VALUING ENVIRONMENTAL GOODS AND SERVICES
1. Market-based valuation methods
Direct market pricing
Direct market pricing is one of the most basic approaches to developing suiting values for
environmental goods and services, making use of the price of goods and services bought in
markets. This kind of approach has the characteristic of offering measurable results that signify
the economic value of such goods and services in real economic transactions of which for
instance, timber includes forest resources, fish includes ocean resources, and purified water
includes natural resources; goods that have direct market prices that can be used to estimate their
value. This method’s main strength is that it does not require estimating markets to any
significant extent, rather it uses real market data (Tietenberg & Lewis, 2018). Nevertheless,
there’re some drawbacks of direct market pricing. Since not all environmental goods and
services are traded in the market this leads to some of them being valued less. For example, the
price that people are willing to pay to have clean air, biodiverse species, and pollination services,
and other similar ecosystem goods are still nonexistent in current market conditions (Pearce,
2001). Also, market prices frequently fail to reflect the total social worth of environmental
goods, especially if there are market imperfections such as externalities. In Example, the market
price of fossil fuels does not capture the social cost of carbon emissions hence market distorts
clean energy prices (Stern, 2006). Another crucial factor relates to that the prices that buyers
accept in a particular market may change over time for several reasons which may include the
change in policies, the state of the economy, and adoption of modern technology. These
fluctuations could therefore pose some levels of variability and hence instability to the direct
market pricing as a stock valuation method. For instance, the intervention such as carbon tax
changes the price of fossil fuels and renewable energy thus swaying their valuation (Nordhaus,
2019). Hence, though DMCP is a good starting point for environmental valuation, many a times
it requires other methods to get the complete picture of the environmental value.
Avoided cost method
The avoided cost method is most useful technique of placing a value on the environmental goods
and services by assessing the costs that are averted as a result of the availability of the goods and
services. It is especially useful in the evaluation of the ecosystem services that avert harm or
mitigate the require ment of costly human action. For instance, wetlands act as buffer to floods
which implies that they help in avoiding expenses in construction of flood control structures
(Barbier et al. , 2011). This is because, by estimating the expenses of such infrastructure that
would be needed in case wetlands were not existing, then the value of this ecosystem service can
be ascertained. A major strength of avoided cost method is in this area of depicting the economic
value of natural systems in a more real sense. It can be more convincing to the policy makers and
other stakeholders who need tangible reasons for the conservation of the environment on the
basis of economic benefits (Heal, 2000). For instance, New York City has implemented
investment in protection of its watershed as it was cheaper to invest in natural capital than
construct and operate a water filtration plant as was realized earlier (Chichilnisky & Heal, 1998).
However, the method of avoided cost also has its limitations. In other cases, it involves elaborate
and precise information on the environmental service of interest and of potential substitutes. This
can be difficult especially in the modeling and the assumptions that are made because they can
introduce uncertainties (Gren et al. , 1994). Furthermore, this method is likely to be oriented
towards the immediate economic returns and often disregard long-term ecological consequences
and characteristics which are often non-market. For instance, although the avoided cost method
can be considered as rather efficient in estimating the value of the flood control by wetlands, it
can fail to present the other benefits of these ecosystems, including the ones related to the
support of bio-diversity and carbon sequestration (Turner et al. , 2003).
Replacement cost approach
The final common important method of evaluating the environmental goods and services is the
replacement cost approach, which focuses on the costs incurred when an ecosystem service is
substituted with a manmade system. Such approach becomes relevant when natural services can
be replaced by technologies, which are offered by existing systems, for instance, the function of
a forest in supplying clean water can be valued through the cost of establishing and maintaining a
water purification plant capable of delivering the same service (Shabman & Batie, 1978). It can
also be said that a primary benefit of the replacement cost approach is based on the use of
realistic, measurable costs that are easy for managers and other stakeholders to comprehend. This
method can be used to show their economic relevance by contrasting them with man-made
analogues for example, coastal wetlands act like buffers to storm surges; hence, it is possible to
quantify the cost of building walls or other mechanisms that can offer the same level of
protection (Costanza et al. , 2008). However, the replacement cost method also has some
disadvantages. It supposes that the man-made replacements can offer similar services that the
natural systems offer, which is not the case most of the time. In natural ecosystems there are
several interdependent functions which are very hard if not impossible to imitate with artificial
systems (Heal, 2000). For instance, although a water treatment plant can filter water, it does not
offer the other functions of a forest which include being a home to wildlife, carbon sink, and a
recreational area (Barbier, 2007). However, the replacement cost approach can also
underestimate the worth of natural systems by providing a value based solely on substitutes’
costs. However, it can be somewhat limited in terms of exploring the other more global aspects
of ecosystems as well as the social aspects of ecosystems which are often less measurable in
nature. For example, the cultural and aesthetic attributes of a forest are not readily substitutable
or recreatable through technology (Pearce, 2001).
2. Revealed preference techniques
Travel cost method
Travel cost method is a revealed preference technique used in estimating the economic value of
sites such as the recreational sites and natural resources. This method founded on the belief that
the amount of money and time people are willing to lay down to access a site determines the
value of the site, that is, the travel costs shown herein are the proxies of the cost of gaining an
access to the site. Therefore, based on the data of visitors’ rates in relation to a site with travel
costs, the demand curve for the site can be determined, as well as its economic value (Parsons,
2017). Also, one of the peculiarities of TCM is the absence of theory in contrast to the BVM, and
with that the possibility of the enhancement of the accuracy of the valuation can be provided. It
has been commonly applied in estimating the economic value of national parks, beaches and
most of the recreational facilities. For instance, Clawson and Knetsch [1966] applied this method
to establish the worth of outdoor recreational areas in the United States for additional research
work. According to the given data, it is possible to gather information on the visitors’
expenditures, and, therefore, the researchers attempt to predict the economical impact of these
natural sights.The TCM has its flaws, it mostly responds to use values such as recreation and
may not be very sensitive to non-use values such as existence value which is the value that
people place on a site remaining there for generations. Also, the method assumes that traveling
and time are the only constraints to site visitation while other factors could as well be equally or
even more influential (Ward & Beal, 2000). For example, the choices made independently by
consumers, availability of other related products or service, and socio-economic characteristics
are also known to influence the visits made.
Hedonic pricing method
The hedonic pricing method (HPM) is one of the revealed preference techniques that can be used
to estimate the economic value of environmental goods and services through focusing on how
environmental factors influence the price of market commodities particularly real estates. This
method is assumed on the facts that the price of the marketed good is associated with the
characteristics of goods, for instance, the environmental characteristic. For instance, properties
close to sources of clean water or parks or with quality air will cost more in the market place as
they are seen to possess an inherent environmental quality (Rosen, 1974). Another advantage of
HPM is its foundation on real market data which increases the actual and objective value of the
action. This method can prove useful in estimating the value of environmental qualities and anti-
qualities that affect property values which for instance, research will reveal that properties close
to parks or with good views attract higher prices compared to those close to sources of pollution
or noisy areas (Freeman, 2003). The ability to estimate the dollar values of environmental quality
on property values makes HPM a useful tool in policy analysis and for urban planning, however,
HPM also has its challenges as the following points depict. Market equilibrium is assumed, and
prices of properties incorporate the value of environmental characteristics, which is one major
limitation. Actually, property markets can be affected by a number of factors inclusive of zoning
ordinances, property taxes and the state of the economy which can, in turn, alter the correlation
between environmental quality and property values (Palmquist, 2005). HPM involves a call for
comprehensive and precise data on properties’ characteristics and sale, where data collection
often poses challenges and high costs as it mostly focuses on the value that is assigned to
environmental assets based on property markets and may not be able to estimate the non-use
values such as the cultural or intrinsic values. For instance, the method may underestimate the
value of conserving bio-physical resources that have no relation with the property value such as a
wildlife reserve, but that has extreme importance in terms of ecological and social value (Boyle
& Kiel, 2001).
Averting behaviour approach
The averting behavior approach (ABA) is a revealed preference technique employed in the
estimation of the marginal willingness to pay for the elimination of hazards in the environment
based on people’s expenditure to mitigate adverse environmental effects. This method is based
on the fact that people spend money to prevent or minimize contact with an unfavorable
environment such as pollution or contaminated water ands such expenditures can therefore be
employed to give an indication of the worth that people attach to environmental quality and
safety (Courant & Porter, 1981). For instance, spending on water and purified air by purchasing
bottled water, air conditioners or attics, or insulating home against pollution can be used to
estimate the means to clean water and air (Abdalla et al. , 1992). This method can be very helpful
in policy making since it supports the results with concrete data about the economic return of
enhanced environmental quality. Nevertheless, ABA has some disadvantages. This is because the
task of minimizing exposure to environmental risks through spending involves a considerable
amount of effort in collecting quantitative information regarding the concerned persons’
spending patterns and the efficacy of such spending patterns respectively. Often, this information
can be very hard to come by and using modeling techniques to estimate the function between
averting behavior and environmental quality may be complicated (Cropper & Freeman, 1991).
Further, ABA also involves one major limitation by assuming that people always possess perfect
knowledge about the threats in the environment as well as the efficacy of their avoiding
activities. ABA mainly focuses on the private costs of averting actions and may exclude public
ones and the overall social costs. For instance, people may consider public expenditures in
environmental improvement; this could be air quality standards or water purification plants and
these are not captured in the private averting costs (Dickie & Gerking, 1996). This occurrence of
using only the private expenditures will result in underestimation of the overall worth of
environmental enhancements.
3. Stated preference methods
Contingent valuation
Contingent valuation (CV) is one of the stated preference techniques that aim to place economic
values on non-market environmental resources by determining the respondents’ WTP for certain
environmental commodities or their WTA for certain environmental damages. This approach
involves administering surveys to obtain monetary values of options that have not been
experienced, making it a very flexible method in valuing a myriad of environmental assets
ranging from clean air and water, wildlife, and even aesthetic value of the landscape (Carson,
2012). A major advantage of CV is that it encompasses revealed and stated preferences which
allow the inclusion of use and non-use values, existence and bequest values. Therefore, CV is
exceptionally beneficial for total environmental valuation. For instance, the oil spill by the
Exxon Valdez in Alaska led to the application of CV in the assessment of public WTP for
aversion of future similar disasters using the CV (Carson et al. , 2003). Nonetheless, CV also has
some challenges which include the following. Some critics pointed out that hypothetical bias can
still influence the results because people can be tend to overstate their willingness when they are
in hypothetical conditions, than when they are really on condition. Strategic bias can also emerge
if the respondent gives a WTP that is higher or lower than the true WTP with an aim of changing
the decision made by the policymakers. Also, developing and conducting CV surveys may be
difficult and expensive since reliability and validity of survey results depend of the design of the
survey (Arrow et al. , 1993). In addition, the reliance of the CV results on the respondents’
understanding of the specific environmental good that is being valued, and the hypothetical
scenarios used to elicit these values, cannot be overemputed. Lack of knowledge and
understanding of the environmental issue cause unreliable estimations of the value. For instance,
many of the respondents will have a challenge in determining the utility of some of the
ecosystem service or even the future environmental gains (Hausman, 2012).
Choice experiments
Choice experiments (CE) is a stated preference method of assessing the willingness to pay for
environmental goods and services by offering a number of options that are made up of different
attribute levels to the respondent and asking him or her to select the most preferred one. By
choosing this approach, researchers are able to assume the value of individual attributes and their
trade off, this way there is a clear indication of the preference for the more complex
environmental goods (Louviere et al. , 2000). Another major strength of CE lies in its capacity of
evaluating several attributes at a time, hence, it can be applied in estimating the value of complex
environmental commodities with multiple attributes. For instance, a choice experiment can
contain different ways of managing a river basin regarding its water quality, bio-diversity, and
recreational activities where the researchers will be able to estimate the worth of the attributes
and the joint impacts of these attributes (Hanley et al. , 2001). This detailed information can be
useful to policymakers who are working on developing complex environmental interventions.
The type and nature of the scenarios as well as the mental demands that are put on the
respondents can influence the quality of the results. If the respondents feel that the choices are
too many or else confusing, they may be forced to use the heuristics, this may cause them to give
either biases or even inconsistent responses (Bateman et al. , 2002). Furthermore, the nature of
choice sets such as the choice of attributes and their levels needs to be highly realistic for the
respondents (Hensher et al. , 2005). A weakness is that CE uses hypothetical questions and thus
can suffer from hypothetical bias similar to contingent valuation methods. This is due to the fact
that respondents may provide the answers that they think are expected of them rather than their
actual WTP for those attributes. To avoid this, the researchers apply debriefing questions that
allow to check the consistency and reliability of the answers given (Bennett & Blamey, 2001).
Conjoint analysis
Conjoint analysis is a stated preference method that is closely related to choice experimentation
to determine the utility of individual attributes of environmental goods and services based on
people’s trade-offs between different attributes. It involves showing the respondents a number of
‘constructed’ profiles of an environmental good and ranging or ranking the respondent according
to the level of attributes on each of these profiles. The responses are then subjected to analysis to
arrive at the count of times each attribute and its corresponding value has been mentioned (Green
& Srinivasan, 1978). Another advantage of CA is flexibility in the measurement and analysis of
values assigned to environmental goods; it breaks the gross value into attributes that give clear
perception of attributes preferred most by the people. This makes it especially appropriate for use
in framing and assessing multi-element environmental policies as for instance, conjoint analysis
was employed to compare the public’s preferences on the use of forests for conservation
purposes, recreation or timber production to be adopted by the government (Riera et al. , 2012).
Nevertheless, it has been established that CA also has several limitations. The level of the task’s
difficulty may result in respondents’ high cognitive load and, therefore, either crude decision-
making patterns or erratic answers. It is advantageous to make certain that the attribute levels are
realistic and the respondent understands any trade-offs that are likely to be made (Holmes &
Adamowicz, 2003). However, similar to all stated preference methods, conjoint analysis suffers
from hypothetical bias, in that the respondents’ responses in hypothetical contexts may differ
from actual scenarios. Furthermore, the structure of the conjoint survey such as choice of the
attributes, and how the levels are presented also matters in its validity and reliability. Inadequate
surveys are likely to generate unreliable figures, and therefore skew the results making the
outcome of the survey questionable (Roe et al. , 1996). However, if properly designed and
implemented, conjoint analysis can yield important insights about the public’s perception and the
importance that is placed on specific environmental characteristics to aid decision making in the
formulation and implementation of environmental policies and management.
4. Ecosystem services valuation
Provisioning services assessment
The mentioned products include food, fresh water, raw materials, and genetic materials that are
obtained from ecosystems. Evaluating the worth of provisioning services entails identifying the
revenue that accrues to the human society as a result of using these goods, and this is done using
economic valuation whereby the services are valued based on market prices where they exist or
alternative means where they are nonexistent (Fisher et al. , 2008). The direct market pricing is
known to be one of the most efficient techniques of evaluating the provisioning services. The
economic value of products such as timber, fish, an agricultural produce are estimated using this
method by relating the cost to existing market prices. For example, the market price of timber
that is obtained from the forests can be used to estimate the economic values of provisioning
services. This method is relatively simple and focuses on the exchange prices of goods, which
can be easily obtained and quantified hence is a good method for valuing goods that are sold in
well established markets (Hein et al. , 2006). But direct market pricing can neglect the value of
all the provisioning services especially the none market goods or the ones that their market price
does not include the real scarcities or ecological significance. For instance, the services such as
freshwater supply could be underpriced for natural ecosystems if the prices do not capture the
processes that support water quality and availability (Costanza et al. , 1997). In such
circumstances, other methods of valuation such as the replacement cost method may be applied.
Calculating the cost at which an ecosystem service can be substituted by a manmade service, this
method gives an approximate value for the service (Kumar & Kumar 2008). The other issue that
has been highlighted when attempting to measure the provisioning services is the inability to
determine the sustainability of the resource use. On the negative impacts of overusing the
provisioning services, it is evident that the ecosystem is depleted and future yield is lost.
Sustainable management practices are consequently needed to be incorporated in the valuation
activity so that these services can be available in the future. For instance, an appropriate measure
that can be used to sustain the supply of timber and at the same time sustain the ecosystem is the
sustainable forestry (MEA, 2005).
Regulating services evaluation
Regulated services are the services that people derive from the regulation of ecosystem’s
processes, for instance, regulation of climate, water treatment, flood prevention, and pollination.
Such assessment is done by assigning monetary values to the benefits that come with the use of
ecosystem regulation services most of which are not easily monetized because of the indirect
nature of the services (TEEB, 2010). The avoided cost approach is perhaps one of the most
conventional assessment techniques with regard to regulating services. This method therefore
puts a price tag on regulation services by determining the amount of money that would have been
paid if the services were nonexistent or substandard. For Instance, flood control benefits of
wetland soaks up water and releases it slowly, this therefore eliminates the need for costly flood
control structures. The cost of constructing and maintaining these structures which are not
established can be used to put into consideration the avoided cost of wetlands’ flood regulation
services (Barbier et al. , 2011). The other is the replacement cost method that has to do with the
assessable cost of substituting a natural regulating service with a human-made one. For instance,
it is possible to determine the worth of pollination by insects by evaluating the price of
pollination if carried out artificially due to dwindling natural pollinator population. This method
draws attention to the economic values of natural processes and the possible loss of such worth
(Allsopp et al. , 2008). However, the assessing of regulating services can be problematic because
ecosystem processes are intricate and diverse. Some regulating services occur at very broad
spatial and temporal scales, such that it is hard to isolate the effects of specific actions on the
benefits realized economically. Also, the relationships of the ecosystem services have to be taken
into account to ensure that no two services are counted for the same benefit or that some benefits
are underestimated. For instance, forests help in climate change by helping in carbon storage;
however, they also support water regulation, species diversity, and soil nitrogen retention (Ninan
& Inoue, 2013).
Cultural services quantification
Cultural services refer to the social values people derive from ecosystems for instance, tourism,
appreciation, religion and history. Measuring these services requires assessing their monetary
worth, which is always difficult since many of them are non-material, and therefore, have no
market price (Daniel et al.2012). Among the most frequently applied approaches to evaluate
cultural services, there is the contingent valuation (CV) method. The stated preference technique
of this method entails asking the people their WTP for certain cultural services, or WTA for the
lost amount. For instance, with CV, one can determine the willingness to pay for recreational
services offered by national parks or the existence of the aesthetic value of beautiful views
(Carson et al. , 2003). This method has been devised to cover both the use and non-use values
hence it can be used to value cultural services that are directly enjoyed and those that are
indirectly enjoyed. Another technique is the travel cost method (TCM), which finds the value of
recreational and tourism services through the costs involved to the visitor in reaching a site
which is operationalized by the costs of travel such as transportation, accommodation and time
taken to get to and fro as a measure of the recreational value. For example, the worth of a natural
park in a certain economy can be measured depending on the cost of travel of visitors and the
rates of visitation (Parsons, 2017). Two methods: CV and TCM have their weaknesses. CV can
be influenced by hypothetical bias in which respondents are willing to pay more for a good or
service in hypothetical scenarios than they would in real life. While TCM largely involves use
values it often misses out on non-use values such as aesthetic value, religious value or historical
value of an ecosystem. Further, TCM assumes that travel costs are the only determinant of
visitation, which may lead to ignoring other factors such as visitors’ preference and substitute
sites (Hanley et al. , 2003).
5. Non-use value considerations
Option value
Option value is another concept emphasized in environmental economics which incorporates the
perceived value of a natural resource or an ecosystem service that is not currently being used by
a person, but who values the option to use such a resource in the future. This idea is most
suitable especially in conditions of risk and uniqueness in connection with changes in the
environment (Arrow & Fisher, 1974). An example of the method used to estimate option value is
contingent valuation (CV) surveys that employ willingness to pay (WTP) to ensure the continued
availability of an environmental asset for future use. For instance, people are willing to pay to
conserve a forest even though they have not been using it for recreation or firewood, because
they may want to use it in the future or there are prospects of discovering a cure for a disease
from the plants found within the forest (Freeman, 2003). However, the quantification of the
option value is not easy because the scenarios created in the CV surveys are hypothetical. One
can fail to estimate when he/she is likely to have a certain preference or whether it is worthwhile
to maintain an option. Furthermore, option value is associated with other non-use values such as
existence and bequeathal values and hence it is not easy to quantify the two different components
independently (Smith, 1983). Another technique that is used to evaluate option value is the real
options analysis which is an extension of the financial options theory to the field of environment
decision making. This approach measures the utility of postponing an irreversible decision that
involves subjecting a piece of land to deforestation or wetland conversion in order to retain the
option of using the piece of land for other purposes as and when one acquires more information.
Real options analysis, thus, has a dynamic characteristic in terms of the capacity to take future
changes into account, which makes the evaluation of environmental resources under uncertainty
much more efficient (Dixit & Pindyck, 1994).
Existence value
The existence value is one of the species of non-use value, which portrays the worth people
associate with natural objects and systems without regard to their utilization. This value is
spurred by ethical, moral or altruistic attributes in that it affirms the worth of existence of
species, wild and natural aesthetics (Krutilla, 1967). The contingent valuation (CV) method is
commonly used in existence value assessment by posing questions to the respondents concerning
the amount they are willing to pay for the environmental good to persist in existence. For
instance, people would be prepared to donate for the protection of some animals which they
might not even come across and see in their lifetime, because they hold the animals’ existence in
the world as an asset (Carson et al. , 2003). This approach captures the non-utility aspects that
people get from the satisfaction of having it in mind that a natural resource or an ecosystem is
conserved. However, there are some issues; hypothetical bias and strategic bias are some of the
issues experienced while using CV method hence the reliability of the result. Hypothetical bias
results from the discrepancy between the respondents’ willingness to pay in hypothetical
scenarios and their real behavior while strategic bias is when the respondents deliberately
provide an incorrect willingness to pay for a given service in a bid to bring a certain change in
policy. To reduce these biases, there are several methods which are followed by the researchers
including follow-up questions and validity checks to obtain consistent responses (Arrow et al. ,
1993)Existence value can also be measured by data on donations from conservation
organizations and through this research, one can deduce the importance that people accord the
need for existence of natural resources by assessing the degree of participation of people in
environmental causes. Although the use of this method yields observed WTP of existence value,
it fails to register existence value of the resource since people do not always give expression of
their preference via donations (Champ et al. , 2017).
Bequest value
Since bequest value is a type of non-use value, it implies people’s willingness to conserve natural
resources and systems for generations to come. This value is derived from the intergenerational
equity argument as well as the ethical consideration that future generations equally should be
able to reap from the advantages of a sound environment (Pearce & Turner, 1990). One of the
methods of estimating bequest value is contingent valuation (CV) that implies the direct WTP to
preserve natural resources for the future generations. For instance, the people will be willing to
contribute towards protecting say a national park in order to ensure that future generation
including their children and grandchildren have a chance to enjoy the beauty of such an area or
the species found in it (Carson et al. , 2003). This method encompasses the spirit behind bequest
value focusing on the desire to leave the environment in a better state. This is the primary reason
why it is often difficult to estimate bequest values alongside other non-use values such as
existence and option values. It may be challenging to distinguish the respondents’ willingness to
pay for the conservation of resources for future generations from their inherent value. To
overcome this, surveys can have questions that are aimed at identifying the specific bequest
motivation questions that will assist in elaborating on the separate factors of the non-use value
(Mitchell & Carson, 1989). Another method of estimating bequest value is the choice
experiments where the respondents are given options that involve trade offs between current and
future gains from environmental preservation.. The integration of bequest value in environmental
policy and decision making brings out the ethical responsibility of considering the future
consequences of resource utilization and management making establishing that those policies
that acknowledge and incorporate bequest value could encourage environmental conservation
and guarantee that the earth resources are left for future generations’ use and benefit. For
instance, the creation of protected areas, and easement agreements offer a mechanism of
protecting ecosystems and biological diversity and hence yielding long-term values to the future
generation (Barbier et al. , 2011).
6. Benefit transfer method
Unit value transfers
The benefit transfer method is one of the useful techniques of valuing environmental resources
and services when it is difficult to obtain the primary data for the valuation and among others,
one technique commonly implemented within this method is the unit value transfers whereby
value estimates are put from another study site known as the source site to a policy site
recognized as the target site using per unit values like per hectare or per person (Johnston &
Rosenberger, 2010). Of the three types of value transfers, unit value transfers are the simplest
and least expensive because they do not call for many changes. For example, if in a study on the
value of wetland services, it is determined that the services of wetlands per hectare the value is
estimated then this value can be used on the wetlands which are found in another geographical
area that has similar characteristics with the previous wetland. This method is quite effective
especially when the environmental goods or services to be valued are standardized and the socio-
economic and ecological conditions between the source and target sites are similar (Rosenberger
and Loomis, 2003). However, the efficiency of the unit value transfers is not fully reliable if the
distinctions between the source and the target locations are considerable. Population density,
income level, environment, and culture differ greatly and can consequently influence the
transferred value. For this reason, to increase the accuracy, adjustments for income and price
levels between the source site and target site are typically made (Boyle & Parmeter, 2017).
However, unit value transfers are not without their drawbacks; their application is somewhat
constrained when it comes to valuing non-market goods with multiple layers of ecosystems and
socio-economic relations. The method implies that any value estimated at the source site is
transferable to the target site without considering site characteristics that may affect the value of
the environmental goods or services (Bergstrom and Taylor, 2006).
Function transfers
Function transfers are considered as a more advanced technique as compared to the benefit
transfer techniques as it involves the transfer of estimated functions or models only. This method
applies statistical models derived from the primary studies to estimate values at the target site
according to the characteristics and variables of the site (Rosenberger & Loomis, 2003). Other
benefits associated with function transfers include the fact that they are in a position to capture
differences in site specific characteristics thus offering better and site specific estimates of value.
For instance, a function developed from a hedonic pricing model used in estimating property
values relative to green spaces can be exported to another area by re-parameterizing the model
using inputs compatible with the new site’s property characteristics, environmental quality, and
socio-economic conditions (Johnston et al. , 2006). Function transfers can be categorized into
two types: a value function and a demand function A value function is a function that is used in
decision making processes in operations research and can be used to model a decision maker’s
preferences for various outcomes. Value functions provide an estimate of the worth of
environmental characteristics whilst demand functions provide an estimate of the quantity of
demand of an environmental good or service. Both types allow for differences between the
source and target sites and thus increase the efficiency of benefit transfer (Brouwer, 2000).
However, the function transfers are more elaborate and involve a lot of data compared to the unit
value transfers. They need accurate information on the variables that define the value estimates
as well as sound statistical models to give accurate prognosis. In another way, it can be restricted
by the availability and quality of primary studies that supply the needed functions (Rosenberger
& Phipps, 2007). Another limitation is model misspecation, that is, the functional form or the set
of variables used to determine environmental attributes and values may be inaccurate. It is thus
important to ensure that the functions that are transferred correspond to the target site and are not
biased or give unfair estimation of value (Johnston & Rosenberger, 2010).
Meta-analytic function transfers
Meta-analytic function transfers are another type of benefit transfer technique that goes beyond
merely transferring individual, primary studies: meta-analysis is conducted to integrate the
studies. This approach involves formulation of another statistical model that integrates the
outcomes of number of studies to acquire an overall function that can be used to forecast on the
other policy sites (Nelson & Kennedy, 2009). Meta-analysis enables a researcher to combine and
analyze a host of empirical data from various studies, in order to determine the patterns and more
so the association between variables and in this way, meta-analytic function transfer can produce
more generalizable and accurate benefits estimates, thereby increasing the reliability of benefit
transfers (Stanley & Doucouliagos, 2012),and other major benefit of meta-analytic function
transfers is that they allow for the consideration of study-specific factors that may affect value
estimates, including differences in the studies’ design, participants and methods of valuation.
These factors have been incorporated into the meta-analytic model and used to adjust for biases
as well as heterogeneity across studies to enhance the transfer of values (Johnston &
Rosenberger, 2010). For instance, a meta- analysis of contingent valuation studies that estimated
the recreational value of beaches may contain attributes such as the type of beach, method of
survey, and characteristics of the respondents. The meta-analytic function obtained may then be
employed to estimate recreational values for the newly identified beach sites with these factors
taken into consideration (Shrestha & Loomis, 2001). However, the meta-analytic function
transfers have some limitations as well as follows. The type and accessibility of primary studies
are thus critical because the meta-analysis builds on the literature. Variability associated with
analysis and reporting of the studies included in the meta-analysis can be caused by differences
in the study methodologies that were used in the research. It is also critical to follow Nelson and
Kennedy’s (2009) suggestion and ensure that only high-quality, or at the very least, comparable
studies are used for meta-analytic function transfers. Also, because of the complexity of meta-
analytic models, more sophisticated statistical methods and skills are needed to undertake them,
and this is usually time consuming and costly. Another limitation is the context and range of
original meta-analyses to avoid the wrong generalizations while interpreting and applying the
outcomes (Rosenberger & Phipps, 2007).
7. Challenges in environmental valuation
Uncertainty and risk
One of the biggest obstacles to environmental valuation is uncertainty and risk because the
valuation of environmental resources is an application of the economic theory based on natural
systems and human relations with these systems, and the latter are inherently complex and
unpredictable. Environmental vulnerability stems from inadequate information about the
environmental processes, socio-economic states in the future, and the effects that will be
triggered by alteration of environment. Risk is the likelihood of negative occurrences that may
have an influence to the valuation of environmental goods and services (Hanemann, 1989). There
is scientific doubt which relates to lack of certainty about ecological processes and how they will
react to human actions Another source of imperfection in environmental valuation is scientific
one. For instance, estimating the impacts of climate change on species or aerated services entails
high risk and notable variability because of the interaction of components in the ecosystem and
uncertain climate conditions in the future (Pindyck, 2007). The cases with high uncertainty can
cause significant variability of estimated values and may produce confusion in decision-making.
Methodological uncertainty also has its role to play in the situation. It is also important to note
that with different valuation methods like contingent valuation, hedonic pricing or the travel cost
methods estimates derived can be significantly different for the same environmental good or
service, such variation can stem from differences in the surveys’ design, sampling populations,
and analytical methods. Inconsistencies in methods reduce the reliability and validity of
valuation estimates and present complexities for policymakers using these estimates in their
decision-making process (Boyle et al. , 2017). Thus, when dealing with uncertainty and risk, one
has to apply sound and appropriate valuation methodologies and decision models that encompass
these factors. For example, sensitivity analysis is useful in evaluating the impact of variations in
key assumptions and parameters on the valuation results, which gives a measure of the reliability
of the estimates (Boardman et al. , 2018).
Temporal and spatial scales
Spatial and temporal dimensions are the major factors that create more complexities in valuing
the environment because environmental resources and change are not fixed in time and space.
The knowledge of these scales and their application in the valuation of environmental goods and
services are significant for generating proper and appropriate assessments (Bateman et al. ,
2011). Environmental temporal scales refer to both the short-term and the long term effects of
change in the environment. Environmental goods and services vary from other tangible goods in
a way that they last for quite sometime and the value of those goods and services may fluctuate
with time because of such factors as ecological succession, technological development, and
changes in people’s preferences (Pearce et al. , 1989). For example, the advocate of afforestation
may get his gains in the long-run by receiving CO2 storage, while bearing most of the costs in
the short run. Valuation methods are used to solve the issues with temporal scales, and one of
these methods is discounting future benefits and costs Although, the choice of the appropriate
discount rate still remains rather controversial because its choice can have significant
implications for the final value (Goulder & Williams, 2012). Spatial considerations refer to the
geographical dimension of environmental effects and distribution of the costs and gains across
space. Environmental goods and services can be, therefore, of local importance, regional or
global, and their importance is relative to the extent of the area. For instance, the ability of a
wetland to offer protection against floods may be invaluable to a community, but at a global level
the importance could be negligible. Likewise, goods that are good for all people such as climate
control are public in the global sphere and are difficult to assign or divide among those who will
benefit from them (Fisher et al. , 2008). Also, ecological and socio-economic conditions with
spatial distribution make the valuation process more complex, indicating the requirement for
site-specific valuation to reflect local conditions (Johnston et al. , 2002). It is clear that when
addressing temporal and spatial scales in the context of environmental valuation, there are
numerous complex processes and methods that are necessary to tackle and require detailed and
case-sensitive approaches. Burying it where it will have both short and long-terms effects that are
localized and also the general effects on the environment are needed.
Ethical considerations
Ethical issues are important in evaluation and assessment of environmental values in the choice
of methods and in the analysis and application of the results obtained to preserve environmental
assets as well as the provision and consumption of environmental goods and services entail
ethical choices on the worth of nature, equality between generations, and fairness in the
distribution of benefits and costs among the various strata of society (Sagoff, 1988). The first is
the issue of anthropocentrism that is evident in most of the valuation techniques where much of
the emphasis is placed on human preference and willingness to pay for the environment goods
and services. It can lead to the underappreciation or complete dismissal of the inherent worth of
nature and non-human entities, and results in choices that may well deliver the greatest value to
humans, but does so at the cost of the environment’s health (O’Neill et al. , 2008). To tackle this
bias, it is necessary to introduce the ecocentric views, which state that every living creature is
valuable and that the preservation of the biosphere is worth it. The inter generational equity is
another important ethical issues in environmental valuation as modern valuation techniques may
focus on the satisfaction of the current generation’s demands by ignoring the rights and interests
of future generations. Indeed, decision criteria such as the discount rates are also inherently
ethical in nature regarding how much value should be attached on future benefits and costs.
Reduced discount rates are more effective in reflecting the future worth of environmental
commodities and their services, thus supporting sustainability and its relation to generation
equity. Environmental valuation can show that costs and benefits are not evenly spread across the
society and this is most likely to be seen at the disadvantage of the poor and the marginalized in
society (Martinez-Alier, 2002). Environmental policies must be just and equitable, which can
only be achieved through social equity concepts being integrated into valuation and decision-
making systems, this may apply such things as distributional weights, participatory methods,
and, last but not the least, recognition of the community’s voice and its concerns (Schlosberg,
2007).
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