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Valuing natural assets, the economics of natural resource damage assessment
Book Reviews/Ecological Economics 10 (1994) 265-270 Valuing Natural Assets Valuing Natural Assets, The Economics of Natural Recurce Damage Assessment. Raymond J. Kopp and V.
Kerry Smith (Editors). Resources for the Future, Washington, DC, 1993, 358 pp., $75, ISBN 0-91570766-7 (cloth), o-915707-67-5 (paper). This important book by senior U.S. environmental and natural resource economists represents the state of the art in defining and measuring the economic value of natural resources. The immediate focus is upon resource valuation, litigation and research under specific U.S. legislation, primarily the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA) of 1980, its reauthorizing amendments, the Superfund Amendments and Reauthorization Act (SARA) of 1986, and the Oil Pollution Act of 1990. However, the authors provide an excellent overview of the economic theory and practice of resource valuation. In summary, their view of natural resources (resources) is one of assets which yield a flow of services that are diminished when damages (e.g., hazardous releases and oil spills) occur. Damages are measured at the margin by the public perception of loss and the resulting behavioral changes, which are easily measured to the extent that the resource services pass through markets. However, damages to nonmarket, nonuse resource services result in more subtle behavioral changes, whose valuation requires the sophisticated theory and research explored here. Of the central environmental policy issues concernmg ecological economists (i.e., sustainable scale, equitable distribution, and economic efficiency) only the last has been addressed here directly, but that is all that the authors have set out to do. Their concept of value is not only solidly based upon centuries of theoretical and empirical observation, but, as this book by economists and attorneys makes clear, is also now embedded in U.S. legal statutes and regulatory practice. The book also demonstrates that the authors have achieved interdisciplinary proficiency in working with lawyers and administrators, but that their interaction with the natural sciences is far less advanced. Introductory Chapters 1 and 2 by editors Raymond Kopp and Kerry Smith provide a lucid overview of value as based upon economic efficiency. There is much more of importance in this chapter, as there is throughout the book, than can be covered in the space available for this review. Chapter 3 by Frederick Anderson provides an excellent discussion of the relevant legal background and
269
regulatory practice. Among the provisions of CERCLA and Superfund are explicit charges to government agencies to exercise their responsibilities, as trustees of the public, to protect natural resources and to sue those who damage them. In Chapter 4, as is the approach throughout, the editors follow up with a critique (in this case by Howard Kennison, who notes more recent legal developments). In Chapter 5, Gardener Brown provides an economic critique of CERCLA’s shortcomings, and of its implementation by the regulatory rulemaking and procedures of the Department of the Interior (DOB. He would exclude scientifically based damages if they are not perceived by the public, but with perfect consistency, he would broaden damage estimates to include perceived damages whether scientifically verified or not. He gives a reasoned defense of discounting future damages, and with consistency which should be welcomed by environmentalists, also points out that the same logic requires compounding past damages. He regards the present OMB rate of 10 percent as too high by about half. In Chapter 6, Willie Smith of DO1 provides a balanced response to these critiques of administrative practices. In Chapter 7, the editors present valuable material on the economic assessment of damages to nonmarketed services of natural resources under the relevant legislation, decisions, and rules. They also preview and compare methodologies explored in following chapters for estimating the value of nonuse, nonmarketed commodities. The first of these is the indirect approach discussed by Kenneth McConnell in Chapter 8. McConnell provides excellent coverage of hedonic, travel cost, random utility, averting behavior and other ingenious methods that he and others have developed and successfully applied in order to estimate the dollar values that consumers attach to recreation, environmental quality and other nonmarketed services of natural resources. He explains the significance of willingness to pay (WTP) versus willingness to accept (WTA). He provides detailed theoretical models for each of the methodologies cited and explains his preference for the hedonic approach on the basis that it, of all the indirect approaches, is most subject to the rigors of the market. Robert Mendelsohn in Chapter 9 even more strongly advocates indirect approaches because of his belief in their superiority over the alternatives to be explored below. These alternatives are primarily survey methods, which he criticizes as attitudinal and based upon what people say rather than behavioral studies based upon what they do.
270
Book Reviews/Ecological Economics 10 (1994) 26.5-270
In Chapter 10, William Schulze provides an excellent overview of direct methods for valuing natural resources through surveys, primarily the contingent valuation method (CV), noting that this approach has the important property of measuring nonuse as well as use values. He explores theoretical refinements of this method and cites practical experience in the design of improved survey instruments. In Chapter 11, Richard Carson and Robert Mitchell discuss the standing of CV in the courts, evaluating its strengths and weaknesses. In Chapter 12, Ralph d’Arge addresses one of the most difficult and controversial environmental issues, that of time and discounting. He explores not only the conventional economic and legal rationale for discounting, but also adds important new insights into this formidable problem. In the only effort in this book to address issues of equity and ethics, d’Arge departs from the conventional economic preference for using a single discount rate. Expanding on the minority view of Talbot Page and Ezra Mishan, he provides a reasoned theoretical justification for the intuitive view of many environmentalists, that in cases involving intergenerational choices and irreversibilities, discount rates “...would be exceedingly low, if not zero” (p. 258). In Chapter 13, Myrick Freeman, a pioneer in nonmarket valuation, offers a valuable review of empirical studies estimating nonuse values of resources. Among his conclusions is that option value, rather than being considered as a separate form of economic value, should actually be regarded as the algebraic difference between ex post and ex ante concepts, and furthermore that it can actually take on negative as well as positive values. In the concluding Chapter 14, editors Kopp and Smith express regret that out of court settlement of the large oil spill and other cases discussed here has precluded publication of valuable data and has reduced incentives for more responsible protection measures. They note that ineffective rulemaking by DOI makes it possible for governmental trustees and emitters to avoid entirely their responsibility for resource restoration. They provide an analytical summary and agenda for future research. Though the book contains occasional references to the need for a balanced approach between the natural and economic sciences, the authors’ ambiguity towards this issue is evident throughout. Chapter 5 states that, “ ... there is no reason why private individuals should
see the world or interpret phenomena in the manner of scientists” (p. 75). In Chapter 7, the editors devote Section 4 to their view of “Balancing the Natural And Economic Sciences In Damage Assessment.” Here they note the importance of linking public perceptions of resource damage (their basis for economic assessment of damage) to scientific evaluations of damage. However, on the basis of Figures 7-l and 7-2 and the text, using their example of the death of birds from an oil spill, the role of science is limited to narrowing the confidence interval on the injury attribute, which is the number of birds killed in their example, not to evaluating the importance of the species and its interrelationships with the environment. In their conclusions about the balance between the economic and natural sciences on the last page of the chapter, they state that, “Fourth, the natural sciences will continue to have perhaps too great an influence on the design of damage assessments” (p. 143). It should be noted that the authors follow the logic of their theoretical model consistently in viewing resource value as what is measured in actual and in virtual markets. Evidence from natural sciences is only admissible, even if nearly unanimous, to the extent that it eventually affects aggregate human behavior and markets. However, in their concluding chapter, the editors express their uneasiness with the incentives which have led senior economists to “...focus so much attention on natural resource damage assessment...that it may be diverting attention from more important national or global environmental issues” (p. 307). Finally, to those who believe that a theory of resource value should address not only economic efficiency, but also equity, sustainability and natural science, this book presents a challenge to develop a broader alternative approach that will also Meet the rigorous standards of scholarship, serve the needs of legislators, policy makers and administrators, and withstand the ordeal by litigation as well as has the economic value theory explored by these authors. John H. Cumberland Center for Environmental and Estuarine Studies University of Maryland Solomons, MD 20688, USA SD1 0921-8009(94)00015-N
Kerry Smith (Editors). Resources for the Future, Washington, DC, 1993, 358 pp., $75, ISBN 0-91570766-7 (cloth), o-915707-67-5 (paper). This important book by senior U.S. environmental and natural resource economists represents the state of the art in defining and measuring the economic value of natural resources. The immediate focus is upon resource valuation, litigation and research under specific U.S. legislation, primarily the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA) of 1980, its reauthorizing amendments, the Superfund Amendments and Reauthorization Act (SARA) of 1986, and the Oil Pollution Act of 1990. However, the authors provide an excellent overview of the economic theory and practice of resource valuation. In summary, their view of natural resources (resources) is one of assets which yield a flow of services that are diminished when damages (e.g., hazardous releases and oil spills) occur. Damages are measured at the margin by the public perception of loss and the resulting behavioral changes, which are easily measured to the extent that the resource services pass through markets. However, damages to nonmarket, nonuse resource services result in more subtle behavioral changes, whose valuation requires the sophisticated theory and research explored here. Of the central environmental policy issues concernmg ecological economists (i.e., sustainable scale, equitable distribution, and economic efficiency) only the last has been addressed here directly, but that is all that the authors have set out to do. Their concept of value is not only solidly based upon centuries of theoretical and empirical observation, but, as this book by economists and attorneys makes clear, is also now embedded in U.S. legal statutes and regulatory practice. The book also demonstrates that the authors have achieved interdisciplinary proficiency in working with lawyers and administrators, but that their interaction with the natural sciences is far less advanced. Introductory Chapters 1 and 2 by editors Raymond Kopp and Kerry Smith provide a lucid overview of value as based upon economic efficiency. There is much more of importance in this chapter, as there is throughout the book, than can be covered in the space available for this review. Chapter 3 by Frederick Anderson provides an excellent discussion of the relevant legal background and
269
regulatory practice. Among the provisions of CERCLA and Superfund are explicit charges to government agencies to exercise their responsibilities, as trustees of the public, to protect natural resources and to sue those who damage them. In Chapter 4, as is the approach throughout, the editors follow up with a critique (in this case by Howard Kennison, who notes more recent legal developments). In Chapter 5, Gardener Brown provides an economic critique of CERCLA’s shortcomings, and of its implementation by the regulatory rulemaking and procedures of the Department of the Interior (DOB. He would exclude scientifically based damages if they are not perceived by the public, but with perfect consistency, he would broaden damage estimates to include perceived damages whether scientifically verified or not. He gives a reasoned defense of discounting future damages, and with consistency which should be welcomed by environmentalists, also points out that the same logic requires compounding past damages. He regards the present OMB rate of 10 percent as too high by about half. In Chapter 6, Willie Smith of DO1 provides a balanced response to these critiques of administrative practices. In Chapter 7, the editors present valuable material on the economic assessment of damages to nonmarketed services of natural resources under the relevant legislation, decisions, and rules. They also preview and compare methodologies explored in following chapters for estimating the value of nonuse, nonmarketed commodities. The first of these is the indirect approach discussed by Kenneth McConnell in Chapter 8. McConnell provides excellent coverage of hedonic, travel cost, random utility, averting behavior and other ingenious methods that he and others have developed and successfully applied in order to estimate the dollar values that consumers attach to recreation, environmental quality and other nonmarketed services of natural resources. He explains the significance of willingness to pay (WTP) versus willingness to accept (WTA). He provides detailed theoretical models for each of the methodologies cited and explains his preference for the hedonic approach on the basis that it, of all the indirect approaches, is most subject to the rigors of the market. Robert Mendelsohn in Chapter 9 even more strongly advocates indirect approaches because of his belief in their superiority over the alternatives to be explored below. These alternatives are primarily survey methods, which he criticizes as attitudinal and based upon what people say rather than behavioral studies based upon what they do.
270
Book Reviews/Ecological Economics 10 (1994) 26.5-270
In Chapter 10, William Schulze provides an excellent overview of direct methods for valuing natural resources through surveys, primarily the contingent valuation method (CV), noting that this approach has the important property of measuring nonuse as well as use values. He explores theoretical refinements of this method and cites practical experience in the design of improved survey instruments. In Chapter 11, Richard Carson and Robert Mitchell discuss the standing of CV in the courts, evaluating its strengths and weaknesses. In Chapter 12, Ralph d’Arge addresses one of the most difficult and controversial environmental issues, that of time and discounting. He explores not only the conventional economic and legal rationale for discounting, but also adds important new insights into this formidable problem. In the only effort in this book to address issues of equity and ethics, d’Arge departs from the conventional economic preference for using a single discount rate. Expanding on the minority view of Talbot Page and Ezra Mishan, he provides a reasoned theoretical justification for the intuitive view of many environmentalists, that in cases involving intergenerational choices and irreversibilities, discount rates “...would be exceedingly low, if not zero” (p. 258). In Chapter 13, Myrick Freeman, a pioneer in nonmarket valuation, offers a valuable review of empirical studies estimating nonuse values of resources. Among his conclusions is that option value, rather than being considered as a separate form of economic value, should actually be regarded as the algebraic difference between ex post and ex ante concepts, and furthermore that it can actually take on negative as well as positive values. In the concluding Chapter 14, editors Kopp and Smith express regret that out of court settlement of the large oil spill and other cases discussed here has precluded publication of valuable data and has reduced incentives for more responsible protection measures. They note that ineffective rulemaking by DOI makes it possible for governmental trustees and emitters to avoid entirely their responsibility for resource restoration. They provide an analytical summary and agenda for future research. Though the book contains occasional references to the need for a balanced approach between the natural and economic sciences, the authors’ ambiguity towards this issue is evident throughout. Chapter 5 states that, “ ... there is no reason why private individuals should
see the world or interpret phenomena in the manner of scientists” (p. 75). In Chapter 7, the editors devote Section 4 to their view of “Balancing the Natural And Economic Sciences In Damage Assessment.” Here they note the importance of linking public perceptions of resource damage (their basis for economic assessment of damage) to scientific evaluations of damage. However, on the basis of Figures 7-l and 7-2 and the text, using their example of the death of birds from an oil spill, the role of science is limited to narrowing the confidence interval on the injury attribute, which is the number of birds killed in their example, not to evaluating the importance of the species and its interrelationships with the environment. In their conclusions about the balance between the economic and natural sciences on the last page of the chapter, they state that, “Fourth, the natural sciences will continue to have perhaps too great an influence on the design of damage assessments” (p. 143). It should be noted that the authors follow the logic of their theoretical model consistently in viewing resource value as what is measured in actual and in virtual markets. Evidence from natural sciences is only admissible, even if nearly unanimous, to the extent that it eventually affects aggregate human behavior and markets. However, in their concluding chapter, the editors express their uneasiness with the incentives which have led senior economists to “...focus so much attention on natural resource damage assessment...that it may be diverting attention from more important national or global environmental issues” (p. 307). Finally, to those who believe that a theory of resource value should address not only economic efficiency, but also equity, sustainability and natural science, this book presents a challenge to develop a broader alternative approach that will also Meet the rigorous standards of scholarship, serve the needs of legislators, policy makers and administrators, and withstand the ordeal by litigation as well as has the economic value theory explored by these authors. John H. Cumberland Center for Environmental and Estuarine Studies University of Maryland Solomons, MD 20688, USA SD1 0921-8009(94)00015-N