A Guide to Non‑Market Valuation

[greenbuild]

Environmental Policy Analysis: A Guide to Non‑Market Valuation
Productivity Commission Staff Working Paper January 2014

Full report attached

Key points
• Government policies aimed at generating environmental benefits almost always impose costs on the community. Weighing up these trade-offs is challenging, in part because environmental benefits are difficult to value, particularly those that are not reflected in market prices (so called ‘non-market’ values).
• There are several non-market valuation methods that can be used to evaluate such trade-offs, but they are not widely used for environmental policy analysis in Australia.
• There are two main types of non-market valuation methods: revealed preference and stated preference.
– The validity of revealed preference methods is widely accepted, but there are many circumstances where they cannot provide the estimates needed for environmental policy analysis.
– Stated preference methods can be used to estimate virtually all types of environmental values, but their validity is more contentious.
• The evidence suggests that stated preference methods are able to provide valid estimates for use in environmental policy analysis. However:
– there are many elements that practitioners need to get right to produce meaningful results
– value estimates are likely to be less reliable when respondents are asked about environmental assets that are especially complex or relatively unfamiliar to them.
• Benefit transfer involves applying available value estimates to new contexts. Its accuracy is likely to be low unless the primary studies are of high quality and relate to similar environmental and policy contexts. These seemingly obvious cautions are often not observed.
• Because non-market valuation methods can generally provide objective estimate of the value that the community places on environmental outcomes, they offer advantages over other approaches to factoring these outcomes into policy analysis.
• The case for using non-market valuation varies according to circumstances. It is likely to be strongest where the financial or environmental stakes are high and there is potential for environmental outcomes to influence policy decisions.
• Where non-market valuation estimates are made they should generally be included in a cost–benefit analysis. Sensitivity analysis should be provided, as well as descriptive information about the environmental outcomes of the proposed policy.
• There is a range of steps that could be taken to realise more fully the potential of non-market valuation, including de