining reliable
communities within countries. It can not revealed using other information therefore requires a substantial investment of
therefore serve as a basis for es- methods. In particular SP time and resources, which makes SP techniques very
can uncover non-use values. expensive.
timating returns to indigenous com-
munities as part of a benefit shar-
ing agreement. In practice, data to ensure that questionnaires mimic monetary values. Arguably, this can
sources will prevent identification the relevant features of the market reduce protest votes since people
of inputs for many crops. place, and that potential biases in may find it easier to rank or rate
This approach can also help to responses are controlled. alternatives without having to directly
determine the value added at each The SP techniques become nec- think in money terms. However this
production stage by informal and essary when the WTP information that depends on the amount of back-
formal breeding inputs that have led is needed cannot be inferred from ground information provided in what
the crop to its current status. This is markets. They are then extremely is already (for the respondent) a
particularly important information for applicable to the valuation of pub- cognitively burdensome task. At
the CGIAR8 group when informa- lic goods for which no markets exist. present there is no strong reason to
tion on the returns to publicly funded CVM is technically applicable to all choose one of these technique in
research is at issue. circumstances and is the only prac- preference to the other.
tical method for uncovering existence
Stated Preference Approaches value (e.g., preservation of rare Application to Biodiversity
Stated preference techniques (SP) species, biodiversity for its own sake) Contingent valuation has been
refer here to any questionnaire- that generally does not pass through used extensively in the valuation of
based technique that seeks to dis- markets and do not have substitutes biological resources including rare
cover individuals’ preferences. The or complements that pass through and endangered species, habitats
most well-known approach under this markets. and landscapes.
category is Contingent Valuation Choice Modelling involves a rat- CVM is likely to be most reliable
Method (CVM) although Choice ing or ranking of options each of for valuing environmental gains,
Modelling (CM) is becoming in- which contains a varying set of particularly when familiar goods are
creasingly popular . characteristics (e.g., a forest can be considered, such as local recre-
The CVM uses survey techniques described in terms of species diver- ational amenities. The most reliable
to ask people directly what their sity, age structure and recreational studies (i.e. those that have passed
environmental preferences are. It is facilities), including a money price the most stringent validity tests and
therefore a form of market research, or cost. Respondents are not asked avoided severe ‘embedding’
where the ‘product’ in question is a any WTP questions. Rather the will- whereby values are not sensitive to
change in environment quality. A ingness to pay is inferred from the the quantity of the good being of-
hypothetical market is constructed stated choices (Louviere et al, 2000), fered) are those valuing high profile
and consumers are asked what they CM differs from CVM in that it species or elements that are familiar
would be WTP for a hypothetical solicits rankings or ratings rather than to respondents. In other cases, the
environmental improvement or to need to provide information to elicit
prevent a deterioration, or what they 8 reliable values is a limit both to CV
Consultative Group on International
would be willing to accept (WTA) in Agricultural Research. and other attribute-based choice
compensation to tolerate a loss. A 9
See OECD, 1995; Bann, 1998; Mitchell models.
and Carson, 1989 for more details on
hypothetical market is taken to in- methodology There is a small body of studies
clude not just the good itself (an 10
Choice modelling approaches include - testing the applicability of CM to
improved view, better water quality, choice experiments, contingent ranking, biological resources. It is argued
contingent rating and paired compari-
etc), but also the institutional context sons. that the constrained attribute de-
in which it would be provided, and 11
Other valuation techniques are not sign requirement makes CM even
the way in which it would be financed. aimed at capturing non-use values. more limiting than CVM. Moreover,
While it may be possible to infer
Answers to questionnaires are in- estimates of existence values from the selection and representation of
market behaviour - such as donations
tended to simulate the behaviour of to philanthropic pursuits - it is almost these attributes and their levels
individuals in the market place. A impossible to separate out use and simply adds to the design prob-
existence values revealed in such
great deal of care needs to be taken markets. lems already associated with hy-

14 APRIL-JUNE 2002
Table 7. Benefit Transfer – Advantages and Limitations to transfer an average WTP estimate
from one study site, or to transfer a
Advantages Issues / Limitations
WTP function from the study and
Avoids the cost/time of Reliability? How can the transferred values be validated? apply it to the policy site, or to trans-
engaging in ‘primary studies’ fer WTP estimates from meta-analy-
The literature that tests for validity of benefits transfer is a
long way from supporting such procedures. Therefore, at sis.
present there appears to be no substitute for high quality If values are transferred ‘unad-
original studies.
justed’ the credibility of the policy
site estimates are questionable.
pothetical surveys. A strong advan- cluded. This margin of error may be Possible differences that should be
tage of the CM over CVM is that acceptable for some project and accounted for include: differences in
it can reveal something about the policy applications, and uncertainty baseline conditions and/or the
sum of the parts of a resource rather of the final results can be dealt with magnitude of the economic impact
than the total value. In many cir- through sensitivity analysis. (i.e., change from baseline), varia-
cumstances, the policy question to Benefits transfer is most appro- tions in study methodology, research-
be answered by a valuation study priate when: funds, time, or person- ers judgement in the selection of
concerns the improvement of a nel are insufficient to undertake a sample size, socio-economic char-
specific attribute. satisfactory new study; the study site acteristics of the relevant population,
is similar to the policy site; the issues determinants of WTP, differences in
Benefits Transfer (e.g., proposed policy change, or market conditions applying to the
A final valuation technique is nature of the project) are similar in sites (e.g. variations in the availabil-
known as benefits transfer, which the two cases; and, the original ity of substitutes), and econometric
could be based on any of the valu- valuation procedures are theoreti- specifications.
ation techniques described above. cally sound (OECD, 1995). These
Benefits transfer (BT) involves ‘trans- ‘borrowed’ unit values can repre- Meta-analysis explains the variations in
WTP taken from a number of studies.
ferring’ economic benefit estimates sent ‘order of magnitude’ estimates This should enable better transfer of
values since we can find out what WTP
from a site where a study has al- for the environmental goods and depends on. In the meta-analysis case,
ready been done (the ‘study site’) to services of interest. However, primary whole functions, based on the collected
studies, are transferred rather than
the site of policy interest (the ‘policy data collection and analysis may be average values.
site’). If BT is a valid procedure, then unavoidable for large projects,
the need for ‘primary’ studies is projects with potentially large (and Camille Bann is a consultant on
environmental economics based at
greatly reduced. However, the ‘in- irreversible) consequences, or for London, United Kingdom,
terim’ consensus, based on ongoing particularly complicated or politically email: CABann@aol.com
research, appears to be that BT is sensitive projects.
unreliable (Brower, 1988; Bateman The benefits value could have
et al, 1999a). Results tend to differ been measured using any one of Bann, C. 1998. ‘An Economic
Analysis of Tropical Forest Land Use
by up to 75% if outliers are excluded, the techniques summarised in Box Option: A Manual for Researchers’,
and by up to 450% if they are in- 3. In benefits transfer, it is possible The Economy and Environment Program
for Southeast Asia (EEPSEA), April,
1998. Singapore.
Barbier, E. 1992. ‘Valuing Environ-
mental Functions: Tropical Wetlands’.
LEEC Discussion Paper 92-04.
London Environmental Economic
Centre / IIED.
Bateman, I., Nishikawa, N and R
Brouwer, 1999. ‘Benefits Transfer in
Theory and Practice: A Review’, Faculty
of Environmental Sciences, University of
East Anglia, mimeo.
Bockstael, N. Freeman, M., Kopp,
R., Portney, P. Smith, V. 2000. ‘On
Measuring Economic Values for
Nature’. Environmental Science and
Technology, 34, 1384-1389.
Brouwer, R and Spannincks, F.
1999. ‘The Validity of Environmental
Benefits Transfer: Further Empirical

Testing’. Environmental and Resource Hanley, N. D. and R.J. Ruffell, Policy Makers’. OECD, Paris.
Economics, 14, 95-117. (1993). ‘The Contingent Valuation of
Forest Characteristics: Two Experi- Pearce, D.W., and Moran, D. 1994.
Costanza, R., R. D’Arge, R de ‘The Economic Value of Biodiversity’.
ments’. Journal of Agricultural Econom-
Groot, S. Farber, M. Grasso, B. In Association with The Biodiversity
ics 44 pp218-229.
Hannon, K. Limburg, S. Naeem, Programme of IUCN. Earthscan
R. O’Neill, J. Paruelo, R. Raskin, P. Huber, R., Ruitenbeek, J. and Publications Ltd, London.
Sutton and M van den Belt. 1997. Putterman, D. 1997. ‘Marine
‘The Value of the World’s Ecosystem Biodiversity Valuation: Internal Research Pearce. D.W. and Pearce, G.T.
Services and Natural Capital’, Nature, Note Supplementing Interim Report’ 2001. ‘The Value of Forest
387, May 15 1997, 253-260. The World Bank Research Committee Ecosystems: A Report to the
Project No. 681-04, Washington. Secretariat Convention of Biological
Ehrlich P., and A. Ehrlich, 1996. ‘A Diversity’. University College
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mental Benefits’. Cambridge University Pearce, D.W. 1988. ‘Auditing the
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(eds.) Valuing Environmental Benefits in J. 2000. ‘Stated Choice Methods: McCullum, C. Huang, P. Dwen,.
Developing Countries, Michigan State Analysis and Application’. Cambridge: J. Flack, Q. Tran, T.B. Cliff
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Maille, P and R. Mendelsohn Environmental Benefits of Biodiversity’.
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‘The Environmental Economic Impact of The Contingent Valuation Method’. Broadus, 1993. ‘On the Measurement
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