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May 31, 2005

Valuing Environmental Services: Explicit, Implicit, Not at All?

People are finally talking more about valuing environmental services (here, here, here, here, here). Some advocate that environmental services be explicitly considered in government cost-benefit calculations (e.g. OMB Circular A-4). Others like me advocate that environmental services be implicitly valued (here).

Explicit Valuation Schemes
The "explicit valuation" argument goes something like this, snipped from OMB’s Circular A-4:

Benefit-cost analysis is a primary tool for regulatory analysis…. Where all benefits and costs can be quantified and expressed in monetary units, benefit-cost analysis provides decision makers with a clear indication of the most efficient alternative, that is, the alternative that generates the largest net benefits to society (ignoring distributional effects). This is useful information for decision makers and the public to receive, even when economic efficiency is not the only or the overriding policy objective.

Many who advocate for explicit valuation schemes are fully aware of the criticisms leveled at it (e.g. here, here) but believe that the advantages of getting into the real games played in the ever-political world outweigh drawbacks. We who are economists ought to love the explicit valuation talk, as it suggest full-employment for us.

Implicit Valuation Schemes
The "implicit valuation" argument goes something like this: Tell the truth, obey the law, and practice adaptive ecosystem management. In a complex systems environment with politically wicked problems lurking all around, the implicit valuation notion is staged from the impossibility of finding closed-form priced solutions to vexing production/consumption possibilities. Economists can conjure up the values, but gaining agreement on the conjuring process will likely prove impossible as J. de V. Graaff pointed out long ago in Theoretical Welfare Economics. The implicit valuation notion is also staged from arguments on the other side, "Do not produce it here, do not produce it from public lands – these lands are sacred and ought not to be subjected to crass consumerism and the production that accompanies it."

If we don’t use explicit pricing in comprehensive cost-benefit analysis, what might we do? W. Edwards Deming’s The New Economics gives us clues, as do the writings or Peter Drucker and many other management writers. In running any organization there are many things that are not priced out. Still, there are ways to focus on improving quality of offerings (and in our public lands case, non-offerings) via simple means for organizing people and information and the relationships that tie one with the other.

Part of the quality improvement process says that we have to pay attention to costs, and that receipts can in some ways be associated with costs (e.g profit, cost reduction, etc.). But we must be vigilant to make sure that whenever we make such comparisons, we haven’t left out important qualitative factors that might tend to overwhelm monetary concerns. It proves too easy to discount the future instead of just looking at discounted cash flows. It proves too easy to project profits or cost reduction by ignoring things that are external to any particular view.

Instead of asking, "How hard can we push systems to enhance revenues?" perhaps we ought to be asking "How gently can we live within systems and still survive?" This is the Buddhist economics E.F. Schumacher talked about in Small is Beautiful. Incidentally, many who advocate for explicit valuation of ecosystem services would agree with the so-called Buddhist economics approach.

Middle Ground Schemes
Some economic practitioners want to defend a middle ground wherein they develop partial monetary efficiency measures. I believe that this middle ground is harder to defend than either the comprehensive full pricing strategy, or the implicit valuation scheme which is simply adaptive management without explicit monetary efficiency metrics. In this case, the problem is trying to gain agreement on why we might consider partial efficiency measures, and how they interrelate with important qualitative considerations in decision-making. A.Allan Schmid summed up the dilemma of middle ground schemes this way in Benefit-Cost Analysis: A Political Economy Approach:

... politicians keep asking technicians to derive some formula to determine the worth of environmental or health products. They ask because of the myth that market prices are somehow natural or right. .... [Politicians] do not need the crutch of an economic or scientific formula derived without political input; these formulas are often a lie or a mask for the personal preferences of the economist who derived them. (p. 293)

... A major theme of this book has been that analysts must be more interactive with politicians and other clientele if analysis is to play its role in demonstrating the systematic effects of implementing more generally stated objectives. The analyst need not be apologetic for asking questions rather than supplying independently determinative project values and rankings. ... To conclude, there is no way politicians can regard BCA as independent information to be weighed, somehow, along with other inputs to make a decision. BCA is either the politician's decision, or it is nothing at all. (p. 306)

The middle ground is excluded in Schmid's conclusions. The comprehensive, explicit valuation ground has to be explicitly identified as "the politician's decision." Neither of these is standard fare in government economic practice. I continue to champion an adaptive management, quality improvement approach, which has stood the test of time in "for profit" and "not for profit" life for eons. I have problem with explicit valuation schemes too, but understand why some economists have gone there – to gain access to what they consider the main political game in play. I leave it to others to make the case for any middle ground schemes.

Proposed Forest Service Economics Directives
Some of us have been working on proposed Forest Service economics directives that simplify analysis requirements. The proposed directives, in essence, only require practitioners to "address social and economic context" and to "address the social and economic consequences of action to the extent practicable and foreseeable."

This loose directive allows economists like me to work on adaptive management, quality improvement via implicit valuation schemes, and to watch closely for people to propose schemes that appear to make money (or to cut costs) while neglecting important constraining safeguards to the environment or to humans (including future generations) who hold a stake in outcomes of government decision making.

Proposed Forest Service economics directives also allow economists to work with decision makers to effect comprehensive, explicit valuation cost-benefit analysis.

Finally, proposed directives also allow economists to defend middle ground, should they be bold enough to try.

Posted by Dave on May 31, 2005 at 10:44 AM | Permalink


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