Valuing Ecosystem Services Toward Better Environmental Decision-Making (2005) / Chapter Skim
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6 Judgement, Uncertainty, and Valuation
6 Judgement, Uncertainty, and Valuation
Pages 209-238
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From page 209... ...
Framing Perhaps the most important choice in any ecosystem services valuation study is the selection of the question to be asked and addressed. This report has previously described the importance of a careful selection of the question in several case studies including the Catskills watershed and the Exxon Valdez oil 209
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From page 210... ...
, a critical decision was made early on to not attempt to value the entire suite of services provided by the watershed but rather to focus on the service of water purification. More specifically, the issue was whether the restoration of the Catskills watershed would be more cost-effective than constructing a new drinking water filtration system as a way of addressing New York City's drinking water quality problems.
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From page 211... ...
Clearly, completing all three stages of such an ecosystem valuation study presents a massive and challenging task.11 Al though numerous studies were commissioned by Exxon, the State of Alaska, the federal government, and other interested parties, a clear answer to the question of the dollar value of damages to ecosystem services caused by the oil spill was not produced (Portney, 1994)
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From page 212... ...
If an environmental policy will result in half of an existing wetland being lost, should this be presented as half being lost or half being saved? Should an analyst emphasize the number of birds or fish saved as the result of a policy measure or the number that will die in spite (or because)
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From page 213... ...
Indeed the experience of some investigators in this area is that subjects in contingent valuation studies are more comfortable with questions about what they are WTP than with questions about WTA, as deciding what to pay for a good or service is an everyday human activity whereas one is rarely called upon to decide what to accept.22 In such cases, the analyst should ideally report both sets of estimates in a form of sensitivity analysis. However, the committee recognizes that in some cases this may effectively double the work and in such situations a second best alterative is to carefully document the ultimate choice made and state clearly that the answer would probably have been higher or lower had the alternative measure been chosen.
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From page 214... ...
Such an approach does raise questions about how informed the sample used in the Exxon Valdez contingent valuation study was, about the soundness of their understanding of the impact of the oil spill on the local ecosystem, and about the sensitivity of the values people placed on preventing ecosystem damage to possible further information about the issues. Additional Methodological Judgments In most ecosystem valuation studies, the analyst will be called on not only to frame the study but also to make additional judgments about how the study should be designed and conducted.
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From page 215... ...
In many cases, different choices regarding some of these issues will make a substantial difference to the final valuation. For example, many environmental restoration projects have projected lives of a century or more, and over such long periods, even small differences in discount rates can result in order-of-magnitude differences to the present value of a stream of net benefits (Heal and Kriström, 2002)
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From page 216... ...
. UNCERTAINTY The following sections discuss the major sources of uncertainty in the economic valuation of aquatic ecosystem services and how policymakers and analysts should respond.
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From page 217... ...
There is no database of events on which the company can draw, and important decisions will have to be based solely on experts' assessments of the risks. Environmental policymakers find themselves in this situation when making decisions about climate changes because there is no database that allows an estimation of the consequences of increasing concentrations of greenhouse gases.
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From page 218... ...
In fact, in most studies of the value of aquatic ecosystems, this will be the largest single source of uncertainty because our understanding of how the structure of an ecosystem is affected by human activities and of how these effects translate into changes in ecosystem services is often rudimentary (see, for example, the Columbia River case study in Chapter 5 for further information)
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From page 219... ...
Reducing Uncertainty: (Quasi) Option Values and Adaptive Management Although there is considerable uncertainty regarding the value of ecosystem services, there is often the possibility of reducing this uncertainty over time through learning.
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From page 220... ...
, adaptive management has recently only been applied by natural resource managers.88 A key component of adaptive management is active learning by introducing new management policies to learn more about the system's behavior and thereby reduce uncertainty. Typically, there may be an effort to implement environmental management actions as "experiments" in order to "learn by doing," with the experiments designed to reduce critical uncertainties about the ecosystem's behavior.
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From page 221... ...
If one believes that additional information could be influential in selecting the best environmental policy option, then adaptive management is a natural step from the passive concept of an option value associated with gaining information to the concept of managing the ecosystem to learn and so reduce uncertainty. When an adaptive management approach is possible, which will not always be the case, the option value associated with conservation is likely to be increased because of the enhanced rate of information acquisition.
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From page 222... ...
In general, faced with the choice between policies that generate the same expected value but with different ranges of outcomes, most people would choose the policy with the lowest variability, implying that they are "risk averse." The extent of their risk aversion determines what they would be willing to pay to avoid a risk and replace it by a certain outcome. If people are very risk averse, an environmental policy that delivers a modest outcome with some certainty might be preferred to one that may deliver a truly outstanding outcome but may also deliver a very poor result.
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From page 223... ...
Obviously, using the maximin criterion in ecosystem services valuation is a special case because all of the weight in the weighted average is placed on the worst case. A logical extension of this line of thinking leads to concepts such as the
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From page 224... ...
One of the conclusions to emerge from this discussion is that while there may be an option value associated with ecosystem conservation, it is also possible that there is a value associated with not adopting conservation policy measures that require significant investments. The point is that if an environmental policy requires investment in fixed capital and there is some uncertainty about the appropriateness of the policy, and so about the value of the associated investment, there may be a benefit from delaying its adoption so as to benefit from learning about the value of the investment.
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From page 225... ...
In effect, this is adaptive management and the option value stays on one side of the equation. In their study of Lake Mendota, Carpenter et al.
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From page 226... ...
As stated above, many of the concerns that drive people to articulate the precautionary principle are addressed by existing economic approaches to environmental decision-making but under different names. With learning and irreversibility, option values may tilt decisions in the direction of environmental conservation, more so if learning can be actively pursued through an adaptive management approach, and especially if there is a chance of a significantly negative outcome from environmental impacts.
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From page 227... ...
These preceding examples illustrate situations in which U.S. society reacts to uncertainty about ecosystem services by specifying safe minimum standards (i.e., not causing conditions that would drive a species to extinction, not damaging human health)
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From page 228... ...
An analyst can then conduct a Monte Carlo simulation by picking a series of values for the uncertain variables as random numbers chosen according to their density function and for each set values for P, Q, and Cf computing the value of NV. This simulation is repeated many times with a different set of randomly-chosen values of P, Q, and Cf each time.
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From page 229... ...
have reviewed these and conducted their own analyses. Although these previous applications were not in the context of ecosystem services valuation, they illustrate the feasibility of using Monte Carlo analysis to evaluate environmental policies and suggest that this approach could be applied in ecosystem valuation studies as well.
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From page 230... ...
If probabilities were available to attach to these numbers, then an expected cost could be calculated and adjusted to allow for risk aversion, and the risk-adjusted expected restoration cost could be compared with the replacement cost. In the case of the Edwards Aquifer, which provides water to San Antonio, Texas, uncertainty arises from several sources -- one of which is our inability to forecast recharge rates for the aquifer.
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From page 231... ...
Likewise, the possibility of damage to endangered species or to the structure of the aquifer because of low water levels increases the value of existing water stocks, because in addition to providing more water for consumption, a higher stock will lower the risk of damage from a future low stock level. The value of the aquifer considering uncertainty about future replenishment can be approximated by Monte Carlo simulation, using the equation for the dynamics of the aquifer with alternative future replenishment patterns that draw probabilistically from a distribution of future replenishment rates.
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From page 232... ...
There are several cases in which investigators have to use professional judgment in ecosystem valuation regarding how to frame a valuation study, how to address the methodological judgments that must be made during the study, and how to use peer review to identify and evaluate these judgments. Of these, perhaps the most important choice in any ecosystem services valuation study is the selection of the question to be asked and addressed (i.e., framing the valuation study)
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From page 233... ...
Parameter uncertainty is one level below model uncertainty in the logical hierarchy of uncertainty in the valuation of ecosystem services. The almost inevitable uncertainty facing analysts involved in ecosystem valuation can be more or less severe depending on the availability of good probabilistic information and the amount of ambiguity.
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From page 234... ...
However, it is not clear that the precautionary principle brings anything new to the decision criteria frameworks usually used by economists. With learning and under conditions of irreversibility, option values may similarly move environmental policy decisions in the direction of environmental conservation, more so if learning can be actively pursued through an adaptive management approach and especially if there is the chance of a significantly negative outcome from environmental impacts.
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From page 235... ...
In such cases, the best solution is to state clearly that the assumption about risk aversion will affect the outcome and conduct sensitivity analyses to indicate how this assumption impacts the outcome of the study. · There is a need for further research about the relative importance of, and estimating the magnitude of, option value in ecosystem valuation.
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From page 236... ...
1996. The safe minimum standard approach: An alternative to measuring non-use values for environmental assets?
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From page 237... ...
1974. Option values in the economics of irreplaceable assets.
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From page 238... ...
1999. Uncertainty, risk aversion, and the game theoretic foundations of the safe minimum standard: A reassessment.
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