Introduction to experimental ecosystem extent and services accounting based on SEEA-EEA THE CONTRACTOR IS ACTING UNDER A FRAMEWORK CONTRACT CONCLUDED WITH THE COMMISSION

Monetary Valuation Methods Introduction to experimental ecosystem extent and services accounting based on SEEA-EEA / London / 13 June 2018 Ece Ozdemiroglu

Training Programme Date AM1 AM2 PM1 PM2 12 June 2018 Setting the context of the course Concepts Constructing accounts Physical data needs 13 June 2018 Monetary valuation methods   Value transfer Using physical data Building ecosystem extent accounts 14 June 2018 Building ecosystem service accounts Example & exercise Thematic accounts Closing session

Contents Wealth vs income A multi-data approach Total Economic Value Monetary valuation methods Using monetary valuation methods Welfare values and exchange values Using monetary values in accounting

Wealth vs Income

Economics > Finance Value > Price Income = monetary flow = GDP! = Ecosystem service value Wealth = underlying assets = Property, knowledge = Natural environment Explicit when doing CNCA. Decision-makers and managers in all organisations can read and understand each others accounts.

Measuring, valuing and monitoring natural capital assets

A multi-data approach

Ecosystem services assessment Quantitative assessment Qualitative assessment Understand what ecosystem services are provided Ecosystem services assessment Quantitative assessment Measure the change in the provision of ecosystem Services Input in decision making Monetary assessment of economic values (market & non-market) Apply valuation methods (market prices, revealed preference, stated preference, value transfer)

Total Economic Value

Total Economic Value Use value Non-use value Option value Actual use For others Existence Direct use Bequest Indirect use Altruism

Monetary valuation methods

Valuation ‘hierarchy’ Market prices Markets exists and prices reflect opportunity costs Shadow prices Market prices observed but need to be adjusted (e.g. taxes and subsidies) Revealed preference methods Market prices do not exist but ‘surrogate’ markets and prices can be observed Stated preference methods Market prices and surrogate markets do not exist Actual Market data Surrogate market data: RP methods Hypothetical market data: SP methods

Valuing non-market impacts from this… to this… Water Air Clean air Biodiversity q0 q1 Peace & Quiet Natural Areas Health & Safety q0 q1 Non-Market Goods (Q) q0 q1 How much does the individual wellbeing change?

Economic valuation methods Wellbeing generated from: Q OR X £ Q AND X £ Q PART OF X £ NO MARKET DATA? Biodiversity Substitutes Complements Characteristic Water Bottled water Natural Areas Fuel Peace & Quiet Property Hypothetical market Contingent valuation Choice modelling Hedonic pricing Avertive behaviour Defensive expenditure (Avoided health costs) Travel cost model Discrete choice models Revealed preference: relationship between market and non-market good Stated preference

Using monetary valuation methods

Selecting the appropriate monetary valuation method Type of good Type of change Whose values? Data limitations Timing and budget Level of ‘acceptable error’

Type of good If market – market price (market price proxies) If non-market – Substitutes?  avertive expenditure Complements?  travel cost or random utility Attribute of a market good?  hedonic pricing If ‘No’ to above  stated preference whole of the good  Contingent valuation Individual attributes  Choice experiment

Type of change Experienced before? Change affecting users / non-users? Yes ?  market prices, revealed preference No?  stated preference Change affecting users / non-users? Non-users only  stated preference Certainty about the change Reasonable / a small number of scenarios  contingent valuation High / a high number of scenarios  choice modelling

Whose values? Users only? Users* and non-users* only? Non-users only? Revealed preference if “type of good” criterion allows – stated preference otherwise Users* and non-users* only? Combined approaches if “type of good” criterion allows for revealed preference Non-users only? Stated preference only

Data limitations Revealed Preference Stated Preference Scientific uncertainty Market transactions data recorded Design to address potential for biases Neutrally worded ‘right amount of’ information Sufficient variation for each respondent and across the sample Sampling the appropriate population Potential difficulty in isolating the value of the environmental good Factors affecting market behaviour from secondary sources or surveys

Timing and budget Appraisal of 100s or 1000s of similar schemes Revealed Preference Stated Preference Change has already taken place/previously experienced BOTH previously experienced AND new change Already aware of risks/changes Risk or change can be introduced in the survey Not suitable once a change has become ‘political’ Appraisal of 100s or 1000s of similar schemes Value transfer inevitable? Relative limitation – cost of ‘wrong decision’ or overall cost of policy

Timing and budget Appraisal of 100s or 1000s of similar schemes Revealed Preference Stated Preference Change has already taken place/previously experienced BOTH previously experienced AND new change Already aware of risks/changes Risk or change can be introduced in the survey Not suitable once a change has become ‘political’ Appraisal of 100s or 1000s of similar schemes Value transfer inevitable? Relative limitation – cost of ‘wrong decision’ or overall cost of policy

Level of ‘acceptable’ error Some policy purposes may require more ‘robust’ results while others may be able to live with a higher level of uncertainty or potential error e.g. design of a tax vs 1000s of similar schemes? “Gains in knowledge” Screening/ scoping options Investment decisions Financial instruments Compensation Lower accuracy Higher accuracy

Welfare values vs exchange values

Welfare vs Exchange values All of the above measure ‘welfare’ changes as many of the ecosystem services are not traded in markets. The SNA uses exchange values, not welfare values, and the same basis is called for in ecosystem accounting (SEEA-EEA 2012). Exchange values are defined as the amounts of money that willing purchasers pay to acquire goods, services or assets from willing sellers. The exchanges should be made between independent parties on the basis of commercial considerations only, sometimes called “at arm’s length” (SNA 2008; 3.119). “SNA does not attempt to determine the utility of the flows and stocks that come within its scope. Rather, it measures the current exchange value of the entries in the accounts in money terms, that is, the values at which goods, services, labour or assets are in fact exchanged or else could be exchanged for cash (currency or transferable deposits).” SNA (2008; p50 3.118).

Welfare vs Exchange values Exchange values do not capture the full benefits (utility) derived by the agents participating in a transaction. Exchange value of walking in an open access woodland may be €0 The benefits people derive from such walks may significantly exceed €0 The fundamental point is that exchange values are dependent on market institutions and structures and the definition of property rights, whereas welfare values are not.

Using monetary values in accounting

Choices… Use a price of zero: this is a strict application of the SNA use of exchange values, valuing consumption of non-traded goods at zero; Use a representative marginal price: create a model to estimate the price that would arise in a perfectly competitive market; or Use representative discriminatory prices: select any feasible set of discriminatory prices that fall below the demand curve and pass through the observed quantity. Day (2013)

Pragmatic conclusion: Accept that accounting frameworks will never capture all values for the natural environment. Accept that some loss of precision in value estimates may be acceptable, for the sake of greater inclusivity; Accept that monetary valuation, whether through exchange or welfare values, cannot fully address sustainability concerns: there are inevitable challenges such as non- linearity, irreversibility and the limitations of marginal valuation that “point to the need for complementing monetary valuation and wealth accounting approaches with assessments of critical stocks, as well as to the importance of developing physical accounts and indicators”; and Recognise, therefore, that monetary accounting depends upon and must be developed in parallel with physical accounting. Pittini et al (2013)

Thank you! Ece@eftec.co.uk +44 (0) 20 7580 5383 @eftecUK