Monday, June 3, 2013

Valuation

We're starting our study of valuation. Valuation means figuring out what something is worth, usually in dollars.
It is important to note that economic value involves much more than market transactions. People value things that are not traded in markets and people value things that they never use.  Another important point is that economists don't just go around trying to place a value on things for no reason. We engage in valuation when understanding what something is worth can help inform the policy process. Any time there is a tradeoff involving environmental quantity or quality, valuation can serve an important role in terms of helping us understand what is at stake.

One situation where valuation is useful is in determining the monetary value of a fine or fee to impose on a responsible party in the case of natural resource damages. For example, BP will pay about $4.5 billion in criminal and civil penalties for the Deep Water Horizon spill.  Transocean (the owner of the rig) will pay $1.4 billion.
 
What are some other scenarios where valuation might be useful for informing policy?

I sometimes encounter hostility when I first present the idea of valuation to people who have never been exposed to it.  One line of reasoning is that valuation somehow "cheapens" the environment by expressing its worth in dollars and cents. My response to this objection is that the default value is typically zero. That is, most people treat the environment as if it were free, and you can't get much cheaper than that.  Valuation often helps people realize that the environment is extremely valuable, despite it being available for "free".

Another thing to realize is that we are constantly engaging in valuation anyway, through our actions.  For example, when society chooses to spend a certain amount of money on highways, healthcare, and social security and NOT spend that money on environmental protection, are we not indirectly placing a value on the environment relative to those other things?  On a micro level, when you choose to drive your car instead of walking, are you not revealing that you value your own convenience more than you value the environmental damage from your emissions?


Here are some links to more reading about valuation:

The National Ocean Economics Program

NOAA's State of the Coast

Ecosystem Valuation

Economic Values without Prices (Loomis, Choices, 2005)
FAO Fisheries Valuation Summary
Here is a pdf version of a presentation that I put together for SocMon Caribbean

14 comments:

Martin Dailey said...

I've never thought of valuation like that. It will make you take into consideration the small choices you make in everyday life.

amyeballard said...

I think the only way to get people to realize the true importance of the environment is to put a dollar amount on it. I agree that yes it is priceless as we are nowhere and are nothing with out the environment but people think in decimals and dollars. We want hard facts and numbers to back it up. It is vital that people realize the environmental degradation that is occurring is quite costly in more ways that just the expense of an oil spill. It’s the ecosystem its self and the services provided from it that are truly suffering.










Tyler Mckee said...

I think valuing the environment is the only way we can possibly comprehend the damage that is truly being dealt to it. Without a value, like you said, people will just assume that the environment is "free" and abuse it.

Kae said...

I think the only problem with putting a dollar amount on a tree is some money hungry jerk will see "PAYCHECK!" instead of national treasure and a healthy environment.

Joe Rodriguez said...

I also agree that the only way for people to truly understand the importance of the environment is for it to be expressed by a dollar amount. Without attatching some type of monetary value to it, it makes it easy for individuals to simply turn the other cheek. In today's society of computers and technology, many people are too wrapped up in their own doings to acknowledge the environmental degradation that is taking place. However, by conducting valuation and placing a price tag on our natural resources, it forces people to recognize what is happening.

Luke Zente said...

I believe that giving the environment a monetary value will make it easier to see how important the environment really is. Our society is subliminally taught to put preference over things that cost more, so I believe that seeing the word BILLION next to how much damage was caused during the oil spill will help people see the true severity of the situation.

Dr. Peter Schuhmann said...

Kae,

I'm not sure I understand your comment. If understanding the value of oxygen generation, carbon sequestration, habitat provision etc. allows someone to profit from keeping the tree alive, why is that bad? Would you rather the tree be cut and sold for timber? Because the landowner knows that aspect of value simply via market signals.

Taking this a step further, consider that one of the only ways to limit deforestation in developing nations is to allow poor people and governments to derive a "paycheck" from standing biomass. i.e. profit from NOT cutting trees instead of profiting from cutting trees.

Hadi Hamed said...

Its true that in order for some people to turn their head to the conversation we need to speak their language, dollars and cents. But these dollars and cents also need to deal with them directly. Efforts to inform average citizens of the benefits of environmental protection often fall on deaf ears, as many people just don't care.
The major fault for the environment lies in human nature, to do what seems easiest right now, disregarding future consequences.
Like fast food, nearly everyone knows that it is destructive and costly from a health perspective in the short and long run, yet it is still consumed in destructive amounts.
If it is that easy for people to neglect something so direct as a diet, which has immediate negative effects, the hope that they will warm up to an effort to promote environmental issues that protect even their health is optimistic at best.
So even if there is a high dollar amount on a certain resource, it will only cause people to change their actions if it proves the be financially beneficial for them. The main hope for finding the means to preserve the environment is to make it worth more money, which can be done in the market economy by promoting demand for companies that utilize green technology, thus protecting the environment, and placing a higher "price" on its destruction.

Taylor Cobb said...

I agree with most of the posts. There are two main motivators for me when it comes to the environment. Money is one motivator. If I am asked to donate a dollar to "such and such" charity, I will usually pay the dollar if I agree with the cause. If the price of an environmentally friendly product is slightly higher than a non-friendly product, I would opt for the environmentally friendly product. If the asking price for the donation of product is significant I will go with the cheaper one. The other motivator for me is how close to home it hits me; whether geographically or personally. The closer it is, the more likely I am to sacrifice dollars for it. The same may be true for corporations and the amount of environmentally sound processes that corporation is willing to participate in. That along with bottom line numbers and mandatory regulations involved. Eventually environmental concerns will become personal for everyone. Whether it's a neighbor that buys an electric car or puts up solar panels, or pollution giving their loved ones health problems or acid rain burning their grass.

Who comes up with the values associated with natural disasters?

Donald Zimmer said...

I am having a little bit of trouble with the concept of valuation, because like Dr. Schuhmann said in his original post, my original impulse is to think that putting a value on the environment is recognizing that its worth is somehow on the same level as any amount of currency. I recognize that it is important for most people to put a dollar amount on things so that they can have a tangible number to coincide with how much they value a given part of nature, but for some reason I still feel like there is something wrong with thinking about nature as if it is something that's only value is how it is beneficial to humans. It seems to me that by putting a dollar amount on nature, you are acknowledging that it is expendable and that at some point there is a monetary amount that is worth more than say clean water, or fresh air. I know that this is not the true intention of valuation, but it is still difficult for me to think about the environment purely in terms of economics, even if it is the most effective way to ensure preservation and conservation of natural resources, especially in third-world countries.

Sherry Renee McPherson said...

Mankind places value on everything; it’s human nature. Issues with valuation seem to arise from an economic growth vs. environment debate. The environment is likely valued far beyond any of our calculations, but through necessity for our modern lives, we are forced to make choices and sacrifices, which impact the environment. This is unlikely to change until humans are willing to modify our behaviors. It seems that from the environmental aspect, there is growing concern that too many decisions are made in favor of short-term profits without considering the long-term impacts on environmental goods and natural resources. I agree with Dr. Schuhmann, that we like to think of the environment as priceless, when the decisions we make each day say otherwise. But what happens to the economy when the resources we rely on are gone or so degraded they become of little or no use to us? Will we continue with certainty that human ingenuity will continue to offer alternatives, or realize there is no alternative to a healthy environment?

Cameron Weeks said...

I was always curious as to the math behind establishing the huge, billion-dollar number attached to the fines for the oil companies when one of these giant spills occur.

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