Why We Should Value the Environment?

And
When?

Anil Markandya

1. Introduction
It gives me great pleasure to participate in this international seminar on non-market valuation
methods for the environment, and to revisit the delightful city of Prague. The presentations at
this seminar will go into great detail on the latest developments in non-market valuation
techniques, which is of course right and proper. My task, however, is to step back and
motivate such valuation activities. Why should we make this big effort? Is it worth it – and
what are the benefits? What has been the experience in policy terms of work that has been
done on valuation?

These are, of course, important questions. The research we will be presented is, I believe,
mainly of value in an applied context. It is not (although some may disagree with me) of
primary value as advancing the frontiers of economic theory and economic science from a
conceptual perspective.

The basic thrust of my argument is that valuation of the environment is important because it
‘works’ – i.e., it helps make the case for protecting the environment in an effective way. I
would argue that in many cases it is more effective in a long-term strategic sense than other
methods of protecting the environment – such as lobbying, undertaking direct action and so
on. Needless to say it is not as ‘sexy’ as these other methods, but it does help change the
decision making framework in a fundamental way. I will give some examples in this paper of
where valuation techniques have worked and delivered results in this sense. I also
acknowledge, however, that it is not always effective, and I will try and indicate when it does
work best.

2. What Do Environmental Values Consist of?

The word ‘value’ is one of the most confusing and misused words in the English language. It
means so many different things that people are often talking cross purposes when they talk
about ‘values’ (and not just in an environmental context). What then do environmental values
consist of? To environmentalists, they derive from the pleasure of using a clean environment
(so-called use values) and from the pleasure of simply knowing that the environment is clean,
now and in the future (so-called non-use values). To those not directly concerned with these
things, the environment may have a value if it contributes to social and economic well-being,
and it does this by providing inputs into production (soils, forests etc.) and as a sink for
waste. All these are very real values, and there is little disagreement on that. Where
disagreement comes about is when we try and convert these values into money terms. This is
more acceptable to those dealing with the social and economic benefits of the environment
than to those interested in the use and non-use values (especially the latter). Valuation in

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money terms can be accepted more widely if we can agree that such values are seen as a tool
for deciding what we are willing to sacrifice from our scarce resources to protect the
environment. No one argues that we should devote all our resources for this purpose, and
therefore by implication there must be some trade-off between environmental protection and
economic use of the environment. The next step is to agree on how to measure what we are
willing to sacrifice. Here we make the case for money because it is a convenient unit of
account. It allows us to compare values across very different things. Of course any other unit
of account would be valid, as long as it was well understood by everybody.

3. How Do We Value Environmental Goods and Services and What

Are the Problems with Such Values?
If we accept money values as a valid basis, we then have to decide how to value things that
do not readily have money values associated with them. Starting from the economic theories
of value, the basic principle in a market-based society is to value scarce goods and services in
terms of the maximum people are willing to pay to receive them or the minimum they need to
be paid if these goods are taken away from them. These ‘willingness to pay’ (WTP) and
‘willingness to accept’ (WTA) concepts are central to the valuation of the environment. Of
course, there are objections to their use, the most persuasive being that it favours the rich,
who have a higher WTP/WTA. This is true, but there are ways to get around the problem; we
can adjust the estimated WTP to account for such differences and even if we do not do that,
we can include distributional considerations as an additional factor in making decisions about
the environment. To take an example, suppose there is a choice between building a noisy
airport near a rich neighbourhood or near a poor one. We could argue that the rich will be
protected because they have a higher WTA, thus raising the cost of building it in their
neighbourhood. Actually it is not as simple as that. The ‘poor neighbourhoods’ are generally
more densely populated and so there is a countervailing effect. But be that as it may, we can
always take account of the distributional implications in the decision-making framework as
an additional factor and reverse (if necessary) a simple comparison of costs and benefits.

Another objection to values based on money and WTP/WTA relates to the comparison of
present and future values. For a variety of reasons that are too complex to go into here,
people have a lower WTP for goods that will be provided in the future than for goods
provided now. This difference is captured through a discount rate, which is a factor (less
than one) that lowers future values to make them comparable to present values.
Environmentalists complain that individuals tend to have too high a rate of discount and this
militates against environmental protection. Growing trees, for example, yields results over
very long periods, and if the future values of the trees and timber are discounted at too high a
rate, no one will invest in reforestation. There is some merit in this argument, but not much.
First, high rates of discount also act to protect the environment – some large infrastructure
projects such as dams are less attractive at high discount rates. Second, future values need to
be discounted but, as far as the environment is concerned, the basic values themselves can be
expected to increase over time. So, in the case of forests, people’s WTP for non-timber forest
services will grow as they become richer and as the available natural environment shrinks.
This will act as a countervailing force to the discounting and has been shown to result in the
case for conservation being successful. Having said this, however, economists do
acknowledge that discounting is an issue when we look at very long-term impacts, such as
climate change. There is now agreement that the standard techniques for discounting are

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inappropriate in such cases and we need to use different rules, such as declining discount
rates for example.

4. The Political Economy of Valuation

By calculating the value of the environment through the use of the tools described above, we
can argue our case against those who would dismiss the environment as of little economic
value. For, as the many studies that have been done show, the numbers that come out on the
value of environmental services can be very large. Presented in the common currency of
government decision-makers, they are then very hard to ignore.

The experience of the last 20 years or so has brought up a number of cases where the
environmental valuation made a successful case for better environmental protection. Here are
some of them.
• The world-wide movement to ban lead from petrol had its origins in a US study that
quantified the health benefits of such a ban and found them to be much greater than
the costs.
• The environmental benefits of phasing out ozone depleting substances (ODS) (such as
CFCs) were estimated as being much higher than the costs of such a ban. This was
one of the factors that resulted in the Montreal Protocol, which was an international
agreement that committed all countries to phase out ODS.
• Programs to reduce the application of pesticides have been found to have significant
environmental benefits that often outweigh the costs in terms of reduced yields.
• EU regulations to reduce emissions of sulphur, NOx, ozone and VOCs have been
subjected to a cost benefit analysis and in each case justified on the grounds that the
benefits exceed the costs.
• Multiple uses of land areas for recreation and conservation can have environmental
benefits that exceed the costs of shifting out of intensive agriculture.
• In developing countries, programs to arrest deforestation have been shown to have
benefits in terms of non-timber products and prevention of erosion that are greater
than the losses to loggers.

So, the case for the environment can and has been made successfully using non-market
valuation techniques. But it has not always worked as outlined above and there has been
disquiet among those concerned with the environment that the values are underestimated or
not estimated with enough credibility. Here are some examples when this has been so.
• In the climate change debate, estimates of the damages caused by such change have
been hard to quantify. There are too many uncertainties in the physical impacts and
the time scale has proved too long for the numbers to be credible. This is not to say
that the valuation work in this area is without merit; simply that it has not driven the
policy discussion and agreements that have been reached.
• The benefits of river clean-up programs are often less than the costs of such
programmes (e.g. Danube clean-up). The reason is the difficulty in quantifying the
non-use benefits.
• Protecting the wilderness areas of the world is sometimes found to have measured
environmental benefits lesser than the benefits of exploiting them for mineral
development. This is because the wide non-use benefits are difficult to quantify.

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 • The costs of nuclear power, where benefit cost analyses support the use of such power
in some cases, but the public view is strongly against it, some say based on
misinformation about the costs.

To summarise, non-market valuation is not a useful tool when the environmental values
cannot be elicited with confidence. This may be because the science is too inexact, or because
the case is highly dependent on non-use values, which are the most difficult to value and the
most controversial.

Even in these cases, however, the valuation exercise is not without some merit. Partly it helps
because it provides some idea of the environmental values, and even if that makes only a
partial case, it shows who cares about the environment and how much. Politicians need to
factor this in their overall decisions. Secondly, the partial valuation can be fed into a ‘cost
effectiveness’ calculation. Take, for example, the case of climate change. Countries have
agreed to reduce emissions of greenhouse gases (GHG) by a certain amount. The costs of
individual programs to reduce such gases are then compared and the lowest cost set of
activities that meets the target reduction should be adopted. But, in estimating the costs of the
programs, a ‘credit’ can be given for their environmental benefits. These include, but are not
limited to, the reductions in other pollutants such as particulates and aerosols as a result of a
reductions in the use of fossil fuels that accompany GHG reductions.

5. Conclusion
Non-market valuation of the environment is a growing field and for good reason. It can, and
has contributed to better decision-making in the public sector, both in terms of rules for
investment as well as regulations on activities that harm the environment. But the
methodologies are not without weaknesses and some environmental impacts remain difficult
to value in a credible way. However, the research effort in this area is paying dividends and
techniques have improved considerably in the last 20 years or so. The papers that follow
provide a decent sample of the kind of issues being addressed and the advances being made.

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