Environmental and Natural Resource Economics 3rd ed. Jonathan M Environmental and Natural Resource Economics 3rd ed. Jonathan M. Harris and Brian Roach Chapter 6 – Valuing the Environment Copyright © 2013 Jonathan M. Harris

Figure 6.1: Components of Total Economic Value Use Values Non-use Values Direct Use Value Indirect Use Value Option Value Bequest Value Existence Value Total economic value is composed of both use and non-use values. • Timber • Non-timber products • Hiking • Hunting • Soil erosion control • Flood protection • Carbon storage • Future recreation • Potential pharma- ceuticals • Forest available for future generations • Welfare from just knowing forest exists

Table 6.1: Sample of Recent Environmental Contingent Valuation Results Good or Service Valued WTP Dollars Reduced highway noise and air pollution in Spain1 $22/year Increased biodiversity in Hungary2 $23–$69/year Increased supplies of renewable energy in the United States3 $10–$27/month Urban greening in China4 $20–$29/year Increased forest reserves in Norway5 $261–$303 (one-time payment) Clean drinking water supplies in Pakistan6 $7–$9/month Grassland conservation in Italy7 $11–$19/year Marine biodiversity in the islands8 $121–$837 (one-time payment) River recreation in Australia9 $113/day Contingent valuation gives a range of estimates for various non-marketed goods. Sources: 1. Lera-Lopez et al., 2012; 2. Szabo, 2011; 3. Mozumder et al., 2011; 4. Chen and Jim 2011; 5. Lindhjem and Navrud, 2011; 6. Akram and Olmstead, 2011; 7. Marzetti et al., 2011; 8. Ressurreicao et al., 2011; 9. Rolfe and Dyack, 2010. Note: WTP = willing to pay.

Table 6.2: Present Value of a $100 Impact, by Discount Rate Years Discount Rate 1% 3% 5% 7% 10% $100.00 10 $90.53 $74.41 $61.39 $50.83 $38.55 20 $81.95 $55.37 $37.69 $25.84 $14.86 30 $74.19 $41.20 $23.14 $13.14 $5.73 50 $60.80 $22.81 $8.72 $3.39 $0.85 100 $36.97 $5.20 $0.76 $0.12 $0.01 Present values of future costs and benefits decline rapidly at higher discount rates.

Figure 6.2: Present Value of a $100 Impact, by Discount Rate At discount rates above 3%, costs that are 50 to 100 years in the future are discounted almost to insignificance.

Table 6.3: Hypothetical Example of Risk Analysis Scenario Net Benefit Probability Expected Value Low precipitation + $5 million 0.27 + 1,350,000 Average precipitation + $10 million 0.49 + 4,900,000 High precipitation + $20 million 0.23 + 4,600,000 Extremely high precipitation – $100 million 0.01 – 1,000,000 Total expected value + 9,850,000 Expected value takes into account the probabilities of different possible outcomes.

Table 6.4: Potential Costs and Benefits Associated with Dam Construction Proposal Potential Benefits 1. Construction costs 1. Flood control 2. Operations and maintenance costs 2. Recreation 3. Environmental damages 3. Hydropower supply 4. Risk of dam failure Costs of dam construction include construction and operations, as well as environmental and potential catastrophic costs. Benefits can include flood control, hydropower, and recreation.

Table 6.5: Annual Present Value of Costs and Benefits of Dam Construction Proposal (in Millions), Selected Years Costs Benefits Year Construction Operations Environmental Dam Failure Recreation Hydropower Flood Control 50.00 0.00 1 47.62 2 45.35 3 6.91 8.64 0.43 12.96 4.32 7.77 4 6.58 8.23 0.41 12.34 4.11 7.40 5 6.27 7.84 0.39 11.75 3.92 7.05 … 49 0.73 0.92 0.05 1.37 0.46 0.82 50 0.70 0.87 0.04 1.31 0.44 0.78 51 0.66 0.83 1.25 0.42 0.75 52 0.63 0.79 1.19 0.40 0.71 Total Present Value 142.97 132.47 165.59 8.28 248.38 82.79 149.03 Costs and benefits for future years need to be discounted to calculate total present value.

Area (millions of hectares) Annual value (1994 $ billions) Table 6.6: The Global Value of Ecosystem Services Biome (ecosystem) Area (millions of hectares) Annual value (1994 $ billions) Open ocean 33,220 8,381 Estuaries 180 4,110 Seagrass/algae beds 200 3,801 Coral reefs 62 375 Shelf 2,660 4,283 Tropical forest 1,900 3,813 Temperate/boreal forest 2,955 894 Grass/rangelands 3,898 906 Tidal marsh/mangroves 165 1,648 Swamps/floodplains 3,231 Lakes/rivers 1,700 Desert 1,925 NA1 Tundra 743 Ice/rock 1,640 Cropland 1,400 128 Urban 332 Total 51,645 33,268 Values for the total global ecosystem are somewhat speculative, but add to $33 trillion in total.

Figure A6.1: Total Cost Demand Curve Example Results of a travel cost study can be used to construct a demand curve and obtain an estimate of total consumer surplus.

Figure A6.2: Contingent Valuation Question Formats Open-Ended Format: What is the maximum amount you would be willing to pay annually, as a tax surcharge, to fund a wetlands protection program? Payment Card Format: Which of the amounts below most closely indicates your maximum willingness to pay annually, as a tax surcharge, for a wetlands protection program? Please circle your answer. $5 $40 $80 $200 $750 $10 $50 $100 $300 $1000 $20 $60 $125 $400 $1500 $30 $75 $150 $500 $2000 Single-Bounded Format: Would you be willing to pay $75 annually, as a tax surcharge, to fund a wetlands protection program? Yes No Unsure Double-Bounded Format: If respondent answers “Yes,” then ask: “Would you be willing to pay $150?” If respondent answers “No,” then ask: “Would you be willing to pay $40?” Multiple-Bounded Format: For each dollar amount below, indicate whether you would be willing to pay that amount annually, as a tax surcharge, to fund a wetlands protection program? $5 Yes No Unsure $10 Yes No Unsure $25 Yes No Unsure $50 Yes No Unsure $75 Yes No Unsure $100 Yes No Unsure $200 Yes No Unsure $300 Yes No Unsure $500 Yes No Unsure $1000 Yes No Unsure Different formats are possible for contingent valuation surveys.