The Economic Valuation of Non-Marketed Forest Benefits in Saxony

Potential and Limitations of Benefit Transfer


Diploma Thesis, 2010

88 Pages, Grade: 1,5


Excerpt

Contents

Acknowledgements

Contents

List of Figures

List of Tables

List of Abbreviations

Abstract

A. Introduction
The Importance of Sustaining Non-Marketed Forest Benefits in Saxony
Forests as an Economic Good
Internalization of Benefits through Economic Valuation

Problem and Purpose

B. Research Objective and Hypothesis

C. Theory and Methods

C.1 The Economic Valuation of NMFB
The Total Economic Value
The Scope of Influence of Economic Valuation
The Neoclassical Welfare Theory
Dependence of Accuracy Requirements from the Decision Context

C.2 Economic Valuation Techniques
Overview on Primary Valuation Techniques
Secondary Valuation with Benefit Transfer
Properties of and Conditions for Benefit Transfer
Simple Unit Transfer
Unit Transfer with Income Adjustment
Function Transfer
Tailoring Temporal and Spatial Preference Changes
Reliability and Validity Tests
Guidelines for Benefit Transfer
Literature Collection of Primary Studies

C.3 Review of benefit transfer applied to NMFB valuation
Valuation initiators, valuation objectives, and types of NMFB valued
Overview on the application of BT approaches
Management of differences in NMFB characteristics
Management of spatial difference
Management of time differences
Tests on Reliability and Validity
Conclusion

D. Case study: Application of benefit transfer to the valuation of NMFB in Saxony
Saxony's forests: The policy site
Saxony's Development Plan Goals
Using benefit transfer to evaluate NMFB in Saxony
Step 1) The expected change in NMFB
Step 2) The affected population in Saxony
Step 3) Conduction of a literature review to identify relevant primary studies
Step 4) Assessment of the relevance and quality of primary data
Step 5) Selection and summary of the data available from primary data
Step 6) Transfer to Saxony
Step 7) Calculation of total benefits
Step 8) Assessment of uncertainty and acceptable transfer errors 67
Step 9) Sensitivity analysis
Discussion

E. Conclusion

F. References

G. Appendix

Electronic Annex

Acknowledgements

This diploma thesis aroused at the Centre for Environmental Research - UFZ in Leipzig, Germany. Several peoples' support and encouragement contributed significantly to its present shape:

Thanks are due to Peter Elsasser who took time for frequent discussions and valuable suggestions.

I am grateful to Thomas Köllner, Irene Ring, and Nele Lienhoop for their willingness to supervise me, the care with which they reviewed drafts critically, and provided thoughtful and professional comments.

This thesis would not have been possible unless the Helmholtz Centre for Environmental Research GmbH - UFZ facilitated shelter conditions and access to research information.

Also, the language's grammar and style benefited from Katie Mackie's proof-reading that enhanced its linguistic quality.

I owe Dirk Künne a debt of gratitude for his friendship, spiritual and personal support.

List of Figures

Figure 1 Overview of value composition of TEV applied to NMFB

Figure 2 Relationship between individual demand curve, market price and consumer surplus

Figure 3 Accuracy requirements for decision making

Figure 4: Forest distribution in Saxony indicated in green, non-wooded regions are white

Figure 5 Emphasis of afforestation in Saxony according to ecosystem service enhancement

List of Tables

Table 1 Overview on revealed and stated preference techniques

Table 2 Overview on NMFB studies using BT

Table 3 Examples of primary valuation methods as basis for BT

Table 4 Saxony's forest composition in 2009

Table 5 WTP of Schleswig-Holsteins for forest biodiversity enhancement (by Küpker et al. (2005))

Table 6 Sensitivity analysis of the transferred WTP

Table 7 Discounting the total 2007-benefits with different discount rates and time horizons

List of Abbreviations

Abbildung in dieser Leseprobe nicht enthalten

Abstract

This thesis investigates the potential and limitation of benefit transfer application for the economic valuation of non-marketed forest benefits in Saxony. This time- and cost saving valuation technique can support political and business decisions by transferring monetary costs and benefits from environmental changes from a studied to an unstudied site. As benefit transfer is currently not applied in Saxony, the question becomes how far it can contribute to a better-informed regional decision procedure. To elicit the methodological experiences of this application field, a literature review investigates the technical state of the art. From a methodological perspective, research and application manages spatial, temporal, and ecological site differences and accuracy tests very heterogeneously. The majority refines function transfer with varying models methodologically, drawing on primary valuation studies on forest recreation. A minor fraction concentrates on applica­tions with simplistic unit transfer are of a likewise technically inconsistent manner. Ab­sence of homogeneous methodological performance and experiences suggest an applica­tion of unit transfer for Saxony following a guideline by Navrud (2010). In a compact manner it guides a benefit transfer application on forest benefits. A transfer of a WTP for forest biodiversity demonstrates income-adjusted unit transfer to be principally possible for contexts requiring knowledge gains. However, under current conditions it faces dis­tinct limitations. Valuation is restricted to a small empirical pool on non-marketed forest benefits in such a way that most indirect use and non-use values remain unapproachable. Therefore, further primary valuation studies are fruitful additions to enlarge the number of appraisable benefits. If thorough benefit transfers are pursued in Saxony, income- adjusted unit transfer is recommended according to Navrud's (2010) guideline to enable a methodological homogeneous and well-reported valuation. Further, the literature should be collected from databases with empirical studies satisfying the criteria of site similarity. Facilitating a regular prospective application in Saxony, interest and demand needs to be raised to create a legal framework for the internalization of non-marketed forest benefits in political and business decisions.

Keywords: benefit transfer, economic valuation, forest, non-marketed forest benefits, Saxony

A. Introduction

The Importance of Sustaining Non-Marketed Forest Benefits in Saxony

Forests in Saxony provide a wide range of benefits to society besides marketable goods, such as, timber. The majorities of these benefits are not traded in markets and are referred to as non-marketed forest benefits (NMFB)1. They are closely intertwined with the hu­mans' welfare and provide benefits at regional, national, and international scales. NMFB comprise biodiversity and various ecosystem services, e.g.

- soil services: the protection of soils from erosion, water purification for drinking water quality
- water services: the regulation of watersheds and local hydrological systems by reducing variation in water flows
- climate regulation through carbon storage, purification of air from nitrogen and sulfur oxides
- habitat for many species
- cultural and historical heritage, opportunities for outdoor recreation and leisure (Stenger et al., 2009)2

Forests as an Economic Good

From an economic point of view, many NMFB have public good characteristics: partly as a result of their natural properties (that make them difficult to trade on markets), but also due to institutional frameworks and political regulations (e.g. regulations regarding the public access) that makes it difficult to allocate them optimally: they are non-rivalrous (i.e. common consumption does not reduce the availability) and non-excludable (i.e. in­evitable consumption by others). Where the natural properties prevent NMFB from mar­ket allocation, market failure occurs. Subsequently, rational self-interested individuals (the human model assumption of the neoclassical welfare theory3 ) are seduced to free­ride on other's engagement (i.e. people hide their own benefits, but hope others will not) to secure e.g. clear drinking water provision. Eventually, this leads to degradation and over-exploitation of NMFB (Common and Stagl, 2005). In Saxony, exploitation started with the beginning of industrialization (about 1800) when extensive clearing and frag­mentation answered the demands for agricultural and settlement land and opencast mines for coal, sands and rare earths. In the course of time, three quarters of the original deci­duous and mixed forest cover vanished from 80% to 20% (Staatsbetrieb Sachsenforst, 2010).

A secure provision of public goods justifies institutional or political interventions to set incentives to maintain the desired benefits and restrict destructive behavior (Ostrom, 1990). However, difficulties remain in the basic lack of knowledge about the contribution of forest ecosystems to welfare, their resilience to environmental changes, and impacts on human welfare after their depletion. Political interventions, however, can limit this mis­management and invigorate marketability by establishing relevant regulating and eco­nomic instruments through (e.g. logging regulations, subsidies, conservation contracting (Vertragsnaturschutz)) and defining property rights (e.g. hunting rights, public access, emission rights). However, these instruments can also fail if not or weakly implemented. Where property rights remain undefined and revenues lack, forest owners miss incentives to guarantee the provision of NMFB allocation. Over time, this results in an undersupply and overutilization. Also, in Saxony, as well as, in the Federal Republic of Germany and in most European countries, political failure consistently enhances market failure, e.g. until today the provision and accessibility of NMFB remains free (Mavsar et al., 2008).

The loss of regional NMFB is grounded in a disparity between private and social costs. Yet, entrepreneurs and landowners are incentivized to degrade them because their actions only internalize private costs (those cost that directly accrue for the execution of the land converting action). While the degradation-resulting costs of repairing damages or com­pensation of missing ecological functions, accrue to society instead of the perpetrators. Consequentially, they turn into negative externalities (Common and Stagl, 2005). In Sax­ony, various negative externalities were caused by, e.g. afforesting rapid-growing con­iferous monocultures that bestow inferior NMFB instead of more ecological stable na­ture-close stands. Another example marks the decline of game density and NMFB due to logging. With respect to the ecological state of the fragmented, downscaled Saxon forest, it opposes a low ecological stability to extreme events, such as, floods (e.g. in 2002), storms (hurricanes Kyrill and Lancelot in 2007), insect attacks on spruce monocultures, and soil acidification from anthropogenous nitrogen and sulfur immissions. The results of a statewide monitoring reveal regionally varying magnitudes of degradation, foliage dam­age, growth irruptions of spruce monocultures in the Ore Mountains, and a reduced abun­dance, primarily, in former opencast mining areas of northwest Saxony and Lusatia (Lau­sitz) (SMUL, 2009).

Internalization of Benefits through Economic Valuation

In forestry, people must often choose between incompatible alternatives, e.g. preserva­tion, timber production or conversion to agriculture. Moreover, many if not most, land­use options inevitably have a strong economic basis; while those factors, which are not quantified, such as public goods, risk being ignored. One way to make trade-offs compa­rable and intelligible is through economic valuation. It pursues different purposes and reveals attractive application fields in Germany (Pruckner, 2001; Elsasser and Meyerhoff, 2001):

(1) to express benefits and costs of a single forest land-use, e.g. for consideration of eco­nomic arguments in the context of conservation contracting (Vertragsnaturschutz),
(2) to compare monetary net benefits of alternative land-uses or different management options in a policy appraisal (e.g. assessment of environmental projects with cost-benefit analysis), and for environmental accounting (umweltökonomische Gesamtrechnungen),
(3) to justify and choose the investment of public means as general information and basis for political advice (Politikberatung),
(4) to consider public damages, e.g. in environmental liability regimes (Umwelthaf­tungsregelungen),
(5) to encourage public participation and support environmental initiatives, and
(6) to prioritize conservation or restoration projects and establish a basis for scientific research programs.

Political institutions started just recently to express growing demand for the internaliza­tion of forest externalities in a more consistent manner. In Europe forestry institutions are about creating a legal basis for the internalization of NMFB in political and business de­cisions. Today's level of research on forest valuation is considerable, but quality levels differ substantially and application is often of an individual nature. The recently enforced EU Forest Action Plan (European Commission, 2006) places valuation and compensation of NMFB as a basis for policy decisions; while the implementation report of the EU Fo­restry Strategy (European Commission, 2005) underlines the market introduction of NMFB as an emerging issue (Mavsar et al., 2008).

Focusing on Germany, the application of economic valuation for non-marketed goods is an analogous non-standard: Forest Accounting (Waldgesamtrechnung) of the Bundesfor­schungsanstalt für Forst- und Holzwirtschaft (BFH, 2006) extends national accounting (Volkswirtschaftliche Gesamtrechnung) to the economic value of timber production, eco­logical data on the German carbon reserves (tons of stored carbon), and forest damages (percentage of foliage and crown damages). However, it leaves out NMFB. Also, in Sax­ony only one legal text claims monetary forest valuation: the Waldwertermittlungsrichtli­nie (WaldwertR, 2000). It governs (1) damage assessments (Schadensbewertung), (2) compensation assessments (Entschädigungsbewertung), and (3) the assessment of market values (Walderwertermittlung) and beforehand sales and purchases. Forest agencies (Forstdirektionen) and forestry offices (Forstämter) are compensated for foregone timber and gaming revenues, management costs due to insect and storm damages, or for forest fragmentation. However, the market-based assessment solely recognizes (forestry) busi­ness transactions and leaves NMFB disregarded.

Problem and Purpose

Over the past decades different economic valuation approaches have been developed to assess environmental benefits. Benefit transfer (BT) is a time- and cost-saving alternative that adopts benefit estimates from directly or indirectly observed market demands at the expense of rigor. Despite the doubts of critics for the welfare estimates' accuracy and methodological consistency (Johnston and Rosenberger, 2009), legal texts in the United States (U.S.) and Great Britain call upon environmental agencies to utilize BT for the economic valuation of ecosystem services due to its main advantage of saving means and time (U.S. Office of Management and Budget, 2003, p.24; DEFRA, 2007, p.38). Al­though in Saxony neither legal aspirations are currently underway nor do forestry politics reveal commensurable experiences, the question arises how far benefits of land-use changes can be monetized with BT if, e.g. a cost-benefit analysis were to be conducted. Such a political framework could be formed by the state's development plan (Landesent­wicklungsplan) of 2003 (SMI, 2003a), which assigns the forestry sector to afforest the current forest cover of 28% to the national average of 30% and to convert conifer- dominated to nature-oriented mixed and deciduous stands. As it explicitly seeks to in­crease certain regional NMFB (e.g. flood protection) their monetization with BT can render additional information on gained benefits that are provided to the Saxon society, and beyond.

To pursue the issue whether BT reveals a potential valuation method in policy appraisals to monetize Saxon NMFB, it appears to be meaningful to elaborate on the technical state of the art and gain knowledge on its means and limitations via an exemplary transfer framed by the afforestation goals of the Saxony's state development plan.

B. Research Objective and Hypothesis

The research objective is to investigate the scientific and grey literature in order to depict the scientific state of the art of BT and to develop recommendations for future BT valua­tions applied to Saxon NMFB. As future policy appraisal will benefit from insights in its application potential and limitations in Saxony, the present work aims to start closing this research gap by conducting an exemplary transfer to examine the following hypothesis:

If benefit transfer principally allows assessment of the economic value of non-marketed forest benefits for Saxony, further methodological advancement and primary data are required for thorough transfers.

To explore the hypothesis, the proceeding goes according to the following structure: To shape methodological recommendations, chapter C is structured in a theoretical part (sec­tions C.1 and C.2) and a methodological part (section C.3). Section C.1 elucidates to the relevant fundamentals of economic valuation and its scope of influence. Section C.2 in­troduces shortly the primary economic valuation techniques BT draws on. It illuminates, in depth, the methodology of BT that underpins the subsequent methodological elabora­tions in section C.3. Therefore, section C.3 reviews forest valuation studies to investigate the state of the art in the relevant scientific and grey literature and critically analyzes its methodological approaches to deviate technical recommendations for NMFB valuations with BT in Saxony. Based on an exemplary valuation of the afforestation endeavors as­signed by the Saxon development plan, chapter D scrutinizes the application potential and the constraints of BT for Saxon NMFB. The concluding chapter E discusses the research objective and answers, in a compilation of technical recommendations, the expectable application potential and limitation.

C. Theory and Methods

C.1 The Economic Valuation of NMFB

Section C.1 introduces the economic classification concept of the "total economic value", classifies economic valuation's scope of influence underlines the relevant foundations of the neoclassical welfare theory and elucidates the dependency of the decision type on the accuracy required.

The Total Economic Value

NMFB can be categorized according to the utilitarian concept of the total economic value (TEV; Pearce et al., 2006), which is the net sum of all relevant benefits society obtains from a forest. It comprises two main value categories: use and non-use values (Figure 1).

Use values are defined as values derived from the actual or possible use of a service, such as timber for fuel, or the usage of plants or enzymes for remedies. Many use values are often non-commercial, in the way that forests are also a place of recreation, education, and culture. Use values also include indirect, non-commercial uses, such as, ecological functions e.g. watershed protection, nutrient cycling, air pollution reduction, and micro­climatic regulation. Some people might seek to save the option to profit from certain NMFB in the future although they may not currently use them. Bequest values are values that people place on knowing that future generations will have the option to enjoy the forest. Non-use or “passive use” values are not associated with actual use, or even the option to use a good or service. Existence values is the non-use value that people place on simply knowing that a forest exists, even if they will never use it or seek saving someone else's utilization. Some people might cherish the existence of the national park Saxon Switzerland although they do not plan to visit it. If someone wants soil stabilization to be available for the current generation, it is cherished from an altruistic point of view. Simi­larly, some might want to preserve the option to spend holidays in a forest for forthcom­ing generations and attach bequest value on it (Pearce et al., 2006).

Abbildung in dieser Leseprobe nicht enthalten

Figure 1 Overview of value composition of TEV applied to NMFB

Figure 1 was adapted from Bartczak et al. (2008).

The Scope of Influence of Economic Valuation

Non-economists and other critics doubt heavily whether environmental goods can be valued monetarily (Sagoff, 1997; Freeman III, 2002; Turner et al, 2003). To rectify this issue it should be kept in mind that the estimation of absolute or intrinsic values is not pursued, but the increase or decrease of a certain quantitatively specified NMFB4. It is also not the sole basis for decisions between alternative land usages, but a qualitative supplement. Nor is economic valuation the panacea to forest-related usage problems be­cause it does not ensure sustainable management forms to be preferred over destructive ones. Rather it attempts to integrate environmental effects of land-use conversions and facilitate a sound decision level by converting ecological changes in comparable and in­telligible measures5 (Kengen, 1997). The subject itself is discussed controversially on how preferences change over time, space, and with ecological differences. For brevity, deeper insights can be inferred from in Pearce et al. (2006) and are broached below in section C.2 "Tailoring Temporal and Spatial Preference Changes".

The Neoclassical Welfare Theory

Economic valuation grounds in the neoclassical welfare theory, which constitutes societal welfare and utility, respectively, on that of individuals. Its concept postulates solely indi­vidual well being to yield societal welfare. The principle of consumer sovereignty denotes that every single individual can judge by him/herself whether he or she is better or worse posed in a situation, which means by implication that individual welfare is pivotal for corporate welfare. Utility cannot be measured directly, only ordinally and remains a theo­retical construct. However, it mirrors in the monetary values that an individual with a certain income is willing to pay. If the willingness-to-pay (WTP) is higher for a certain good than for another, the subjective utility is reasoned to be higher. The maximum WTP is, therefore, an approximate measure for comparing utilities on a cardinal scale. It can be defined as the sum an individual remains indifferent between the monetary purchase and the abandonment of a defined quantity/quality of a product. If varying amounts of goods are juxtaposed with the maximum WTP, a utility or demand function can be deviated (Pearce et al., 2006).

Figure 2 shows that with every demanded good the utility that an individual derives from its consumption declines, leading to a decreasing individual utility curve. The market price for marketed goods, however, remains constant for all demanded quantities and the utility maximizing individual seeks to consume, at market equilibrium, where the person­al WTP equals the market price. For less demanded quantities, WTP surpasses the market price and provides additional utility as consumer surplus (punctate area). For non­marketed (i.e. public) goods, such as, forest ecosystem services, the WTP coincides with the consumer surplus (market price is zero) and fills the entire area below the demand curve. Assuming the demand relationship for NMFB can be defined. The supply curve S0 represents the quantity of a specific NMFB, say forest biodiversity, under certain condi­tions. The height of the individual demand curve illustrates the maximum WTP for a marginal increase in the quantity of forest biodiversity. Given the forestry goals of the Saxon development plan, there is an attempt to increase the supply in forest biodiversity (among other NMFB) to a higher provision level S1. The individual Saxon consumer surplus associated with the pre- and post-policy provision is the grey-colored area under the utility curve between S0 and S1. As land-use polices affect groups of individuals of a certain geographical region, rather than merely one person, the individual consumer sur­plus is aggregated over the affected population. As part of the BT demonstration in chap­ter D the transferred estimate is aggregated over the Saxon population.

Abbildung in dieser Leseprobe nicht enthalten

Figure 2 was adapted from Elsasser (1996).

Dependence of Accuracy Requirements from the Decision Context

Depending on the decision context, the level of accuracy in evidence required will vary on a case-by-case basis. It is likely that large investments or expenditures stipulate a high degree of accuracy from economic valuation. As a rule of thumb, accuracy levels can be linked to different types of decision-contexts (see Figure 3): Where analysis is focused on gaining knowledge (e.g. to highlight the importance of a certain forest management form) or if an initial assessment of policy outcomes is required (e.g. scoping or screening) com­paratively low levels of accuracy are likely to be acceptable. Real policy decisions proba­bly require greater confidence in the valuation result and evidence. Overall, accuracy level is also shaped by scale and impacts of the policy or project, the stakeholder situa­tion, information availability, time and means allocatable for analysis (eftec, 2010b).

Abbildung in dieser Leseprobe nicht enthalten

Figure 3 Accuracy requirements for decision making

Figure 3 was adapted from eftec (2010b) after Brookshire (1992)

C.2 Economic Valuation Techniques

The impact of land-use projects and policies can be valued directly on the basis of several techniques. BT utilizes their outcomes for an unstudied site. For brevity, this section touches on primary valuation techniques only shortly and dwells on a methodological elaboration of BT.

Overview on Primary Valuation Techniques

Two primary valuation approaches are relevant for the valuation of NMFB.

(1) Revealed preference techniques observe market behavior and actual market demand. Production function approaches seek to set changes in the quality or quantity of goods in correlation to the output of a marketed good or service by creating a dose-response rela­tionship between ecosystem quality, the provision of a particular services, and related production. Surrogate market approaches, encompassing travel costs and hedonic pricing, quantify the value of forest benefits by inquiring into people's expenditures or the prices of other market goods and services, such as, real estate (Pearce et al., 2006).
(2) Stated preference approaches investigate peoples' intention within hypothetical mar­kets with surveys, i.e. consumers state their preference directly as WTP, e.g. in a contin­gent valuation. Both approaches are founded in different welfare concepts that cause stated preference measures to be larger than revealed preference measures even when there is no measurement error. They are, therefore, regarded as non-commensurable and non-combinable for the aggregation of several NMFB (Smith and Pattanayak, 2002). Revealed preference measures are restricted to use values, while the stated preference techniques are suitable for the valuation of use and non-use values (Pearce et al., 2006).

Table 1 Overview on revealed and stated preference techniques

Abbildung in dieser Leseprobe nicht enthalten

Secondary Valuation with Benefit Transfer

The most important issue for policy appraisal is the cost-effectiveness of the assessment procedure. In the United States and Great Britain, the economic assessment of policies therefore draw increasingly on benefits of marginal provision changes already derived at with primary valuation studied site (study site). By transferring these benefits to an un­studied policy context (policy site), time, personal resources and costs can be saved while finding a WTP for the NMFB in question. This process has been termed benefit transfer (BT).

Properties of and Conditions for Benefit Transfer

A crucial condition for BT to remain valid is to maintain similarity between the study site and the policy site, i.e. commodity consistency (Rosenberger and Loomis, 2001), in terms of

- the NMFB in question
- the quantity or quality change of the environmental good/service in question (baseline and magnitude of the marginal change)
- distribution of property rights (on the benefits valued)
- socio-economic characteristics, such as, markets, demography (e.g. female pro- portion, education), population (e.g. income levels) and culture
- spatial and temporal dimensions (e.g. frequency of provision and duration of en­vironmental change)

As much these information is crucial for a valid transfer, as much this information is of­ten lacking. Most primary studies were not conducted in the scope of a subsequent tran­scription and usually do not report sufficient data to assess the primary study's relevance for the transfer. Guidance in whether or whether not those can be used for the transfer context can be investigated with the check questions of the “An instrument for assessing the quality of environmental valuation studies” of the Swedish environmental protection agency SEPA (Naturvârdsverket, 2006) - a valuation method-specific questionnaire help­ing the analyst to establish an understanding on quality indicators concerning the natural scientific (e.g. “Were any experts in natural sciences/medicine involved in the valuation study?”), economic (e.g. “If the valuation study estimated future economic values, did the study report how these values were converted into present values?”) and statistical (“Was there any test of internal validity?”6 ) dimension. Given that the transfer quality alters with site differences, the quality and kind of primary valuation and the assumptions and deci­sions the BT analyst has to take during the transfer procedure itself7, BT can be regarded "as much an art as it is a science.” (Rosenberger and Loomis, 2001).

Over time several approaches have been developed that differ in scale of adjustment be­tween the characteristics of the study site and the policy site. They can be divided into two groups: unit and function transfer.

Simple Unit Transfer

Simple (or naïve) unit transfer uses an estimate from a single primary study (or range of point estimates if more studies are relevant) (WTPstudy site) and adopts it at the policy site (WTPpolicy site). Further, adopting medians or means derived from several point estimates of primary studies are common practice of North American and British public land agen­cies. Again, both methods share the underlying assumption that study site and policy site possess identical characteristics (Rosenberger and Loomis, 2001). Simple unit transfer is regarded as the simplest technique as equation (1) shows:

Abbildung in dieser Leseprobe nicht enthalten

Possibilities to account for site differences are restricted to the selection of appropriate primary studies (i.e. sufficient quality, highly similar valuation contexts, highly similar commodities; eftec, 2010b). Nevertheless, its rigidity makes unit transfer insensitive or less robust to significant difference, e.g. income variances should not be applied if the policy site is located in a different country, as different income levels and costs of living accrue (Navrud and Ready, 2007).

Unit Transfer with Income Adjustment

In most cases BT is inevitably associated with spatial transfers between different coun­tries or geographical regions with different income levels. Considering that most of the primary studies concentrate on developed countries, projects planned in developing coun­tries adjust income differences between policy site and study site with the following cal­culation (2):

Abbildung in dieser Leseprobe nicht enthalten

Where WTPstudy site is the benefit measure from the study site, Ystudy site and Ypolicy site are the average income levels at the study site and policy site, respectively, and ß the income elasticity of demand for the environmental good or service in consideration (Navrud, 2005). The income elasticity of demand ß (for environmental quantity or quality) is the ratio of the partial change in demand of a certain NMFB (DQ/Q) to the partial change in income of the NMFB consumers (DI/I) (Common and Stagl, 2005). The income elasticity ß for different environmental goods is typically smaller than 1, and often in the range of 0.4 - 0.7 (Navrud, 2010).

Further, the conversion of currencies with official exchange rates depending on macroe­conomic and political circumstances is common practice. However, in lower-income countries with weak currencies in international markets, consumption channels the pur­chasing power to local markets. The International Comparison Program of the United States suggests transforming currencies in Purchasing Power Parity in order to adjust the welfare estimate in proportion to the Gross Domestic Product (GDP). It recommends substituting the usage of exchange rates and to reflect the concerned NMFB with the Pur­chasing Power Parity per capita GDP (Navrud, 2005).

The main reason for only aligning income at international transfers is the broad recogni­tion that mainly income determines the WTP for an environmental good/service. Howev­er, if data are available more socio-economic variations can be made, e.g. population density or age structure (Pearce et al., 2006). This requires the application of benefit func­tion transfer.

Function Transfer

Function transfer usually outperforms unit transfer because it enables tailoring to the dis­tinct characteristics and conditions of the policy site via a benefit or demand function. Function transfer can be grouped in three approaches: benefit or demand function trans­fer, meta-analysis and Bayesian model averaging (Bartczak et al., 2008). The main differ­ence between the first two is that benefit or demand function transfer deviates the welfare estimate for the policy site (WTPpolicy site) from a single primary study; while meta analysis bases on several primary studies obtaining one mean WTP that is treated as a single ob­servation.

All of these approaches underlie the notion that the welfare estimate is a function of so­cioeconomic characteristics of the population affected by the environmental change (e.g. age, income, education, and proportion female), physical and environmental characteris­tics of the NMFB concerned, different spatial and temporal dimensions of site quality, and choice (Rosenberger and Stanley, 2006). A key assumption of function transfer is that the relationship between these attributes and the individual's WTP stays the same at the study site and policy site, e.g. assuming that income changes have a constant influ­ence on WTP (eftec, 2010b). Meta-analysis further recognizes methodological variations to have a distinct influence on the benefit measure. This allows accounting for attributes, such as, (primary) study design, valuation method used, regression model specification, econometric methods, and place and date of publication (Rosenberger and Stanley, 2006). The significant factors relate the estimated WTPpolicy site (the dependent variable or “effect­size”) for a function transfer (equation 3) and meta-analysis (equation 4), respectively, in an empirical utility function in the following way:

Abbildung in dieser Leseprobe nicht enthalten

Meta-analysis (from several studies)

Abbildung in dieser Leseprobe nicht enthalten

where the variables ai (i>1) encode the marginal change in the appertaining variable and a0 is the (constant) random error. A, B, C are each a set of explanatory variables, i.e. cha­racteristics of the site, NMFB and households surveyed, Y encodes the income level and M indicates methodological differences between primary studies (Bergstrom and Taylor, 2006). The choice of those coefficients is subject to statistical methods like regression analysis or maximum likelihood estimation (Bergstrom and Taylor, 2008). Generally, function transfer highly profits from an intimate knowledge of the policy site, the choice of the demand function and the technique itself as the specifications made determine sig­nificantly the reliability of the transfer (Rosenberger and Loomis, 2001). Demand func­tions do not report welfare estimates as WTP such as benefit functions do. Instead, they estimate, e.g. at the travel cost method with the number of forest visits the consumer sur­plus in a demand function. As market prices for NMFB are absent consumer surplus coincides with WTP.

Meta-analysis is considered “the most rigorous benefit transfer exercise” by the environ­mental agency of the United States (U.S. EPA, 2000, p.87). It has three purposes: (1) synthesizing information from selected studies in a systematic way, (2) testing hypothesis on the deciding attributes of the benefit estimates, and (3) transferring benefit value changes owing to different regression model specifications and site attributes (Bergstrom and Taylor, 2008). The advantage of meta-analysis over demand/benefit function transfer is that those explanatory variables (e.g. the proportion of broadleaved trees) that are im­portant to the WTPpolicy site can be drawn from those studies that have included these in their indirect utility function. Studies that have not included the feature in their utility function are left out. A user of demand/benefit function transfer might be in the position to exclude possibly important variables and, thereby, loose descriptive power of the esti­mate (Bartczack et al., 2008).

Besides these two functional approaches a third approach supports situations when prima­ry data are rare, absent or too heterogeneous. Bayesian model averaging offers an alterna­tive statistical analysis to relax the dependency on a large empirical basis. (León et al., 2002; León et al., 2007; León-Gonzalez and Scarpa, 2008; Moeltner and Woodward, 2009). Following the Bayes' theorem (Bayes and Price, 1763), expert judgment and, if available, empirical primary data are summarized in a prior density distribution combin­ing the available data sources in the most efficient way. Experts are required to be famili­ar with (1) statistics, to be able to form an opinion about the parameters of the empirical distribution, and (2) the policy/ project context of the policy site, or similar situations, respectively. In an elicitation process (e.g. a survey), the experts are asked to assess me­dian, distribution mode of WTPpolicy site, and the 3rd quartile. These parameters are later used to constitute a prior density distribution function, which is combined with adequate primary data. However, if no prior empirical studies are available or are too heterogene­ous in terms of site similarity an accurate BT can no longer be guaranteed. In these cases a sample collection at the policy site should update the expert-based density distribution to complement the BT with on-site data and to increase the accuracy of the value transfer. Prior to the estimate prediction the BT analyst has to define a credible interval (the Baye­sian analogue to the classical confidence interval) within its limits the monetization is deemed reliable. This illustrates the individual treatment of each project or policy ap­praisal, as depending on the available prior data pool Bayesian model, where averaging faces a tradeoff between the usage of prior and policy site information (León et al., 2007).

Tailoring Temporal and Spatial Preference Changes

BT is usually intrinsically concerned with (1) temporal and (2) spatial preference changes.

(1) Whenever land-use programs are planned, the provision of NMFB changes during and after the policy or project lifetime. Also, people alter preferences regarding e.g. drinking water availability over time. Especially, conservation or afforestation programs (as Saxo­ny's development plan) are likely to increase many NMFB provided by forests over the long-term (the scale depends specifically on the magnitude and kind of change). Zander­sen (2005) estimates to reach maximum welfare potential after 50 to 80 years subsequent to afforestation. To account for future benefits (and costs) in the valuation process, dis­counting enables the expression of future values over time in present value terms. There­fore, analysts take into account temporal preference changes by choosing a discount rate to convert the monetary benefits calculated for the end of the project or policy lifetime to pre-policy time (Pearce et al., 2006). The choice of discount rates, whether positive, nega­tive or zero, is lively and controversially discussed. For the sake of brevity it is referenced to TEEB (2008) and Pearce et al. (2006). Other preference determinants, such as the mar­ginal utility of income, family structures or transport behavior, are often treated as con­stants during the transfer because knowledge on changing drivers remains usually absent. Temporal transfers increase not only site dissimilarity, but inevitably affect the accuracy of the transfer (Loomis, 1989).

(2) Transferring WTP to a different location brings along changes in (1) forest characte­ristics (e.g. type of forest, density, status quo of NMFB, availability of substitutes), (2) cultural habits of the affected population and access to public forests (definition of prop­erty rights), and (3) differences in markets (e.g. income levels). Consequently, questions on the total extent of the economic market (i.e. location of the affected population) and inherent spatial patterns of preferences, such as the distance decay of WTP, arise (Johns­ton and Rosenberger, 2009) and are due to definition before the transfer. Indeed an aver­age WTP for use values has been shown to decrease with increasing distance to the forest in question as users commonly hold higher values than non-users, e.g. recreation becomes more time and cost intensive with increased distance to the forest site. The spatial distri­bution of indirect use and non-use NMFB is, however, highly uncertain. Variations in the allocation of characteristics and benefits do not necessarily correlate with their location, such as carbon sequestration (i.e. climate regulation) returns benefits not only regionally, but globally (Pearce et al, 2006). Consequently, spatially declining preferences might not be observable (Bateman et al., 2006).

[...]


1 The scientific and grey literature refers to an irregular terminology and uses also "non-market/not marketed forest products/goods and services".

2 A more in-depth discussion of the NMFB classification can be inferred from Stenger et al. (2009).

3 The neoclassical welfare theory is introduced below in section C.2.

4 See next section "The Neoclassical Welfare Theory".

5 What is needed is the order of magnitude of the expected change. It would mean to loose touch with reality and economic theory if 'true' or absolute values are to be estimated.

6 "Internal validity is supported when variables that are expected by theory to be important determinants of preferences actually are statistically significant with the correct sign. For example, with normal goods, price is expected to have a negative effect on demand for a good, while household income is expected to have a positive effect, all else equal." (Naturvârdsverket, 2006, p.96)

7 e.g. the application of regression models and econometrics which is elaborated more in depth below in section "Function Transfer".

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Details

Title
The Economic Valuation of Non-Marketed Forest Benefits in Saxony
Subtitle
Potential and Limitations of Benefit Transfer
College
University of Bayreuth  (Helmholtz Center for Environmental Research)
Grade
1,5
Author
Year
2010
Pages
88
Catalog Number
V536312
ISBN (eBook)
9783346130105
ISBN (Book)
9783346130112
Language
English
Tags
benefit transfer, economic valuation, forest, non-marketed forest benefits, Saxony
Quote paper
Janina Reibetanz (Author), 2010, The Economic Valuation of Non-Marketed Forest Benefits in Saxony, Munich, GRIN Verlag, https://www.grin.com/document/536312

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