Environmental valuation falls from the perspective of environmental economics. In this case, Environmental economics uses information from both environmental issues as well as traditional economics. On the other hand, it concedes that indeed the environment possesses value; however, they tend to pay more focus on human terms of environmental valuation precisely the ones that are measurable in terms of monetary value. According to environmental economics, the cost of the environment can only be measured to the extent of how useful it is to people. People place value on land depending on its use which can include extraction of natural resources like fish and trees harvesting (Tietenberg, 2001).
According to environmental economics, the important concept when it comes to value definition is the principle of willingness-to-pay (WTP). This principle states that an item’s economic value is the same as the highest amount of money that a person is willing to give for it. For instance, if a person is willing to give say $100 as the highest amount to ensure the protection of those species which are endangered, then $100 would be the specified value according to human (Tietenberg, 2001). Sometimes, natural resources are sold and bought in the markets hence one can ascertain its value by merely studying their markets. However, markets for things like physical parks, clean air or endangered species do not exist.
As much as some ecological economists assess the natural capital value using the WTP, they are more likely to base more on the WTP’s limitations. Mainly, natural capital like species as well as ecosystems might possess the inherent value. This is the value regardless of whether a person is willing to pay for it or not. The intrinsic value might be derived from the ethical foundation of the natural rights. Inherent value is, therefore, a subjective concept mainly based on a person’s notion regarding fairness and rights. Thus, environmental economics uses the principle of WTP to measure value whereas ecological economics considers the natural capital’s inherent value (Tietenberg, 2001).
The natural system’s total economic value is the total of all the benefits that a person is willing to pay for in that instance. Therefore, the total economic value of something like the national forest would be the total of all forms of profits accumulated through harvesting of timber, people’s willingness to pay each and everyone who uses the forest for recreational purposes. The value of the services of the ecosystems, which include prevention of soil erosion and storage of carbon and those benefits considered nonuse, those that people get by merely knowing about the forest’s existence.
Non-market Valuation methods of the Environment
To give an estimate of the total economic value, one requires approaches to estimate these values and classify them as ecosystems services, recreational benefits and or as nonuse values. Additional one requires a measure of damages which comes as a result of negative environmental externalities. All these approaches are known as nonmarket valuation mainly because they give estimates of benefits for goods and services which are not traded in the markets directly. Nonmarket values approach includes the following:
Cost of illness method- this method is used to give the damages of reductions estimates in the quality of environment that leads to the consequences of human health. It can also be used to estimate the value of the avoided damages-benefits regarding environmental quality improvements. In these methods, direct cost and indirect costs are calculated relative to the illnesses brought about by environmental factors. Examples of direct expenses consist of medical value like illness whereas indirect costs consist of the reduction in human capital, pain related welfare losses, and suffering, reduced economic productivity because of absenteeism at work. This method mainly gives a lower-bound estimate of the willingness to pay to avoid ill related problems (Getzner et al., 2004). The actual WTP can be more significant as real expenses may not capture an individual’s or society’s entire losses or illness. However, it is possible for the lower bound estimate to give policy guidance.
Replacement cost methods- this method can be used to give estimates of the values of the services of the ecosystem. Under this approach lost ecosystem services is substituted by the cost of actions. For instance, construction of water treatment plan by a community as a way of making up for the benefits lost due to water purification derived from forest habitat. Natural plants pollination by bees can be done using machines or hands to some extent. If one can estimate the costs of substitute doings in terms of labor costs and or construction costs, one can consider such actions as estimates of society’s WTP for such services of the ecosystem even though these methods might not be WTP’s measures. Other methods of nonmarket valuation are stated preference methods and Revealed preference methods (Getzner et al., 2004).
Cost-Benefit Analysis (CBA) Method
This method is used by environmental economists to approximate net benefits- subtracting costs from benefits- of policy or project proposals, measuring the effects in monetary values. Theoretically, measuring the outcomes in currency form gives a “bottom-line” result- single numbers- therefore one can select the option that gives the best net social value. However, practically CBAs are mostly incomplete. Sometimes results depend on certain assumptions. At times the analysis of one side-benefit or costs –may be fully developed more than the other making it hard to get the recommendation that is objective.
CBAs basic steps are:
Listing all benefits and costs of the proposal of the project or proposal-conducting various scenarios
Converting all the benefits and costs of money values through market analysis or nonmarket valuation.
Summing up all the benefits and costs to give each scenario’s net profits- result are provided in ratio form sometimes.
Selecting the most efficient scenario economically.
Future Discounting- naturally, people tend to focus more on the present than they do for future. Many people would consider receiving benefits now than wait to receive the same interest in the future. This concept is incorporated into the CBA by discounting. By discounting, one can reduce the amount of weight exerted on benefit or cost that is to happen in the future about similar current impact. The further the occurrence of the benefit or cost in future, the lesser the impact weight (Whitehead et al., 2012).
Major issues in benefit estimation
Noteworthy, an analyst charged with the responsibility of performing the cost/benefit analysis encounters a number of challenges. First, entails the primary versus secondary effects which often cause a further ripple effect on services provided while conducting environmental projects (Tietenberg, 2001). Second, involves the accounting stance which refers to the geographical scale where the benefits can be measured. Last, involves tangible versus intangible benefits which should not be ignored. Mainly, tangible benefits refer to those that are reasonably assigned a monetary value while the intangible ones should always be quantified to the fullest.
Approaches to cost estimation
In an ideal world, estimating costs is generally easier when compared to benefit estimation. The two main approaches employed include the survey approach and the engineering approach (Tietenberg, 2001). Particularly, the survey approach discovers the costs associated with a policy presumably to know more about them thus revealing the costs to the policymakers. On the other hand, the engineering approach can be used to meet the objective of the estimated costs of purchasing and use of technologies after bypasses the source being regulated.
- Getzner, Michael, Spash, Clive & Stagl, Sigrid, (2004). Alternatives for Environmental Valuation(Routledge Explorations in Environmental Economics). Abingdon, U.K: Routledge Publishers.
- Tietenberg, T. H. (2001). Environmental economics and policy. Addison Wesley.
- Whitehead, John, Haab Tim & Huang, Ju-Chin, (2012). Preference Data for Environmental Valuation: Combining Revealed and Stated Approaches. Abingdon, U.K: Routledge Publishers.
