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III. Physical Partial Analysis - And Valuation

Techniques are partial in the sense that they stop short of a full CBA or CEA with a prescriptive answer. Partial analysis provides input for the planning process whether it is top-down and controlled by the State, or bottom-up, feeding local preferences into a democratic planning system where it exists.

Environmental economists currently attempt to value the environment using standard procedures that have been around, in and out of fashion, for about four decades. For a summary of categories of environmental value and economic value see the Appendix. EIA is not strictly a valuation procedure, but rather is a comprehensive list of physical factors affected by a development or change of use. These factors are then balanced against the net benefits of related projects. This means implicit weights are attributed severally when summing factors.

Methods of valuation are sometimes divided into primary and secondary. Primary methods may be direct or indirect. The former uses stated preferences based on consumer surveys that simulate constructed markets. Respondents are asked what they would be willing to pay (WTP) for various hypothetical environmental alternatives. Values may also be extrapolated from information in parallel markets, say travel cost, of visiting an environmental asset or the effect of public goods with territorial specificity (as most have) on land prices and rent (Foldvary, 1994).

Stated preference estimates derived from surveys of consumer opinion, sometimes called "contingent valuation" (CV), "are very controversial within the economics profession" (IUCN, 1996, p. 874). As Arrow said, "verbal answers don't hurt the way cash payments do" (Cummings at al., 1986). But the approach has legal status in the US for decades. The difficulties of contingent valuation are discussed below in the light of recent debate. This debate goes back several decades and, apart from the recent revival of some issues discussed below in a more interdisciplinary context, has been well summarized (Cummings et al., 1986; Mitchell and Carson, 1988; and Hausman, 1993).

The more recent debate on environmental valuation in general, and on CV in particular, has not yet had an impact on practical and applied methods of environmental valuation and project appraisal in the development banks. See Section V.

The travel cost method (TCM) tries to simulate the attractiveness of a site and is reviewed comprehensively by Fletcher, et al (1980). It cannot easily measure non-use values and the research estimate of cost may differ greatly from an individual perceived cost. For example, is time spent in a car a cost or a benefit? Sites of little utility may attract high value, if the journey is pleasant and vice versa. Hedonic cost methods, e.g., relating house prices to distance from a source of pollution, seem currently to be out of favor, especially as values often contradict hypotheses. For example houses near an airport claiming damage for noise footprint pollution may have higher values than comparable houses elsewhere. Contingent ranking is considered to be easier for consumers to deal with and is described as an indirect primary method.

Given the debate over simple surrogate valuation models, there may not be much future for more complicated models such as random utility or production function approaches (IUCN, 1996. p. 850). These are susceptible to criticism in uses not relating to the environment, and more so when the complexities of the latter are added. Most other revealed preference methods involve estimation of opportunity cost; which, although useful as a concept in principle, is difficult to apply in practice.

The cost of research to provide even contestable estimates of costs and benefits is very large and impractical for most projects. Consequently a secondary method involving a system of short cut estimates has been evolved, namely the "benefits transfer method" (BTM). This involves using secondary data from similar situations in other countries or areas to produce rough estimates of benefits and costs of environmental factors in the environment to be assessed. For example the benefits of a beach in Thailand may be used to approximate the benefits of a beach in the Philippines. This method is mercifully not yet well developed and is a recipe for arbitrary measurement. For a summary of BTM, see Table 3.

In summary, environmental values are hard to measure in practice. Neither surrogate markets based on revealed preferences nor simulated markets are approaches that rise above the swell of criticism. Biodiversity is most difficult to define in scientific and physical terms, and so almost impossible to value. Biodiversity is said to be a public good, non-rival and nonexclusive in consumption. Like many other environmental benefits, it generally has territorial specificity. So, following Foldvary (1994), there is no clear reason why property rights should not be allocated and enforced and the appropriate market rents collected. This thinking is not yet well developed, partly because the bureaucratic elite, often under pressure from minority lobbies, decides what people should value even if they are not currently or ever willing to pay for it.

According to manuals and guidelines, these partial valuation techniques may be incorporated into a comprehensive CBA. But given the debate about their usefulness is it worth it? Perhaps it is better to concentrate effort on EIA; which gives a comprehensive list of environmental physical effects, good and bad, on any project. These physical effects are easier to agree, and can be compared intuitively with the money benefits of a project, excluding environmental effects. This comparison preferably occurs within a democratic planning system that gives full weight to the wishes of local people where a project is situated. The reason for suggesting this approach will be clearer after the next section.

The valuation of non-market goods discussed above reveals the difficulty of environmental valuation in practice. The widespread criticism of environment valuation methods in principle adds to the problem. Neither practice nor principle considers devolving decision making and planning to a more local level, more democratic rather than top-down, and using numerical estimates to inform rather than anticipate a political decision.

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