Process of environmental valuation

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The inefficient allocation of environmental goods and services in the economy has been a prime reason for justifying economic valuation of these goods and services. Such inefficiency stems from the inability of the market to price such environmental commodities and functions to account for their negative spillover effects when people use them. An absence of market prices for environmental goods and services has been explained as a matter of “missing or incomplete property rights” assigned to these goods and services (Schaeffer, 2008: 147), property rights which are necessary in order to determine their prices from their owners’ viewpoint (elaborated below). Hence, this explains the main objective of environmental valuation of ecosystem functions and the natural resources generated from them, which is “to generally indicate the overall economic efficiency” of their various competing uses. The underlying assumption is that the main criterion for determining such allocation is whether resources in a given way “yield an overall net gain to society, as measured through valuation in terms of the economic benefit of each use adjusted by its costs” (Kumar and Kumar, 2008: 810). Achieving efficiency defined in this way applies also to CBA in which environmental valuation provides inputs in terms of monetized benefits and costs (Soma, 2006: 31). The technical application of calculating such value specifies that a particular concept of value in environmental economics ought to be calculated known as the “total economic value (TEV)” of a natural resource or an ecosystem (Liekens et al, 2014: 14; Soma, 2006: 33). While discussion on TEV is beyond the scope of this paper, it suffices to note that TEV is actually made up of many components of value that include the various types of values based on how the resource or ecosystem is currently used: in its direct (direct use value) and/or indirect (indirect use value) usage, as well as values that do not depend on mere usage (i.e. non-use values) which include their reservation for future generations’ appreciation (bequest value), the intrinsic value of

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these environmental entities (existence value) and value based on as yet undiscovered usage (option value) (see Plottu and Plottu, 2007).

Economic valuation is essentially predicated on the treatment of the environmental good or service as a commodity, since their ‘values’ or monetary worth is essentially determined in the context of an exchange in the market that possibly or actually occurs. Hence, some scholars have argued that economic valuation in this respect is useful to calculate the opportunity cost of conservation as mentioned previously; this approach is applicable until people stop treating the ecosystem functions and the natural resources generated, i.e. nature, as a commodity (Azqueta and Delacámara, 2006: 531). The economists’ conception of “nature”, specifically when applied in CBA, is treated as synonymous with the term “natural goods”, which is “generally understood to be a bundle of commodities that can be assigned monetary value” (Soma, 2006: 32). This conception is contingent on more assumptions. One is assuming an accounting price for such environmental entities known as “shadow price” (see Dasgupta, 2001: C5; Stern, 2015: 153) since they are not normally traded on the market but are implicitly traded off against one another as a result of human expansion into the biosphere in order to calculate the utility gained from using one additional unit of the environmental good or service (Daly, 1998: 21). Another assumption is the adoption of a particular view of human behavior: an individual is assumed to have “purely individual consumer interests, wants to maximise individual utility, and is characterised by individual rationality”; in short, collectively described as homo economicus (Soma, 2006: 32). The full value of the natural resource or service is calculated by aggregating these “preference values” of relevant individuals (Soma, 2006: 32), as measured according to TEV abovementioned. To elicit these individuals’ underlying “preference values”, respondents are typically asked via surveys to

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state their WTP for conservation as in stated preference techniques, and/or are observed from the prices of goods and services they paid in actual markets that proxy for the target environmental good or service as with revealed preference techniques. Commodity as a concept, in this context then, is defined simply as “an object (or service) produced for exchange and sale” (Soma, 2006: 33).

Economists see the market in the context of environmental valuation as distinct from the political sphere. This is noted in the “anti-politics” stance of mainstream economists who argue that valuation done by economics experts is necessarily consequentialist as opposed to deontologically based; who are suspicious of political activism as a poor measurement of “intensity of commitment” to environmental conservation; and assure that valuation does not precede timeless non-negotiable rights (e.g. the right to clean air) (Ascher and Steelman, 2006: 81-82). More specifically, the economic process of decision-making—relying on the homo economicus

assumption of human behavior—is viewed as superior to the political process as economic “voting” in terms of prices is preferable to political voting in terms of referenda as the former is “closer to voters’ intentions” such that the voter need not buy something that he/she does not like while referenda on the other hand cannot be held every day on every economic decision even if desirable; and that money can be used to express one’s underlying “intensity of preference” (Pearce and Nash, 1981: 7). In situating their defense of the economic process, economists define the market as “any context in which the sale and purchase of goods and services takes place” (Chee, 2004: 551), which is an “institutionalized voluntary trade” (Neuteleers and Engelen, 2015: 254): people’s relationships are based on “voluntary exchange” as participants in the market. Each

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individual obtains what he/she wants by offering some “equivalent benefit in return” (Miller, 1989: 18).

From a more technical angle, the concept of the marginal is integral to environmental valuation in calculating impacts in monetary terms resulting from a unit of change in ecosystems. Economists aver that marginal valuation is used to mimic markets and obtain values that can be compared with the economic measure of value (Daly, 1998: 21; Costanza et al, 1997: 253; Pritchard et al, 2000: 36; Farber et al, 2002: 388). Costanza et al (1997: 255), in particular, justify that marginal changes in quality or quantity of ecosystem services “have value insofar as they either change the benefits associated with human activities or change the costs of those activities”. As the full impact from environmental change (i.e. degradation) is hard to envisage, let alone quantify, economists recommend that marginal change instead of total change in ecosystems be inputted into CBA (Schuhmann and Mahon, 2015: 57, 58; Ninan and Inoue, 2013: 147). Such changes to the environment are anthropocentric arising from either conserving or degrading the environment, with the impacts from one unit of change in environmental conditions calculated as monetary impacts on individuals. Money thus becomes the standard unit of measure as value can be determined by utility measured in monetary WTP to effect a particular hypothetical change in the environment if individuals do not possess prior ownership over the environment, or as willingness- to-accept (WTA) compensation for a hypothetical change in the environment if they already own the ecosystem or natural resource (Farber et al, 2002: 378). Thus, the marginal utility theory of money is significant to the evolving concept of ecosystem valuation as it can be used to measure use values and not just exchange values in monetary units where such values are determined by the prior private ownership of the resource (Farber et al, 2002: 378). These values denominated in

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monetary prices are then inputted into a formal mathematical model to determine the optimal allocation of resources which is seen as a necessarily “reductionist” process in order to be ‘objective’ in determination of policy as opposed to the ‘subjectivity’ that the political process is prone to (Zafirovski, 2008: 801).