Valuing Our Natural Environment Final Report ... - HM Treasury

Valuing Our Natural Environment – Final Report - Annex1
value is estimated on the basis of the cost of constructing equally effective man-made
defences; an application of the cost of alternatives approach.
A1.1.1.11 Discussion
Market value approaches, as outlined above, typically only provide monetary proxies or
‘benchmarks’ against which the value of the environmental good in question can be judged.
Values that may be derived from these approaches do not represent true valuations as the
assessment only considers whether the environment good is of greater value than the
opportunity cost (Bateman, 1999). Primarily, application of pricing rather than valuation
methods risks the under-valuation of environmental goods. To expand, knowing the price of
a good only informs on the cost of obtaining that good, rather than the actual benefit
derived from the ‘consumption’ of the good. As suggested, the values derived from the
opportunity cost, cost of alternatives, mitigation costs and shadow project costs are a
benchmark set by the market. However, it is important to note that the use of subsidy costs
will typically rely on what may be arbitrary values set by government which do not reflect
opportunity cost.
With regards to opportunity costs, it is likely that the market price of output is likely to
over-estimate the true opportunity cost of an action due distorted market structures which
reflect the political objectives rather than competitive relationships. This may be
particularly true when considering the agricultural sector. Highly intervened markets imply
a certain degree of complexity in the link between market prices and underlying costs,
suggesting that it may be difficult to assess the value of environmental goods in this
manner.
Note also that mitigation costs will typically only provide a partial assessment of the
environmental impact of interest. For instance, the cost of water filtration in order to
improve water quality will only account for the impact that is experienced by water
companies and their customers, and will not account for water pollution damages to
aquatic ecosystems. In relation to the application of shadow project costs, an important
aspect of the procedure would be to demonstrate the adequacy of the shadow project in
terms of replicating the environmental function that is to be lost.
A1.1.1.12 Consideration of distributional impacts
Where markets are distorted, values observed in markets may actually reflect the
preferences of government, who are essentially acting as a single arbiter of valuation,
and/or particular interest groups, rather than the ‘true’ value of the environmental goods
and services to society. This may result in insufficient weighting of values held by a
significant number of individuals not represented by interest groups involved in the political
process.
A1.1.1.13 Advantages and disadvantages
Generally, pricing approaches can be useful in providing an indicative monetary assessment
of the value of environmental goods that might otherwise be regarded as ‘free’. In addition
data may be readily attainable in the form of observable market prices, although some
caution is needed in order to account for price distortions. Strictly though, use of market
values which can inform on the price of obtaining a particular environmental good, does not
inform on the value of the environmental good, and as such it is likely that pricing approach
will lead to under-estimates of the ‘true’ value of environmental goods and services.
A1.1.1.14 Conflicts and synergies with other methods
Some aspects of pricing approaches, such as mitigation costs, may actually serve as inputs
into the production function approach framework (PFA - see separate fiche). Note however,
that in this context, these costs are an input to the analysis in that they are likely to alter
production or cost functions. The PFA enables estimates of changes in consumer and
producer surpluses to be estimated as a result of changes in the provision of environmental
goods and services which are inputs to production processes (e.g. water quality).
eftec A4
December 2006