Contents
1. ES & BIODIVERSITY, DIRECT & INDIRECT ECONOMIC VALUES,
ECONOMIC FRAMEWORK............................................................3
1.1 introduction............................................................................................................................................. 3
1.2 economic value of the environment......................................................................................................... 3
1.3 valuing BD & ES........................................................................................................................................ 4
1.3.1 Utility of putting a monetary value on environment...................................................................................4
1.3.2 economic framework for ES: supply-and-demand relationship..................................................................4
1.3.3 benefit capture.............................................................................................................................................4
2. COST BENEFIT ANALYSIS........................................................6
2.1 introduction............................................................................................................................................. 6
2.2 private CBA.............................................................................................................................................. 6
2.2.1 compounding & discounting (time value of money)...................................................................................6
2.2.2 decision rules...............................................................................................................................................6
2.2.3 dealing with risk...........................................................................................................................................7
2.3 environmental CBA.................................................................................................................................. 7
2.4 discounting.............................................................................................................................................. 7
2.4.1 Opportunity cost of capital..........................................................................................................................7
2.4.2 time preferences..........................................................................................................................................7
2.5 alternatives to CBA................................................................................................................................... 8
2.5.1 cost effectiveness.........................................................................................................................................8
2.5.2 multi-criteria analysis...................................................................................................................................8
2.5.3 deliberative polling.......................................................................................................................................8
2.5.4 citizens’ juries...............................................................................................................................................8
Extra: see exercises & applied example.......................................................................................................... 8
3. VALUING THE ENVIRONMENT..................................................9
3.1 introduction............................................................................................................................................. 9
3.1.1 Categorization of services............................................................................................................................9
3.1.2 Categorization of environmental values......................................................................................................9
3.2 travel cost method (indirect).................................................................................................................. 10
3.2.1 characteristics of E: complementarity & non-essential.............................................................................10
3.2.2 theoretical basis.........................................................................................................................................10
3.2.3 zonal TCM...................................................................................................................................................12
3.2.4 individual TCM...........................................................................................................................................12
3.2.5 pooled TCM................................................................................................................................................12
,3.3 hedonic pricing (indirect)........................................................................................................................ 13
3.3.1 relationships between housing prices an environmental quality..............................................................13
3.3.2 HP- implementation...................................................................................................................................13
3.3.3 HP-problems...............................................................................................................................................13
3.4 contingent valuation method (direct)..................................................................................................... 13
3.4.1 WTP vs WTA: compensating and equivalent surplus.................................................................................14
3.4.2 steps of a CV...............................................................................................................................................14
3.4.3 potential issues with CV.............................................................................................................................16
3.4.4 potential biases with CV.............................................................................................................................16
3.5 choice modelling (direct)........................................................................................................................ 17
3.5.1 analysing the data: random utility theory.................................................................................................17
3.5.2 Advantages of CM......................................................................................................................................18
3.5.3 difficulties of CM.......................................................................................................................................18
3.6 market based approaches (direct).......................................................................................................... 18
3.6.1 market price-based approaches................................................................................................................18
3.6.2 cost-based approaches..............................................................................................................................19
3.6.3 production function-based approaches.....................................................................................................19
3.7 benefit transfer...................................................................................................................................... 19
, 1. ES & biodiversity, direct & indirect economic
values, economic framework
1.1 introduction
Use of project appraisal: to decide whether it is in the public interest to allow a certain project, decision-
aiding tool
Project= a current commitment with consequences stretching over future time, through:
a) Accumulation of capital: investing resources (money) in human-made capital
→ Unintentionally environmental impact (= externality)
b) Adoption of a government policy (e.g. subsidy that is used to avoid deforestation)
→ Project with the main purpose to have beneficial environmental impacts
Projects are ‘marginal’ with respect to the economy as a whole
→ Don’t change the structure of the economy (functioning is maintained)
E.g. big project (airport building): lot of new jobs, lot of money, but doesn’t change structure of economy
Bad e.g. changing from a market economy to a communist economy (project appraisal would not work)
2 kinds
1. Commercial project appraisal: focus on the private costs & benefits of a company
→ environment is an externality market failure
2. Social/environmental appraisal : externalities of the environment are taken into account
→ Commodification of the services that the environment provides (provides utility to firms and
households)
1.2 economic value of the environment
Environment provides services to the economy:
1. Provisioning services: Energy source & material resources Direct impact on production process
2. Regulating services: waste sink (e.g. nutrient recycling, climate regulation)
3. Cultural services: direct source of amenity Direct impact on individual’s utility (consumers)
4. Supporting services: e.g. biodiversity, soil formation, photosynthesis indirect impact on production process
Total economic value= direct value + indirect value
!!! economic value ≠ market price (because ESS are not exchanged on a market)
e.g. timber production (provisioning) can have a market price, biodiversity conservation (has no
. market price but we can put an economic value on it)
‘Ecosystem services are the flows of value to human societies as a result of the state and quantity of
natural capital’
‘Are the direct and indirect contributions of ecosystems to human well-being’
Do not stand by themselves are part of a production chain
Not only services (benefits), als dis-services
- Negative human health effects (e.g. restoration of wetlands= more mosquitoes)
- Production damage (e.g. introduction of wolve = affects sheep farmers)
- Natural disasters (e.g. wildfires)
- Discomfort caused by nature (e.g. more trees in the city= discomfort in the dark)
1. ES & BIODIVERSITY, DIRECT & INDIRECT ECONOMIC VALUES,
ECONOMIC FRAMEWORK............................................................3
1.1 introduction............................................................................................................................................. 3
1.2 economic value of the environment......................................................................................................... 3
1.3 valuing BD & ES........................................................................................................................................ 4
1.3.1 Utility of putting a monetary value on environment...................................................................................4
1.3.2 economic framework for ES: supply-and-demand relationship..................................................................4
1.3.3 benefit capture.............................................................................................................................................4
2. COST BENEFIT ANALYSIS........................................................6
2.1 introduction............................................................................................................................................. 6
2.2 private CBA.............................................................................................................................................. 6
2.2.1 compounding & discounting (time value of money)...................................................................................6
2.2.2 decision rules...............................................................................................................................................6
2.2.3 dealing with risk...........................................................................................................................................7
2.3 environmental CBA.................................................................................................................................. 7
2.4 discounting.............................................................................................................................................. 7
2.4.1 Opportunity cost of capital..........................................................................................................................7
2.4.2 time preferences..........................................................................................................................................7
2.5 alternatives to CBA................................................................................................................................... 8
2.5.1 cost effectiveness.........................................................................................................................................8
2.5.2 multi-criteria analysis...................................................................................................................................8
2.5.3 deliberative polling.......................................................................................................................................8
2.5.4 citizens’ juries...............................................................................................................................................8
Extra: see exercises & applied example.......................................................................................................... 8
3. VALUING THE ENVIRONMENT..................................................9
3.1 introduction............................................................................................................................................. 9
3.1.1 Categorization of services............................................................................................................................9
3.1.2 Categorization of environmental values......................................................................................................9
3.2 travel cost method (indirect).................................................................................................................. 10
3.2.1 characteristics of E: complementarity & non-essential.............................................................................10
3.2.2 theoretical basis.........................................................................................................................................10
3.2.3 zonal TCM...................................................................................................................................................12
3.2.4 individual TCM...........................................................................................................................................12
3.2.5 pooled TCM................................................................................................................................................12
,3.3 hedonic pricing (indirect)........................................................................................................................ 13
3.3.1 relationships between housing prices an environmental quality..............................................................13
3.3.2 HP- implementation...................................................................................................................................13
3.3.3 HP-problems...............................................................................................................................................13
3.4 contingent valuation method (direct)..................................................................................................... 13
3.4.1 WTP vs WTA: compensating and equivalent surplus.................................................................................14
3.4.2 steps of a CV...............................................................................................................................................14
3.4.3 potential issues with CV.............................................................................................................................16
3.4.4 potential biases with CV.............................................................................................................................16
3.5 choice modelling (direct)........................................................................................................................ 17
3.5.1 analysing the data: random utility theory.................................................................................................17
3.5.2 Advantages of CM......................................................................................................................................18
3.5.3 difficulties of CM.......................................................................................................................................18
3.6 market based approaches (direct).......................................................................................................... 18
3.6.1 market price-based approaches................................................................................................................18
3.6.2 cost-based approaches..............................................................................................................................19
3.6.3 production function-based approaches.....................................................................................................19
3.7 benefit transfer...................................................................................................................................... 19
, 1. ES & biodiversity, direct & indirect economic
values, economic framework
1.1 introduction
Use of project appraisal: to decide whether it is in the public interest to allow a certain project, decision-
aiding tool
Project= a current commitment with consequences stretching over future time, through:
a) Accumulation of capital: investing resources (money) in human-made capital
→ Unintentionally environmental impact (= externality)
b) Adoption of a government policy (e.g. subsidy that is used to avoid deforestation)
→ Project with the main purpose to have beneficial environmental impacts
Projects are ‘marginal’ with respect to the economy as a whole
→ Don’t change the structure of the economy (functioning is maintained)
E.g. big project (airport building): lot of new jobs, lot of money, but doesn’t change structure of economy
Bad e.g. changing from a market economy to a communist economy (project appraisal would not work)
2 kinds
1. Commercial project appraisal: focus on the private costs & benefits of a company
→ environment is an externality market failure
2. Social/environmental appraisal : externalities of the environment are taken into account
→ Commodification of the services that the environment provides (provides utility to firms and
households)
1.2 economic value of the environment
Environment provides services to the economy:
1. Provisioning services: Energy source & material resources Direct impact on production process
2. Regulating services: waste sink (e.g. nutrient recycling, climate regulation)
3. Cultural services: direct source of amenity Direct impact on individual’s utility (consumers)
4. Supporting services: e.g. biodiversity, soil formation, photosynthesis indirect impact on production process
Total economic value= direct value + indirect value
!!! economic value ≠ market price (because ESS are not exchanged on a market)
e.g. timber production (provisioning) can have a market price, biodiversity conservation (has no
. market price but we can put an economic value on it)
‘Ecosystem services are the flows of value to human societies as a result of the state and quantity of
natural capital’
‘Are the direct and indirect contributions of ecosystems to human well-being’
Do not stand by themselves are part of a production chain
Not only services (benefits), als dis-services
- Negative human health effects (e.g. restoration of wetlands= more mosquitoes)
- Production damage (e.g. introduction of wolve = affects sheep farmers)
- Natural disasters (e.g. wildfires)
- Discomfort caused by nature (e.g. more trees in the city= discomfort in the dark)
