37 6(5,( medio ambiente y desarrollo E nvironmental values, valuation methods, and natural disaster damage assessment Cesare Dosi Environment and Human Settlements Division Santiago, Chile, June 2001 This document was prepared by Mr. Cesare Dosi, Department of Economics, University of Padova, Italy, consultant of the Environment and the Human Settlements Division, in the project “Improve damage assessment methodology to promote natural disaster mitigation and risk reduction awareness and preparedness in Latin America and the Caribbean”, with the support of the Italian Government. Thanks are due to Mr. José Javier Gómez, for contributive comments on an earlier draft. This document has been reproduced without formal editing. The views expressed herein are those of the author and do not necessarily reflect the views of the Organization. United Nations Publication LC/L.1552-P ISBN: 92-1-121308-8 Copyright © United Nations, June 2001. All rights reserved Sales number: E.01.II.G.93 Printed in United Nations, Santiago, Chile Applications to the right to reproduce this work are welcome and should be sent to the Secretary of the Publication Board, United Nations Headquarters, New York, N. Y. 10017, USA. Member States and their Governmental Institutions may reproduce this work without prior authorization, but are requested to mention the source and inform the United Nations of such reproduction. CEPAL – SERIE Medio ambiente y desarrollo NÛ Index Abstract .......................................................................................5 I. Environmental values and valuation approaches...........7 1. The economic concept of environmental value ....................7 2. Willingness-to-pay and willingness-to-accept ......................8 3. Classifying environmental values .........................................9 4. Valuation approaches..........................................................13 II. Valuation techniques: an overview...................................15 1. Direct and indirect techniques ............................................15 2. The production-function method ........................................16 3. Cost-based methods ............................................................18 4. The travel-cost method........................................................20 5. The hedonic pricing method ...............................................21 6. The contingent valuation method........................................25 7. Environmental value transfer..............................................28 III. Natural disasters and environmental values..................37 1. The rationale of environmental valuation...........................37 2. The ECLAC’s manual: classification of the effects of a natural disaster and criteria for evaluating damage ............38 3. Natural disasters and environmental values: a tentative taxonomy.............................................................................39 4. Intersections between environmental values and ECLAC’s damage categories ..............................................40 5. The choice of environmental valuation method..................42 6. Damage for whom? The natural disaster’s relevant market size ..........................................................................45 7. Time and discounting..........................................................47 3 Environmental values, valuation methods, and natural disaster damage assessment IV. Summary and conclusions ........................................................................................51 References.................................................................................................................................55 Serie Medio ambiente y desarrollo: issues published...................................................59 Index of graphic Graphic 1: A stylized continuum of the level of accuracy required in transfer studies ..............29 Graphic 2: Basic steps in a transfer study (adapted from Desvousges et al., 1998)....................31 Graphic 3: Basic steps in a transfer study (adapted from Brouwer, 2000)..................................32 Graphic 4: Environmental damages and ECLAC’s damage categories ......................................43 4 CEPAL – SERIE Medio ambiente y desarrollo NÛ Abstract It is largely agreed that successful development depends on the rational use of natural capital (World Bank, 1998). In recent years, advances have been made to measuring progress toward “sustainable development” (Kunte et al., 1998), and in applying valuation techniques to the analysis of the environmental impacts of investment projects and public policies, both in developed and developing countries (Barbier, 1998). Natural capital is not exclusively endangered by human actions (or inactions). Environmental (quantity or quality) changes may also be induced by natural hazards which, besides altering the natural capital’s intrinsic “productivity”, may negatively affect people’s “ability to exploit” environmental attributes. In 1999, the UN Economic Commission for Latin America and the Caribbean (ECLAC) has published a Manual for Estimating the Socio-Economic Effects of Natural Disasters (ECLAC, 1991) which intends to be a tool aimed at professionals engaged in the valuation of natural disasters’ socio-economic impacts. ECLAC has recently undertaken a revision process, aimed at expanding the scope of the Manual. One of the objectives of this interdisciplinary upgrading process is to incorporate “environmental values” into disaster damage assessment. The aim of this paper is to contribute to this process, by (i) illustrating the concept of environmental values from an economic perspective, (ii) providing an overview of valuation methods aimed at 5 Environmental values, valuation methods, and natural disaster damage assessment quantifying these values in monetary terms, and (iii) making a preliminary attempt to identify a strategy for integrating environmental damages into natural disaster impact assessment. The paper is organized as follows. The Section I provides a description of the economic concept of environmental values, the predominant taxonomies of environmental services underlying these values, and the general features of the valuation approaches proposed by economic literature. We end this Section by proposing a “valuation spectrum” which could be used as a sort of conceptual device for identifying the linkages between environmental values and valuation techniques. In Section II we provide an overview of these techniques. After illustrating their rationale, potential advantages and caveats, we focus on the “environmental value transfer method” which, because of informational and resource constraints, appears to be a natural candidate for post- disaster damage assessment. In Section III we focus on the incorporation of environmental values into natural disaster damage assessment, by illustrating its rationale, the potential intersections between environmental values and the ECLAC-Manual’s damage categories, and some conceptual and methodological issues which need to be carefully addressed when trying to incorporate environmental values. Section IV offers concluding remarks. 6 CEPAL – SERIE Medio ambiente y desarrollo NÛ I. Environmental values and valuation approaches 1. The economic concept of environmental value Although there are various interpretations of the term “environmental value”, economists have primarily concentrated on monetary value, as expressed via stated or revealed individual preferences. As synthesized by Pearce and Turner (1990), economic value is not an intrinsic quality of anything: it only occurs because of the interaction between a subject and an object. It follows that environmental attributes have value only if they enter at least one individual’s utility function or a firm’s production function. Attributes failing either of these criteria have no economic value (Hanley and Spash, 1993). The main rationale behind measuring, in monetary terms, the costs (or benefits) of environmental (quantity or quality) changes, is to make them commensurable with other market values. In other words, the translation of individual preferences into monetary values is generally interpreted and recommended as an operational device for ex ante valuation (“cost-benefit analysis”) of alternative courses of action entailing both expected environmental changes and alterations in the allocation patterns of other economic goods. Or to evaluate (ex post) 7 Environmental values, valuation methods, and natural disaster damage assessment the welfare impacts of actual environmental changes, in order to determine compensable damages or to assess the economic efficiency of restoration measures. Despite the advocated operational nature of monetary valuation, many writers have questioned or strongly criticized the preference-related value theory underlying economic valuation and valuation techniques. Some critics allege that the economic theory is based on a very narrow and simple definition of self-interest, and by so doing, it fails “to describe the environmental values people hold, the process of value construction, or the way individual values are aggregated into a social value” (Brouwer, 2000, p.138). Moreover, “ecocentric ideologies […] place primary emphasis on a distinction between instrumental value (expressed via human-held values) and intrinsic, non- preference-related value. They lay particular stress on the argument that functions and potentials of ecosystems themselves