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Environmental policy analysis: A guide to non-market valuation

Staff working paper

This paper by Rick Baker and Brad Ruting was released on 14 January 2014.

The objective of this paper is to examine the validity and reliability of various non-market valuation methods, the case for using non-market valuation in environmental policy analysis, and how best use can be made of non-market valuation in developing environmental policy.

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  • Key points
  • Media release
  • Contents
  • Government policies aimed at generating environmental benefits almost always impose costs on the community. Weighing up these trade-offs is challenging, in part because environmental benefits are difficult to value, particularly those that are not reflected in market prices (so called ‘non-market’ values).
  • There are several non-market valuation methods that can be used to evaluate such trade-offs, but they are not widely used for environmental policy analysis in Australia.
  • There are two main types of non-market valuation methods: revealed preference and stated preference.
    • The validity of revealed preference methods is widely accepted, but there are many circumstances where they cannot provide the estimates needed for environmental policy analysis.
    • Stated preference methods can be used to estimate virtually all types of environmental values, but their validity is more contentious.
  • The evidence suggests that stated preference methods are able to provide valid estimates for use in environmental policy analysis. However:
    • there are many elements that practitioners need to get right to produce meaningful results
    • value estimates are likely to be less reliable when respondents are asked about environmental assets that are especially complex or relatively unfamiliar to them.
  • Benefit transfer involves applying available value estimates to new contexts. Its accuracy is likely to be low unless the primary studies are of high quality and relate to similar environmental and policy contexts. These seemingly obvious cautions are often not observed.
  • Because non-market valuation methods can generally provide objective estimate of the value that the community places on environmental outcomes, they offer advantages over other approaches to factoring these outcomes into policy analysis.
  • The case for using non-market valuation varies according to circumstances. It is likely to be strongest where the financial or environmental stakes are high and there is potential for environmental outcomes to influence policy decisions.
  • Where non-market valuation estimates are made they should generally be included in a cost–benefit analysis. Sensitivity analysis should be provided, as well as descriptive information about the environmental outcomes of the proposed policy.
  • There is a range of steps that could be taken to realise more fully the potential of non-market valuation, including developing greater knowledge about it within relevant government agencies.

Background information

Rick Baker (Research Manager) 03 9653 2146

Environmental Policy Analysis: A Guide to Non-Market Valuation

A new Productivity Commission Staff Working Paper provides an up to date guide to valuing environmental outcomes. The paper concludes that non-market assessments can, if handled effectively, make a valuable contribution to policy and project assessment, including for major projects.

Governments are often faced with decisions that involve trade-offs between economic and environmental outcomes. Weighing up these trade-offs is challenging because the environment contributes to people's wellbeing in ways that do not involve markets. There are a range of non-market valuation methods that can be used to analyse these trade-offs, but they have not been widely used in Australia. Increasing their use has the potential to result in decisions that better reflect community preferences and achieve greater environmental benefit per dollar of cost.

The Staff Working Paper, Environmental Policy Analysis: A Guide to Non-Market Valuation, by Rick Baker and Brad Ruting, finds that both revealed preference and stated preference methods can provide valid estimates of non-market values. However, there are many aspects that practitioners need to get right in applying these methods. The paper outlines some key features that make for a good valuation study.

The authors also find that, because non-market valuation studies can be time consuming and costly, the case for using them is strongest where the financial or environmental stakes are high. In addition, the use of non-market valuation should be confined to situations where a sound reason for government action has been established.

The paper identifies steps that could be taken to more fully realise the potential of non-market valuation, including developing greater knowledge about the methods within relevant government agencies.

Background information

Rick Baker (Research Manager) 03 9653 2146

Requests for comment / other

02 6240 3330 / media@pc.gov.au

  • Preliminaries
    • Cover, publication details, contents, acknowledgments, and abbreviations and explanations
  • Overview
  • Chapter 1 Introduction
    • 1.1 Understanding environmental values
    • 1.2 Why do non-market values matter for policy?
    • 1.3 About this paper
  • Chapter 2 When can non-market valuation provide good estimates?
    • 2.1 Methods for valuing non-market outcomes
    • 2.2 Can estimates be valid and reliable?
    • 2.3 What makes a good study?
  • Chapter 3 Use in environmental policy analysis
    • 3.1 Comparison with alternatives
    • 3.2 Non-market valuation: when and how?
    • 3.3 Building confidence in non-market valuation
  • Appendix A Workshop participants
  • Appendix B Australian studies
    • B.1 River red gum forests
    • B.2 The Murray–Darling Basin
    • B.3 Television and computer recycling
    • B.4 Bulli Seam coal mining
    • B.5 Underground power supply
  • Appendix C Validity and reliability of stated preference methods
    • C.1 Criterion validity
    • C.2 Convergent validity
    • C.3 Construct validity
    • C.4 Reliability
    • C.5 Benefit transfer
  • References

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