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

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

3. 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

4. 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

5. Wealth vs Income

6. 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.

7. Measuring, valuing and monitoring natural capital assets

8. A multi-data approach

9. 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)

10. Total Economic Value

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

12. Monetary valuation methods

13. 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

14. 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?

15. 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

16. Using monetary valuation methods

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

18. 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

19. 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

20. 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

21. 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

22. 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

23. 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

24. 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

25. Welfare values vs exchange values

26. 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 ; 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; p ).

27. 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.

28. Using monetary values in accounting

29. 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)

30. 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)

31. Thank you!
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