When to use
Two important conclusions can be drawn from the previous section. First, economic non-market valuation methods are generally the most objective and valid means for estimating non-market environmental values. Second, whether it is worth conducting a non-market valuation study to factor non-market outcomes into policy analysis depends on the circumstances. Factors to consider include the importance of non-market outcomes to the policy decision, the cost of undertaking a non-market valuation study, and the type of analysis that can be conducted.
Figure 3.1 provides a flow chart that suggests how these and other factors might be taken into account.
Figure 3.1 Dealing with non-market outcomes in policy analysis
a Preliminary analysis could be useful in establishing whether the value of non-market outcomes is likely to be material in determining which option has the highest net benefit. b This does not imply that action should be delayed until uncertainties about the effects of policy options are resolved. Precaution should be applied through risk management frameworks that take account of uncertainty c The depth of analysis should be commensurate with the overall effects and in some cases a formal cost–benefit analysis is not justified (Australian Government 2013).
In assessing whether non-market outcomes are important, it should be borne in mind that not all environmental outcomes are non-market in nature (chapter 1). For example, improving the quality of river water might give rise to both market benefits (for example, increased production by irrigators) and non-market benefits (healthier and more sustainable native fish populations). Where market benefits predominate, methods other than non-market valuation are required.
As suggested by figure 3.1, the case for conducting a non-market valuation study is strongest where the cost of a study is low relative to the value of the information it can provide for the policy analysis. In practice, this is most likely to occur where the financial or environmental stakes are high and there is potential for non-market
Are non-market outcomes likely to influence the choice of policy
option?a
Have the likely non-market outcomes of the options been described as rigorously
as is feasible at present?b
Yes No
Yes No
Is the cost of a non-market valuation study small relative to the cost of choosing an inferior option?
No
Consider conducting a non-market valuation study as part of a cost–benefit analysis
Yes
Describe non-market outcomes qualitatively as part of a partially quantified cost–benefit
analysis (or simplified versionc)
Consider using benefit transfer as part of a cost–benefit analysis (or simplified version)
Yes
Efficiency Are suitable non-market
studies available to support benefit transfer?
Seek further information on non-market outcomes
before proceeding
Is the analysis focused on efficiency or cost effectiveness?
Consider using expert valuation as part of a cost–benefit analysis (or simplified version) Describe non-market outcomes qualitatively
as part of a partially quantified cost–benefit analysis (or simplified version)
No
Cost effectiveness
outcomes to influence the choice of policy option. Possible policy contexts include where:
• different regulatory options are being assessed (for example, different air quality standards)
• a regulatory decision is required on whether, or under what conditions, an action that would have negative environmental consequences should go ahead
• a major government investment in environmental improvement is being considered.
Meaningful value estimates can only be obtained when there is reliable information on what the policy outcomes are likely to be. This will often require scientific assessment of the environmental improvement (or degradation) likely to be brought about by a policy option. In some cases, information about how various groups are likely to respond to the policy is also needed (for example, how farmers are likely to respond to incentives to use more environmentally friendly practices). This information does not need to be precise, but the degree of uncertainty should be documented.
The evidence on benefit transfer presented in chapter 2 suggests that, at present, a shortage of suitable primary studies is likely to mean that this technique can only reliably be used in a limited range of circumstances. This is particularly relevant for areas such as natural resource management and biodiversity conservation, where there are a large number of environmental assets, each with a unique value that can be enhanced (or compromised) to different degrees by proposed policies. However, if even a very imprecise value estimate is potentially of use, benefit transfer may be worth considering even when the available primary studies are less than ideal.
The implication of this, combined with the reasonably high cost of doing non-market valuation studies, is that the bottom portion of figure 3.1 is likely to come into play fairly often. The figure suggests that non-market outcomes should not be quantified in dollar terms where the cost of doing so is high relative to the value of the information it can provide to the policy analysis. Where this applies and the analysis is focused on efficiency, such as whether introducing a new environmental regulation will have net benefits for the community, non-market outcomes should be described. In these cases, the analysis should make it clear that the choice of option comes down to the judgment of the decision maker.
Where analysis is focused on cost effectiveness, expert valuation can have an important role to play. For example, if a budget has been set for funding environmental investments, analysis can help identify the options that are most cost effective in achieving the objectives and priorities of the government.
How to use non-market valuation
Chapter 2 provides information on what makes a good non-market valuation study.
In addition, to achieve good results non-market valuation needs to be used in combination with good practice policy principles. For example, the Australian Government’s Best Practice Regulation Handbook details a number of steps that are to be completed before quantifying the costs and benefits of policy options. One of these is analysing the problem to see whether there is a case for considering new government action (Australian Government 2013). Unless there is a problem requiring action, the development of options, let alone a cost–benefit analysis incorporating non-market value estimates, is unnecessary. Box 3.4 provides an example of the importance of problem identification and analysis.
Where non-market valuation estimates are used it is important that they relate to the change in value resulting from the policy or project. In other words, the correct value to use is ‘the difference between the environmental value with the project and without the project’ (Pannell 2013a). While this is a simple point, there are reports of the entire value of the asset being used as well as other errors (Maron, Rhodes and Gibbons 2013).
Non-market valuation estimates that are sufficiently reliable should generally be included in a cost–benefit analysis. Results should be presented with and without the non-market values, the likely accuracy of all components of the analysis explained and sensitivity analysis done. It is important to describe the non-market outcomes as well as providing their estimated value (or range of values).
Cost–benefit analysis is an information aid to decision-making, and not a substitute for it. The analysis needs to be presented clearly to allow for proper scrutiny, including of the basis for non-market valuation estimates. There is invariably a role for judgment concerning a range of social, ethical and political considerations, as well as those relating to residual measurement uncertainties (Commonwealth of Australia 2006).
Box 3.4 Non-market valuation and waste policy
A Productivity Commission inquiry into waste management found that some Australian governments had adopted unrealistic and potentially very costly targets for reducing waste and increasing recycling.
The Commission argued that the main problem that governments should address was not so much that there was too much waste being produced and not enough recycling, but rather that waste disposal could cause pollution and loss of visual amenity. The market failure rationale for government intervention is because these problems impose costs on people in the community. Accordingly, the Commission argued that waste management policy should be refocused on the environmental and social impacts of waste collection and disposal (including those associated with poorly engineered landfills, types of waste that pose particular hazards, and litter).
The inquiry report acknowledged that waste is the end product of a life-cycle process that can have ‘upstream’ environmental impacts. That is, if the full-life cycle of a product is not considered, too many resources could go toward its production.
However, it argued that these impacts could be much more effectively and efficiently addressed using direct policy instruments, rather than by using waste management policies. For example, it is likely to be more effective to address environmental damage from mining by requiring mining operations to meet specified standards, rather than trying to reduce mining (and hence any associated environmental impact) by placing a levy on waste disposal or subsidising recycling.
Since the Commission’s inquiry, a number of non-market valuation studies have been commissioned to try to estimate the benefits of increasing recycling rates. For example, choice modelling was used to estimate the amount that households would be willing to pay for government intervention to increase the percentage of electronic waste (such as televisions and computers) that is recycled (appendix B).
It is not clear that the commissioning of these studies and their use in policy analysis proceeded from a sound analysis of the problem. This is because the focus was on recycling rates (that would not seem to be directly affected by market failure), rather than on the environmental or social benefits from reducing waste disposal.
A related issue is that these studies ask households to value a process rather than an environmental endpoint, which brings the non-market value estimates into question (Collins 2011). This is because people’s willingness to pay for recycling rates to be increased may be based on a poor understanding of the likely environmental and other benefits.
Sources: Collins (2011); PC (2006).