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Centre for Development, Environment and Policy (CeDEP)

Environmental Valuation: Theory, Techniques and Application

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The main issues of this module relate to the ways in which economic values can be placed on the environment, enabling environmental issues to be included in economic decision-making. Methods based on economic theory have been devised to assign monetary values to environmental goods and services, and these values can then be incorporated into decision-making at the project, sectoral and national levels. Although the methods and techniques which this module introduces represent the mainstream approach to environmental economic decision-making, there are many criticisms of such an approach, and the module also addresses these concerns and outlines alternative approaches to analysing economy–environment links.

The module first introduces the concept of environmental valuation and its motivations. The different measures of welfare change, such as consumer surplus, willingness to pay and willingness to accept are then introduced, in order to provide a theoretical basis for environmental valuation. The components of environmental economic value are analysed, with distinctions made between use values and non-use values, including option values and existence values. Cost–benefit analysis is also explained in the first unit, in order to introduce the main project/policy evaluation method where environmental economic values are normally used in practice.

Later units introduce the techniques of environmental valuation and their policy applications. There are many techniques available for valuing the environment, either based on revealed or stated preferences. The main revealed preferences approaches examined include the dose–response and cost-based approaches, travel cost method and hedonic pricing methods. The stated preference approaches reviewed are the contingent valuation method and discrete choice experiments. The exploration of environmental valuation techniques concludes with a discussion of the benefit transfer approach.

The penultimate unit examines applications of environmental valuation in developing countries and in the framework of climate change, as examples of challenging contexts and where to apply the different methods. In the last unit, a brief summary of the module is first provided. Subsequently, criticisms of environmental valuation are considered and a range of alternative methods are briefly reviewed. The module concludes with a look at the future of environmental valuation.

Objectives and learning outcomes of the course

By the end of this module, students should be able to:

  • understand and assess critically the economic theory of environmental valuation
  • understand and assess critically a range of environmental valuation methods and techniques
  • understand and assess critically the application of valuation techniques in practice and relevant challenges
  • understand and interpret critically the results of published environmental valuation studies
  • understand and assess critically the possible alternatives to conventional environmental valuation methods.

Scope and syllabus

The module consists of ten units which are divided into three parts.

Part I

Part I introduces the reader to the main concepts, ideas and theory of environmental valuation, as well as its motivations. This part of the module first makes the case for environmental valuation and then introduces the concept of economic value. A number of welfare change measures are then discussed in order to introduce the main concepts of willingness to pay (WTP) and willingness to accept (WTA), whose estimation is the purpose of environmental valuation. Part I also introduces cost–benefit analysis (CBA), the main method where elicited environmental economic values are used in practice. Its main methodological steps are briefly discussed, as well as its limits.

Part II

Part II covers the main approaches to environmental valuation, organised around the two main categories of revealed and stated preference methods. The material in this part of the module covers a wide array of methods that draw on the theory developed in Part I. We consider environmental valuation methods that can be used very rapidly as well as those which require far more work on the part of the researcher to collect and analyse data. Practical steps in the application of the different methodologies and a number of case studies are discussed along the theoretical dimensions. An important aspect of the material covered in this part of the module is that many of the statistical techniques employed in the research literature will take the reader beyond the methods they will typically cover in basic econometrics courses. Advice on appropriate methods will be provided.

Part III

Part III of the module first provides an insight into some of the most challenging contexts in which to apply environmental valuation methods, ie developing countries and climate change. The module is also summarised in Part III with a closer look at the links between the various topics covered. Finally, we discuss various moral and ethical criticisms of environmental valuation, and suggest and briefly assess possible alternatives to both the methods and the CBA framework. We then conclude with a brief look at the likely future for environmental valuation.

Unit 1: The Economy, Environment and Valuation
Unit 2: Economic Theory and Environmental Valuation
Unit 3: Non-Demand Curve Methods
Unit 4: Travel Cost Method
Unit 5: Hedonic Pricing Methods
Unit 6: Contingent Valuation
Unit 7: Choice Experiments
Unit 8: Benefit Transfer
Unit 9: Cost–Benefit Analysis
Unit 10: Criticisms of Stated Preference Methods and Alternatives