Methods for quantification of costs and benefits

 

Considering the complex nature of impacts, socio-economic and environmental, it is evident that different approaches will be needed in order to quantify them since there are impacts which are easier to value and other which are not.

 

As a result, private costs and benefits identified under the economic impact indicator in the table above will be estimated through financial analysis, consultation with experts within MERMAID combined with available secondary data from related industries and literature review.

 

The needs regarding valuation of social and especially environmental impacts are somewhat different. One theoretical approach of capturing and describing the benefits derived from the different ecosystem services is the TEV framework presented in Section 2. The framework provides a systematic tool for considering the full range of impacts the marine environment has on human welfare. This includes both “economic” and “social” considerations. In addition, the TEV framework and the framework for categorizing ecosystem services can be seen as complementary as shown in the following figure.

 

As it is anticipated that multi-use platforms will interact with the physical environment the impact on marine ecosystems is foreseen. As also mentioned in Section 2, coastal ecosystems provide a wide range of final services and goods of significant value to society - fisheries, transport medium, flood alleviation, recreation and aesthetic services etc. As it has been emphasized in valuing such assets, it is important to capture how society values these services and goods.

 

The various elements of TEV are assessed using economic valuation methods. While some of these elements are more easily valued than others, for example the use type values, non-use values are usually more difficult to assess. The way to derive TEV is from preferences of individuals. These preferences may be observed when goods and services are exchanged in actual markets and the price they pay in the market reflects how much, at the very least, they are willing to pay for the benefits they derive from consuming that good or service. However, for environmental goods and services which are not traded in actual markets such behavioral and market price data are missing and purchasing behavior is observed within the context of a hypothetical market.

 

In this context two broad categories of economic valuation methods with regard to ecosystem services can be distinguished as shown in Figure 6. Stated preference methods and revealed preference methods.  Revealed preference methods rely on data regarding individuals’ preferences for a marketable good which includes environmental attributes and could be divided in market-based and surrogate markets related. As also shown in Table 3, market-based include the market prices method, production function, replacement cost, cost of illness while we could also add defensive expenditures. Surrogate market related includes travel cost method and hedonic pricing. On the other hand, stated preference methods use carefully structured questionnaires to elicit individuals’ preferences for a given change in a natural resource or environmental attribute and are the only methods that can estimate non-use values which can be a significant component of overall TEV for some natural resources. In this category, the contingent valuation method and choice experiment are included while we could also add the laboratory economic experiments.

 

Table 3: Components of TEV of natural resources and appropriate economic valuation methods
TEV component	Economic valuation methods
Direct use values
	Production Function (PF)
	Net Factor Income (NFI)
	Replacement Cost (RC)
	Market Prices (MP)
	Hedonic Pricing Method (HP)
	Travel Cost Method (TCM)
	Contingent Valuation Method (CVM)
	Choice Experiment Method (CEM)
Indirect use values
	Replacement Cost (RC)
	Cost-of-Illness (COI)
	Market Prices (MP)
	Production Function (PF)
Option values
	Contingent Valuation Method (CVM)
	Choice Experiment Method (CEM)
Non-use values
	Contingent Valuation Method (CVM)
	Choice Experiment Method (CEM)
Source: Adapted from Birol et al. (2006) on TEV of water resources

 

In order to value non-market benefits/costs the use of stated preference methods such as CVM and CEM is deemed important. In the group of stated preference methods CVM has a predominant place. The method was originally proposed by Davis (1963) and its direct approach is based on the development of a hypothetical market or scenario in which the respondents to a survey are given the opportunity to buy the good in question stating their Willingness-to-Pay (WTP).  Different elicitation methods/questions (open-ended, iterative bidding, payment card, close-ended, close-ended double-bounded) are used to derive the WTP amounts and because these values are contingent on the hypothetical market the method is called CVM.

 

CEM (Bennett and Adamowicz, 2001; Birol and Koundouri, 2008) is another stated preference method that has gained popularity among environmental economists. In a CE framework, the good in question is broken down into its component attributes, which are presented to respondents normally as set combination of the attributes. Respondents are then presented with a sequence of these choice sets, each containing alternative descriptions of the good under question, differentiated by its attributes and levels. By observing and modelling how respondents change their preferred option in response to the changes in the levels of the attributes, it is possible to determine how people trade-off between the good’s attributes.

 

With regards to renewable energy sources there is extensive literature on the public’s preferences. Several studies have been conducted over recent years using different valuation techniques to explore individual preferences for renewable power generation and “green” electricity reporting positive WTP for green energy premia (Westerberg et al., 2012; Bollino, 2009; Koundouri et al., 2009; Hansla et al., 2008; Borchers et al., 2007; Kotchen and Moore, 2007; Bergmann et al., 2006; Wiser, 2006; Menges et al., 2005; Nomura and Akai, 2004; Liljestam and Söderqvist, 2004; Zarnikau, 2003; Álvarez-Farizo and Hanley, 2002; Batley et al., 2001; Roe et al., 2001). Furthermore, Turner et al. (2010) provides an extensive literature review of marine and coastal ecosystem benefits valuation studies.

 

Regarding the above studies it is observed that the majority is realized in Northern Europe. One exception is that of Westerberg et al. (2012) who explore the tourist demand for sustainability and recreation of high density beach tourism of the Mediterranean Sea. The authors find that everything else being equal, wind farms should be located no closer than 12 km from the shore while, a wind farm can be located from 5 km and outwards without a loss in tourism revenues if accompanied by a coherent environmental policy and wind farm associated recreational activities. In addition, the authors offer a literature review of studies that provide evidence on the impact of wind turbines on tourism.

 

Furthermore, the application of experimental methods in laboratory settings (Davis and Holt, 1993; Kagel and Roth, 1995) to study issues of economic nature such as decision or game theoretic models, policy problems, institutional procedures is also getting more and more popular among economists.  Following Levitt and List (2007) lab experiments offer the possibility to the investigator to influence the set of prices, budget sets, information sets, and actions available to actors. Hence, within the context of the laboratory the investigator can measure the impact of these factors, ceteris paribus, on behaviour of individual economic agents. Examples of experimental games used to measure for instance social preferences are the ultimatum game, dictator game, trust game, gift exchange game, and public goods game. Other topics of experimental economics applications are in the area of market games, coordination games, finance etc. In the typical lab experiment, subjects enter an environment, in which they are aware that their behaviour is being monitored, are provided with instructions and real monetary payoffs.

 

Furthermore, the fact that gathering primary site-specific data is costly and time-consuming has made BT a more and more popular alternative for the valuation of ecosystem goods and services. BT method uses existing economic value estimates from one location to another similar site in another location. In particular, it concerns an “application of values and other information from a ‘study’ site where data are collected to a ‘policy’ site with little or no data” (Rosenberger and Loomis, 2000, p.1097). In simple words according to this technique the results of previous environmental valuation studies are applied to new policy or decision-making contexts.

 

However, there are a number of criteria that have been identified in the literature for benefits transfer to result in reliable estimates as summarised in Brouwer (2000):

 

• sufficient good quality data
• similar populations of beneficiaries
• similar environmental goods and services
• similar sites where these goods and services are found
• similar market constructs
• similar market size (number of beneficiaries)
• similar number and quality of substitute sites where the environmental goods and services are found

 

Bergland et al. (1995) discussed three main approaches to BT: (i) the transfer of the mean household WTP (ii) the transfer of an adjusted mean household WTP and, (iii) the transfer of the demand function. Hence, while the first approach assumes similarity in good and socio-economic characteristics between the study and target site, the other two approaches attempt to adjust the mean WTP and re-calculate it respectively, in order to account for differences between the two sites in terms of environmental characteristics and/or socio-economic characteristics. See also recent BT reviews such as Navrud (2010) and Johnston and Rosenberger (2010). Finally, it is noted the Environmental Valuation Reference Inventory (EVRI)[2] is a comprehensive benefits transfer database that consists of over 1900 valuation studies and could be used for BT applications.

 

The following figure (Figure 7) from Turner et al. (2010, pp.22-23) presents examples of economic valuation techniques that could be employed to assess specific effects categories and ecosystem services.

 

The methods mentioned above could be potentially used to assess the social and environmental impacts of the multi-use platforms. However, it is important to remind that impacts will be extremely site dependent, making for example BT a challenging task, while it should not be underestimated the fact that at present there are impacts that are unknown and will be explored through the project (e.g., hydrodynamic effects). Additionally, the use of stated preference methods such as CE pose questions such as: should one standard questionnaire be developed for all case studies with minor case study adaptations? Or should the questionnaire development in the different case studies be more or less independent of each other? Or should one valuation study be carried out for one of the sites and then the other sites rely on BT from this site?

 

It is regarded that related decisions will be taken on the grounds of applicability of BT in terms of extremely site dependent impacts, while the number of original studies to be carried out, if deemed necessary, will be constrained by the specific budget and time limitations. Hence, options such as run one valuation study and use it for BT purposes for the other sites or in some settings employ a more cost-effective field implementation, e.g., the use of web panel questionnaires will be seriously taken under consideration.

 

Turner et al. (2010) argue that although several approaches can be used to estimate the value of ecosystem goods and services these approaches fall into two groups (p.54):

 

• techniques that estimate economic values – valuation approaches (stated and revealed preference methods), and;
• those that produce estimates that are equivalent to prices – pricing approaches or costs based (market prices, opportunity cost/damage costs avoided, replacement costs)

 

Whilst valuation approaches may be theoretically correct (elicited WTP consists of both the price paid to purchase a particular good, as well as consumer surplus) pricing approaches are often used to value various aspects of ecosystem value since the former are often very expensive and time consuming to undertake. Finally, economic valuation of ecosystem goods and services is supplemented by the BT technique as well methods for eliciting non-economic values such as focus groups, in-depth groups, delphi surveys, systematic reviews etc.