Productivity Commission Staff Paper - Non-market Valuation

A new Productivity Commission Staff Working Paper examines the potential for these methods to contribute to policy decisions that better reflect community preferences. The paper also offers suggestions on how best use can be made of non-market valuation in developing environmental policy.

Government decisions about the environment involve trade-offs between environmental outcomes and other things that benefit the community. For example, investing in environmental improvements (such as cleaner rivers) takes resources that could have been used for other desirable purposes (such as funding for schools or hospitals). Similarly, allowing the use of an environmental asset (such as logging of a native forest) could put pressure on the habitat of a threatened species, but provide benefits (such as timber to build houses).

How such policy trade-offs should be made is a matter of considerable debate. Some stakeholders favour prioritising environmental outcomes above other considerations, while others argue that jobs and economic development should come first. The former approach effectively assigns an infinite value to environmental outcomes, while the latter assigns a value of zero.

Valuing environmental outcomes in these types of situation, while difficult and sometimes contentious, may assist with making trade-offs in a more considered way. Dollar values are used, not to ‘commodify nature’, but rather to help decide whether having more of one good thing is preferable to having more of some other good thing in situations where a choice must be made.

Over the last few decades several ‘non-market’ valuation methods have been developed for this purpose, but to date they have not been widely used for policy analysis in Australia.

There are two main types of non-market valuation methods: revealed preference and stated preference. In addition, benefit transfer can be used to apply existing value estimates to new contexts.

Revealed preference methods use observations of purchasing decisions and other behaviour to estimate non-market values. For example, the hedonic pricing method attempts to isolate the influence of non-market attributes (like proximity to parks) on the price of goods (such as houses). The validity (or potential accuracy) of these methods is widely accepted, but there are many circumstances where they cannot provide the estimates needed for environmental policy analysis. For example, they cannot be used to estimate so called ‘non-use’ values (such as the value people derive from the existence of a species or ecosystem).

In principle, stated preference methods (including contingent valuation and choice modelling) could be used to estimate virtually all types of values, but their validity is more contentious. These survey-based methods typically impute values by asking people to make choices between policy options, in which better environmental outcomes are associated with higher costs (such as higher taxes).

The available evidence suggests that stated preference methods are able to provide valid estimates for use in environmental policy analysis. However:

• there are many elements that practitioners need to get right to produce meaningful results (for example, participants should be made to feel that their responses could influence outcomes that they care about, and clear information about the environmental outcomes that people are being asked to value should be provided)
• value estimates are likely to be less reliable when respondents are asked about environmental assets that are especially complex or relatively unfamiliar to them.

In comparison, benefit transfer (using observable prices for a broadly comparable good or service, i.e. a proxy) is likely to be very imprecise (and possibly misleading) unless the primary studies are of high quality and relate to similar environmental and policy contexts.

The authors argue that because non-market valuation methods can generally provide objective estimates of the value that the community places on environmental outcomes, they offer advantages over other approaches (such as multi-criteria analysis) to factoring these outcomes into policy analysis.

The case for using non-market valuation varies according to circumstances. It is likely to be strongest where the financial or environmental stakes are high and there is potential for environmental outcomes to influence policy decisions.

Where non-market valuation estimates are made they should generally be included in a cost–benefit analysis. Sensitivity analysis should be provided, as well as descriptive information about the environmental outcomes of the proposed policy.

There is a range of steps that could be taken to realise more fully the potential of non-market valuation, including developing greater knowledge about it within relevant government agencies.

The Staff Paper Environmental Policy Analysis: A Guide to Non-Market Valuation was released on 14 January 2014.

For a comprehensive report on valuing multiple benefits from increased environmental water in the Murray-Darling Basin, see the CSIRO report to the MDBA Assessment of the ecological and economic benefits of environmental water in the Murray–Darling Basin published on 22 March 2012.