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Are Economists Becoming Bystanders in Natural Resource Damage Assessment?

By

Jürgen Meyerhoff and Volkmar Hartje

016 /2006

WORKING PAPER ON MANAGEMENT IN ENVIRONMENTAL PLANNING

Working Paper on Management in Environmental Planning 16/2006 Arbeitspapiere zum Management in der Umweltplanung 16/2006

Contact: Dr. Jürgen Meyerhoff [email protected]

Institute for Landscape and Environmental Planning Technische Universität Berlin Straße des 17. Juni 145 D- 10623 Berlin

ABSTRACT Natural resource damage assessment (NRDA) is a central instrument in an environmental liability regime which aims at making the public whole again after a private entity has dam-aged the environment as a public good. One approach to assess the damage caused for example by an oil spill is to measure it in monetary terms using non-market valuation meth-ods. Looking at today’s NRDA rules reveals that a significant shift has taken place from an emphasis on monetary benefit estimates to non-monetary techniques, in particular to the habitat equivalence analysis. Are economists therefore becoming bystanders in natural re-source damage assessment? In today’s U.S. liability regime the use of non-market valuation methods is rather an exception. The same applies to the European liability regime that fol-lows to a large extent the U.S. rules when it comes to damages assessment. However, con-fining the application of economic valuation to the leftovers of non-monetary assessment techniques may rather prove to be a drawback with respect to the aim of making the public whole. After briefly introducing the U.S. liability framework as well as the European Environ-mental Liability Directive, the economic valuation approach is presented. Examples demon-strating the application of valuation methods such as choice experiments or the contingent valuation method follow. One conclusion from the ups and downs of economic valuation within NRDA is that an accepted theory of economic measurement might be one step to bring economists back into the game.

Keywords: Natural Resource Damage Assessment, Non-market Valuation, This paper has been published in Amitabh Kundu, Michael von Hauff (eds.) (2008): Environ-mental Accounting. Explorations in Methodology. Manak, New Delhi-

Working Paper on Management in Environmental Planning 16/2006

1. Introduction

Natural resource damage assessment (NRDA) is a central instrument in an environmental liability regime which aims at making the public whole again after a private entity has dam-aged the environment as a public good. In many countries liability regimes ensure that a pri-vate entity that damages a private property is liable for compensation. But what happens when a private entity damages a public good such as an ecosystem? The Millenium Ecosys-tem Assessment has demonstrated how important ecosystem services are for human well-being (Millenium Ecosystem Assessment, 2005). However, the value of NRDA-related eco-logical resources and the services these can provide are typically not valued by market transactions. Accordingly, government trustees must calculate the value lost to society in order to make the public whole, i.e., to completely compensate for the damage that took place.

Well known examples are damages to a marine environment after oil or chemical spills due to a tanker accident with the still most prominent one the accident of the tanker Exxon Valdez in 1989. But accidents with oil spills – not only caused by tankers – have also hap-pened several times so far along the European coast. More recent examples are the acci-dent of the tanker Erika in 1999 in coastal waters off Brittany, France, and the accident with the Prestige in 2002 off the Spain coast. Both accidents caused enormous damage to the marine environment. The accidents and related oil spills off the coasts of developing coun-tries do not figure prominently in the European press, but the reporting of ITOPF and IMO reveal that oil spills occur globally with a regional concentration along the major export routes (ITOPF 2006). For the Indian Ocean, Greenpeace International reports only one oil spill when the tanker Bright Artemis collided with a smaller cargo ship. However, as the spill oc-curred hundreds of kilometres from land, no substantial impacts on inshore and coastal envi-ronments were unlikely (Greenpeace International, 2006).

One approach to assess the damage caused for example by an accident such as an oil spill is to measure it in monetary terms using non-market valuation methods. In the U.S.-NRDA rules the assessment of damages in monetary terms was an appropriate option, par-ticularly after the so-called Ohio Litigation in 1989. In this litigation the Ohio court interpreted the Comprehensive, Environmental Response, Compensation and Liability Act (CERCLA) in a way that the U.S. Congress intended the damage assessment process to capture fully all aspects of loss. Accordingly, the court noted that market prices are not acceptable as pri-mary measures of the use values of natural resources and that the imperfection of market processes give rise to the need for contingent valuation techniques. In addition the court stated that also non-use values reflect utility received by humans from a resource and that they therefore ought to be included in a damage assessment (Kopp & Pease, 1997). Looking at today’s NRDA rules reveals that a significant shift has taken place from an emphasis on monetary benefit estimates to non-monetary techniques, in particular to the habitat equiva-lence analysis (Boyd, 2004). Moreover, the U.S. experience shows that results from eco-nomic valuation studies have been used less often in damage assessment than is generally assumed. Only in a very few cases results from an economic valuation have been used in


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the court room in order to determine the compensation necessary to make the public whole (Boyd, 2004; Hanemann, 2006).

A reason for this shift was the debate about passive or non-use values that arose after the Exxon Valdez oil spill. Due to the spill not only ecological services such as providing fish for recreational and commercial fishing were thought to be deteriorated but also so-called passive use values . These values are held by people for a good without consuming it (Car-son & Hanemann, 2005). Associated with the measurement of non-use values, Flores and Thacher (2002) identify the big numbers problem as a main reason why the parties responsi-ble for NRDA favour valuing losses in terms of compensatory restoration rather than value the damages in monetary terms. The big numbers problem arises when small amounts of compensation variation for a household or an individual are summed across a country and quickly add up to considerable amounts. Therefore, Flores and Thacher (2002) conclude that the responsible parties may hope to avoid some political unpleasantries by avoiding money in NRDA.

This U.S. development is reflected in the European environmental liability regime (Brans, 2005). The current rule is mainly based on the US Oil Pollution Act which largely abandoned the concept of monetary compensation. Instead, it emphasises resource-based compensa-tion. Only if these measures do not work or are not suitable monetizing the damage is an option. However, to almost exclude economic valuation from natural damage assessment could mean to “throw out the baby with the bathwater”. As Chapman and Hanemann (2001) state, the “polluter pays principle” is meaningful only if one can establish satisfactorily how much that should be. Or, as Flores and Thatcher (2002) argue, money is a necessary condi-tion for sound damage assessment practice. Therefore, confining the application of economic valuation to the leftovers of non-monetary assessment techniques may rather prove to be a drawback with respect to the aim of making the public whole.

In the following we briefly introduce the concept of NRDA, present the economic valua-tion tools and demonstrate their application in three cases. However, we do not go into the details of the legal aspects of NRDA or the technical aspects of economic valuation. Readers who are interested in getting more information about these aspects are asked to consult the cited literature. The paper proceeds as follows: Firstly, we introduce in Section 2 the objec-tive of NRDA and present the U.S. liability framework as well as the European Environmental Liability Directive. In Section 3 the economic valuation approach and valuation methods suit-able for NRDA are presented. Next, Section 4 reports examples of the application of eco-nomic valuation methods, i.e., Choice Experiments (CE) and the Contingent Valuation Method (CVM), in order to determine the lost value. Conclusions are drawn in the final sec-tion.

2. Natural Resource Damage Assessment

2.1 Natural Resource Damage Assessment in the U.S.

As Navrud and Pruckner (1997) point out, the most dramatic and also probably most contro-versial interrelations between environmental valuation and policymaking occurred in the U.S.


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when the Congress passed the Comprehensive, Environmental Response, Compensation and Liability Act (CERCLA) in 1980. The law provided the creation of the so-called Superfund to finance the remedial clean-up of existing hazardous waste sites and established a liability system for potentially responsible parties to pay for injuries to natural resources which re-sulted from released hazardous substances. Moreover, federal and state governments be-came trustees for natural resources owned or controlled by federal, state and local govern-ments. The trustees would be responsible for undertaking steps to assess the natural re-source damages and try to recover the damages from the responsible parties. However, Congress left it to the Department of Interior (DoI) to issue regulations specifying how to measure damages. In its final regulations in 1986 respectively 1987 DoI defined, among other things, a hierarchy of assessment instruments that implied that non-market valuation methods such as the travel cost method or contingent valuation could be applied only if nei-ther market prices nor commercial appraisal techniques were appropriate. Also the so-called lesser-of rule set that the measure of damages is either the replacement or restoration costs or lost use value, whichever is the lesser (Kopp & Pease, 1997).

The next salient step in the development of NRDA was the Ohio vs. DoI case. In 1989 the District of Columbia Court of Appeals promulgated that, pertaining to environmental valuation questions, non-use values ought to be included in a NRDA. The court also struck down the hierarchy of valuation methods and the lesser-of rule. With respect to the contingent valua-tion the court found that the method could be applied as a valid technique when profession-ally applied. Finally, the Department of Interior was instructed to revise its regulations in ac-cordance with the courts findings. In the same year the accident of the Exxon Valdez took place and the State of Alaska conducted an assessment of the damages. Due to the severe environmental damage caused by the oil spill a new order of magnitude was expected and non-use values were likely to occur. Therefore, the contingent valuation was used as valua-tion technique (see Section 4 for more details). In response to this oil spill, Congress passed in 1990 the Oil Pollution Act (OPA) because oil spills had been excluded from CERCLA (Kopp & Pease, 1997)). Many of the elements of CERCLA were kept in the OPA, but firstly the scope of recoverable damage was extended and the Ohio ruling followed with respect to non-use values. Secondly, not the Department of Interior but the National Oceanic and At-mospheric Administration (NOAA) was designated to be responsible for damage assess-ment.

In the course of the debate about the use of contingent valuation in NRDA Exxon pre-sented results from several theoretical and empirical studies questioning the suitability of the contingent valuation for NRDA. In general, the studies claim that the method does not meas-ure values conforming to economic theory of preferences. Exxon’s consultants argued that CV does not provide reliable and un-biased non-use values and therefore the method should be omitted from NRDA. The studies are published in Hausman (1993) and the debate about the validity of CV and the suitability of the studies presented by Exxon is documented by a couple of articles in the Journal of Economic Perspectives (Diamond & Hausman, 1994; Hanemann, 1994; Portney, 2004).


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In order to advice NOAA on the use of CV in environmental damage assessment the so-called blue-ribbon panel, headed by the two Nobel laureates Kenneth Arrow and Robert So-low, was established. The Panel’s final report (Arrow et al., 1993), which was published at the beginning of 1993, concluded in its general assessment that the CV may produce reliable results for the evaluation of environmental goods when applied carefully (see Section 4). Based on the recommendations of the Panel, NOAA proposed regulations on NRDA confirm-ing that non-use values are part of the diminution of value and stated that these values may be reliable estimated using CV studies if they follow the guidelines drawn up by the Panel. However, the debate about valuation issues in NRDA remained unsettled and valuation is-sues were subject to intensive public scrutiny during the OPA rule-making process. As a re-sult of this public dialogue, NOAA re-framed the concept of compensation in damage claims favouring greater emphasis on resource compensation. The determination of compensable values through monetary valuation was relegated to a more secondary rule. The new NOAA rule did not include guidelines for CV development, administration and interpretation any-more. Instead, the rule only notes that contingent valuation is a methodology that may be used when a service-to-service approach is not appropriate (Kopp & Pease, 1997). More-over, NOAA recommended the use of conjoint analysis to determine a cost-effective “equiva-lent” restoration and to scale the quantity of compensatory resource restoration (Navrud & Pruckner, 1997; Hanemann, 2006). The objective of compensatory restoration is to compen-sate the public for the loss of resources and services (interim losses) that are due to the re-covery period. It may take place at the damaged site or off-site. Together with primary resto-ration, which aims at restoring the damaged resource to its pre-damage status, compensa-tory measures aim to fully compensate the public for the damage that occurred.

In general, two approaches to resource compensation can be differentiated: the service-to-service approach and the valuation scaling approach. While the latter comprises the value-to-value approach and the value-to-cost approach (Flores & Thacher, 2002), the for-mer approach is used when restoration alternatives are considered to be of comparable type, quality, and unit value as the damaged resource or service. The approach requires the identi-fication of the services lost in the interim and then designs the compensatory restoration op-tion accordingly. The size of the appropriate compensatory option is determined by equating the presented discounted value of services gained from restoration to the present discounted value of interim losses. Flores and Thacher (2002) point out that the service-to-service ap-proach requires, in economic terminology, perfect substitutability in all respects except with regard to time for all affected individuals. The value-to-value approach can be used when the assumption of a one-to-one match between lost services and compensatory services is not valid. In this case both the economic value of interim losses and the economic value of the services generated by the compensatory restoration are estimated. The scale of the restora-tion option is then determined such that the compensatory services are of equal economic value to the interim losses. This approach requires the use of economic valuation techniques in order to determine losses and gains in either resource or monetary terms. Finally, the value-to-cost approach equates the scale of restoration projects such that the present value


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of restoration costs equals the present value of losses due to injury. It is said to be only ap-propriate when the valuation of lost services is practicable, but the valuation of the replace-ment natural resources and services cannot be performed within a reasonable time frame or at a reasonable cost.

According to MEP and EFTEC (2001) the experience in the US shows that typically the service-to-service approach is implemented whenever possible, i.e., whenever the technical options for a restoration of the same type, the same quality and comparable value are given. If this is not possible, the damaged and compensatory resources and services are measured and compared in monetary or resource terms.

2.2 Damage Assessment in the European Environmental Liability Directive

The European Parliament and the Council adopted in April 2004 the Environmental Liability Directive (ELD) 2004/35/EC. The purpose of this Directive is to establish a framework of en-vironmental liability based on the "polluter-pays" principle, to prevent and remedy environ-mental damage. The ELD imposes a strict or fault-based liability − depending on the type of activity involved − on the operator of an occupational activity for damage to protected species and natural habitats (i.e., as identified under the EU 1992 Habitats and 1979 Birds Directive), contamination of land and damage to waters covered by the Water Framework Directive (Brans, 2005; Deusy-Fournier, 2005). As the European Commission used the 1990 Oil Pollu-tion Act and its natural resource damage assessment as a model, damage assessment in the Directive is comparable with the measures of damage of OPA. Accordingly, the structure of the damage assessment procedure is almost similar to the US NRDA rules. In order to determine the scale of the compensatory restoration measures the two basic approaches are, as in OPA, the service-to-service approach with the Habitat Equivalency Analysis (HEA) as one methods that can be used followed by the valuation approach comprising the value-to-value and the value-to-cost approach.

As Brans (2005) summarizes, The European Directive focuses on developing and imple-menting plans to restore damaged natural resources and services, rather than assessing the dollar value of the damage to such resources and services. Although the use of economic valuation methods is not ruled out by the Directive, it is mainly assigned to determine what scale of compensatory restoration provides an equivalent value to the lost service. The re-sponsible party pays for the cost of implementing the compensatory restoration project but not the monetary value of interim losses as long as the service-to-service approach is used.

The ELD has to be implemented by the members states who will face considerable scru-tiny by the EU-Commission and the EU court when they pass the corresponding national laws, including their regulation about the identification and scaling of compensatory remedial measures (Annex II, 1.2.2. and 1.2.3.), but the ELD leaves discretion to the members states about the application of monetary valuation when the resource or service- based assessment approaches cannot be applied. Whether this potentially residual role of monetary valuation is actively pursued will depend on the circumstances of the member states. In Germany, there is a long tradition with an established network of environmental professionals to calculate ex


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ante compensation for siting/ planning decisions if they result in biodiversity or other envi-ronmental damages. The assessment approaches are resource-based (or function based in the German terminology) of a semi-quantitative –argumentative nature. If they are not appli-cable, then cost based approaches to the compensation are utilized. The existing ap-proaches are not standardized among the German Laender and they are subject to a con-siderable methodological debate as well (Bruns, 2005). It is very likely that these approaches will be transferred to the damage scaling practice in Germany.

3. Economic Valuation of Environmental Damages

3.1 Economic Valuation and Total Economic Value

Ecosystems provide societies with a broad array of environmental goods and services that are crucial for human well-being (Millenium Ecosystem Assessment, 2005). To date the most commonly used approach to classify these goods and services is the Total Economic Value (TEV) concept (Pearce & Turner, 1990; National Research Council, 2005). It is based on the presumption that individuals can hold multiple values for ecosystems. A framework such as the TEV is necessary to ensure that components of value are not omitted in empirical analy-sis and that double counting of values does not occur when multiple valuations methods are employed. Therefore, the US-National Research Council describes the TEV as a road map that facilitates the mapping of ecosystem services and the selection of suitable valuation methods (National Research Council, 2005).

At the core of the TEV is the differentiation between use and non-use values. The former are associated with current or future use of an environmental use of an environmental re-source. For example, people use coastal wetlands for fishing as well as for recreation. Non-use values arise from the continued existence of the resource and are unrelated to use. Within the framework of the TEV an individual can hold both use and non-use values for the services of an ecosystem. The National Research Council (2005, 45) quotes as an example an oil spill on a popular coastal beach. It results on the one hand in forgone recreational trips to the beach, i.e., to lost use values. On the other hand, the oil spill might damage the marine environment in ways that would never affect beach use and that beach users would never observe. For instance, the oil spill might kill marine mammals that live off and that are not seen by beach users. However, beach users, as well as those who do not visit the beach, might experience a loss because of this ecosystem damage. The loss by those who do not visit the beach would be a loss of non-use value, but there could be also a loss of non-use values. Using the TEV the analyst has to investigate the potential loss in use and non-use values of beach users and in non-use values of people who do not visit the beach. However, to determine the damage it is not necessary to estimate the total value of the coastal ecosys-tem. The total loss associated with the oil spill would be sufficient.

Use value can be further differentiated according to whether they are direct or indirect. The former refers to both consumptive and nonconsumptive uses (National Research Coun-


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cil, 2005). Both kinds involve some form of direct physical interaction with the resources re-spectively the services of the ecosystem. Consumptive uses imply extracting a component of the ecosystem such as harvesting a fish. In contrast, nonconsumptive direct uses imply ser-vices provided directly by the ecosystem without extraction such as the use of water for rec-reational activities such as swimming. Finally, the livelihoods of human populations may be affected by certain key regulatory ecological functions such as water purification, storm or flood protection, and habitat functions. The values derived from these services are consid-ered indirect because they are derived from the support and protection of activities that have direct measurable values, e.g., drinking supplies or recreational fishing.

Table 1: Total Economic value of aquatic ecosystem services

Use Values

Direct value Indirect Value

Non-use Value

Ecosystem Service

Commercial / recreational fishing

Nutrient retention Existence value

Transportation Flood control Wild resources Storm protection Potable water Habitat function Recreation Shoreline stabilization Genetic material

Suitable valuation methods Travel Cost Production function Stated Preferences Hedonic Pricing (Stated Preferences) Stated Preferences

Source: National Research Council (2005)

2.3 Valuation Methods

In general, valuation methods are classified according to a differentiation between indirect and direct methods. The indirect approaches rely on observing an individual’s actual choice in the market or other arenas. For example, people travelling to a fishing site or a national park show – reveal – their preferences through actual behaviour. Therefore, approaches rely-ing on actual behaviour are often called revealed preference techniques. In contrast, one can gather information about preferences by asking individuals directly to state something about her preference for an environmental change. As these techniques do not rely on actual behaviour, they are also called stated preference techniques. A comparison of both ap-proaches shows that the latter is a inherently more flexible tool than the former (Carson & Hanemann, 2005). It is, for instance, possible to use the stated preference techniques to examine environmental goods and terms for providing them that are different from what has


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been observed now or in the past. Moreover, stated preference techniques such as the CV can also capture the non-use component of the economic value of an environmental good or service. These advantages are offset by problems that arise with surveys such as the hypo-thetical nature of markets established in a survey. However, as Smith (2006) points out that the data used in revealed preference techniques often are also survey based. For example, people are asked to report how often they were travelling to a fishing site during a certain time period and how big their catch was. Smith argues that data collection itself is an eco-nomic activity and what is collected is the outcome of an economic choice; respondents, for instance, allocate time and effort to provide the requested information. The debate over the reliability of CV, Smith proceeds, seemed to suggest that these issues are only relevant to stated preference data. But mostly also revealed preference data are not directly generated by markets but by surveys.

In the following, we briefly describe the two most often used stated preference methods, i.e., contingent valuation (CV) and choice experiments (CEs). Both have been used in NRDAs. While the CV has thus far been applied several thousand times worldwide in envi-ronmental valuation (Carson, in press; The Environmental Valuation Reference Inventory), application of CEs has started more recently but is increasingly applied in environmental valuation. Moreover, some authors argue that CEs might be particularly suitable for NRDA because they can be used to develop compensation profiles based on salient attributes of the damaged resource (Adamowicz et al., 1998).

Table 1 assigns in the lower part suitable valuation methods to the various value compo-nents. In general, it is in most cases possible to use stated preference techniques in order to capture the value of an environmental change. Indeed stated preference techniques are the only ones that can capture the non-use value. However, when it comes to the monetary valuation of ecosystem functions, stated preference techniques may not always be the first choice. Often the general public is not familiar with ecosystem functions such as nutrient re-moval. In addition, the complexity of the relationships involved makes an accurate and com-prehensive description in a survey extremely difficult (Nunes & van den Bergh 2001, 214). Methods such as the production function approach may therefore be more appropriate to capture indirect values. If recreational uses are affected by natural resource damage, then the travel cost method may be preferable. An example is a beach closure due to an oil spill. The travel cost methods originates from the insight that the consumption of an outdoor rec-reation site’s services require the user to incur the costs of a trip. The travel costs serve as implicit prices reflecting people’s distances from recreation sites visited and their specific opportunity costs of time (Phaneuf & Smith, 2005; also Parsons, 2003). Finally, revealed and stated preferences are sometimes seen as competing techniques for revealing preferences for environmental goods and services. Carson and Hanemann (2005), among others, argue that it would be more productive to view both approaches as complementary but having dif-ferent strengths and weaknesses. A combination of both may overcome some of the difficul-ties associated with each approach (Adamowicz et al., 1998).


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Contingent Valuation

Contingent valuation (CV) is a survey approach designed to create the missing market for public goods by determining what people would be willing to pay for specified changes in the quantity or quality of such a good. The name for this form of non-market valuation arose be-cause the elicited values are contingent upon the particular scenario described to survey respondents. The survey is generally organized as follows: (1) an introductory section identi-fying the general topic, (2) a section asking questions concerning prior knowledge about the good and attitudes to it, (3) the presentation of the CV scenario including what the project was designed to accomplish, how it would be implemented and paid for, and what will hap-pen under the current status quo situation if the project were not implemented, (4) ques-tion(s) asking for information about the respondent’s willingness to pay (WTP) or willingness to accept (WTA) for the good, (5) debriefing questions to help ascertain how well respon-dents understood the scenario, and (6) demographic questions (Carson & Hanemann, 2005).

During the development of the CV within the last twenty years − which has strongly been influenced by NRDA − many design issues and their impact on the estimated values have been discussed. For example, the question format that is used to elicit respondents WTP was one of the major research topics. While in the beginning respondents were just pre-sented an open-ended question asking them to state their WTP directly, today at least in the US the discrete choice and its variants dominate. In the simplest form the discrete choice format presents respondents a single offer and requests a YES if the respondent is willing to pay this amount in order to receive the public good or a NO if she is not willing to pay that amount. Often the question is framed as a referendum in which the program will only be ap-proved if 50 percent of the population votes YES in which case all households/individuals will be required to pay (Garson et al, 251ff.). The discrete choice format was favoured by the NOAA-Panel when it had to investigate the suitability of the CV as a valuation method in NRDA (Arrow et al., 1993). Another topic that attracted considerable attention especially after the NOAA report was the potential for “inadequate responsiveness to the scope of the envi-ronmental insult” (the scope test) and was regarded according to Smith (2006) at that time as the acid test for CV studies. The scope test requires that responses to the valuation question should be sensitive to the scope of environmental damage (or change) which is subject of the valuation exercise. Simply said, the scope test requires that for two goods − one of which nests the other −, that are valued in the same order, the larger good should be valued the same or higher than the smaller good (for more details, see Carson and Hanemann, 2006). The scope test is now included by many practitioners and empirical evidence available sug-gests that there is some sensitivity to scope for a wide range of goods (Smith, 2006). Other issues that received attention in the debate over the validity of the CV estimates are strategic behaviour, the somewhat related difference between hypothetical and real valuations, or the warm glow of giving.

The debate about the validity is far from being decided. In its report the NOAA Panel sur-prised, as Smith (2006) points out, the mainstream of the economics profession that seemed


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to have expected a complete repudiation of CV. In contrast, the panel noted that CV studies convey useful information for NRDA if the guidelines provided by the Panel’s report are obeyed. However, the NOAA guidelines themselves have initiated some debate about some of their elements but many researchers agree that in general they provide sound guidelines on the collection of values.

Choice Experiments

Choice Experiments, also known as attribute based methods (ABM), aim at estimating economic values for a technically divisible set of attributes of an environmental good. In con-trast to presenting respondents an environmental change as a single policy change, for ex-ample the enlargement of riparian wetlands along a river, in CE they are asked to choose their preferred alternative among at least two alternatives in a choice set. Usually respon-dents are asked to perform a sequence of such choices. The alternatives are described by a number of attributes or characteristics with one of the attributes being a monetary value. For example, in the case of riparian wetlands the attributes would by the wetland area (500 ha, 1,000 ha, 2,000 ha), the number of water birds living there (3,000, 5,000, 8,000) and the sur-rounding vegetation (forest, meadow). Thus, when making their choice, respondents implic-itly make trade-offs between the levels of the attributes in the different alternatives presented in a choice set. Choice experiments are therefore said to be useful for multidimensional changes (Stewart & Kahn, 2006).

As both CEs and CV rely on establishing hypothetical markets, several of the design is-sues debated in connection with CV (see above) also apply to CEs. A CE survey is for the most part organized similar to a CV survey. The major difference between both approaches is the way the preferences are elicited. In a CE the environmental good or service in ques-tions is explicitly described through a bundle of attributes. After these attributes have been determined, for instance through a focus group process, the choice sets that are presented to respondents have to be defined. Each of the choice sets comprise in many applications one or two alternatives and the status quo option (see Carlsson et al., 2003; Birol et al., 2006). Depending on the number of attributes and the number of their levels it would be often too burdensome for respondents to present them all possible combinations of the attribute levels. For example, a choice experiment with four attributes (three with four levels and one with two levels) and two alternatives would result in (43 * 21) * (43 * 21) different combina-tions. An experimental design therefore aims at creating the choice sets in an efficient way (for more details Louviere et al., 2000).

Through regressing the choice variable on each of the attributes presented in the choice set as well as individual characteristics one can determine, using, for example, a conditional logit specification, the attributes influence on respondent’s choices. A positive and significant coefficient on the variable wetland area would for instance indicate that respondents are more likely to choose scenarios having higher levels of the attribute. Based on the estimation


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results it is possible to calculate the implicit prices and welfare measures for various policy changes (Bennett & Adamowicz, 2001).

4. Examples of NRDA Valuation Studies using Stated Preferences

In the following we briefly report objectives and main results from three applications of stated preference techniques in NRDA. The applications were chosen to demonstrate, firstly, the use of both contingent valuation and choice experiments, and, secondly, to cover both use and non-use values. Finally, we also wanted to give an example of a study conducted in Europe. However, this study was not used in order to estimate the damage from an actual accident but to determine the benefits that would arise from avoiding an oil spill in front of the Belgian coast.

Other NRDAs where economic valuation methods were applied are the southern Califor-nia bight (Carson et al. 1994) and the Montana versus ARCO case (Morey et al., 2002) An example of a NRDA that used a revealed preference technique is the case of the “The American Oil Trader lost use values due to constrained beach use in California” by Chapman and Hanemann (2001). It is very illustrative firstly with respect to the problems that can occur when revealed preferences are used in order to value natural resource damages. Secondly, as this case indeed went to court and was not settled outside, it also shows how the valua-tion can become subject of debate among experts representing the involved parties. Finally, the study by Carson et al. (2004) gives very detailed insights into the design, administration and analysis of a contingent valuation that was used to value oil spill prevention along Cali-fornia’s central coast.

4.1 Exxon Valdez Oil Spill

The probably still most famous NRDA is the oil spill from the tanker Exxon Valdez. Due to the accident of the Exxon Valdez in the night of 24 March 1989 eleven million gallons of crude oil were released into the Prince William Sound, Alaska. However, it was not only the magnitude of the environmental damage caused by the spill that made this accident so different. As Carson et al. (2003) point out the accident abruptly changed the attention paid to the concep-tual underpinnings and estimation techniques for passive use values. While prior to the Exxon Valdez oil spill the estimation of passive use values was mainly a topic for debate among environmental economists, this changed when it became evident that the State of Alaska and the Federal Government intended to litigate a natural resource damage claim for lost passive use value. Accordingly, the State of Alaska commissioned a CV study to capture the passive use values in preparation for the litigation.

At the core of the CV – the good in question – was an escort ship program that would pre-vent and/or contain a possible second oil spill like the Exxon Valdez (Carson et al., 2003) . Two Coast Guard ships, respondents were told, would escort each tanker on its journey through the Prince William Sound. This would help prevent an accident and, if it would occur,


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the ships would be able to keep even a very large spill from spreading beyond the tanker. Interviewees were than informed that the program would be financed by a one-time tax on the oil companies that take oil out of Alaska and that households like theirs would have to pay pay a special one-time federal tax that would go into a Prince William Sound Protection Fund. The WTP question used a discrete-choice referendum elicitation format. Respondents were asked whether they would vote for the program if it costs a specified amount that would be paid by a one-time federal tax payment. The tax amount presented varied in the four ver-sions of the questionnaire. Also every respondent was asked a follow-up question, i.e., those who voted against the program were shown a lower amount than the initial one and those who voted yes were presented a higher amount in the second question. This core part of the questionnaire was embedded in an introduction asking respondents, for instance, about their attitudes about varies types of public goods and their prior awareness of the oil spill. This was followed by a detailed description of the Prince William Sound and its wildlife. After the core part, for example, a number of questions designed to assess the beliefs respondents held about the key elements of the scenario when they answered the WTP questions were presented. Also socio-demographics were requested.

The CV survey was conducted using a multi-stage area probability sample on residential dwelling units drawn from the 50 United States and the District of Columbia. In the third stage, approximately 1,600 units were drawn and randomly assigned to one of the four dif-ferent dollar versions of the survey instrument. An overall response rate of 75.2% was reached after, among other things, non-English speaking households who were ineligible were dropped. Various statistical models such as the Turnbull nonparametric approach or the assumption of a Weibull distribution were used in the statistical analyses. It results for the latter in a WTP estimate of $30 for the median and $97 for the mean. Based on these figures a conservative estimate of $2.8 billion (1990 dollars) as the lower bound on the estimated aggregate lost passive use value was reported in the study. It was obtained by multiplying the number of English-speaking households by the estimate of median WTP. Calculations based on the mean according to the Weibull distribution or to the non-parametric Turnbull density parameters results in higher numbers up to $7.19 billion. These amounts, Carson et al. (2003) conclude, reflect the public’s willingness to pay to prevent another Exxon Valdez type oil spill given the scenario posed.

4.2 Prevention of an accidental oil spill along the Belgian Coast

Biervliet et al. (2005) estimated the loss of non-use values resulting from different oil spill scenarios along the Belgian Coast. The Belgian coast, that has a total length of 65km, plays a significant role for the regional as well as the national economy since in this area important industrial and service activities take place including fisheries, sand extraction, and tourism. At the same time it is also a unique ecological system. For example, vulnerable sea and coastal birds have their breeding ground and wintering place at this coast. As annually around 10,000 ships sail through the English Channel heading to or coming from the ports around the North Sea and the shipping conditions as well as the climatic conditions are often far


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from optimal, an accident with an oil spill is a real risk. Accordingly Biervliet et al. (2005, 166) point out that the economic valuation of the damage that might occur is an important instru-ment for NRDA (e.g., assessing who is affected by the spill and how important the damage is in monetary terms) and policy guidance (e.g., assessing which type of government interven-tion to implement – prevention or restoration activities?).

In order to cover the range of possible impacts of an oil spill, different scenarios were de-veloped (severe, moderate, light scenario). Each scenario consisted of a risk of an accidental oil spill off the Belgian Coast, with a certain environmental impact, which can be avoided with a prevention programme. The impact was presented, in addition to the size of the oil spill, by means of five parameters: (i) number of birds that will die, (ii) number of fish, crabs, shrimps and lobsters that will die, (iii) pollution of the beach, (iv) pollution of the nature reserve the Zwin, (v) pollution of the nature reserve the IJzermonding. Each impact scenario was ac-companied firstly by a prevention programme consisting of (i) a separate shipping route (varying in kilometre) and (ii) communication system (yes/no) and secondly by an interven-tion programme to minimize damage resulting from a possible accident. It consisted of four measures: (i) number of tugboats, (ii) number of oil-combating platforms, (iii) measures to close the nature reserve the IJzermonding and (iv) measures to close the nature reserve the Zwin. Also a variation in the frequency of appearance of an accidental oil spill was included. Differing from questionnaire to questionnaire it was stated that an accident would occur every three, five or ten years.

During the interview each respondent was presented two scenarios. In order to elicit peo-ples preferences a WTP questions was asked after the first and the second scenario. As a questions format the authors used a dichotomous choice question with one follow-up, i.e., depending on how respondents reacted to the first bid they were presented a second bid higher or lower than the initial one. Altogether 571 interviews (in the Flemish, Walloon, and the Brussels region) were carried out. This corresponds to an overall response rate of 32%. The average WTP (protest responses included) varies from €88 per household in the light-damage scenario (1 accident in 3 years) to €112 per household in the severe-damage sce-nario (1 accident in 5 years). Depending on how those people who refused to participate in the survey and whether protest answers are included or not the total one-time willingness to pay for the Belgian population ranges from €120 million to €606 million. Based on these re-sults the authors argue that any investment program targeted at the prevention of an oil spill, and its damage to the marine environment, can be clearly defended from a cost-benefit per-spective as long as its cost is no higher tan €120 million.

4.3 Pollution damages to recreational fishing

The study by Breffe et al. (2006) demonstrates, among other things such as the combination of revealed and stated preference techniques, the use of stated choice to estimate com-pensable damages in a NRDA. The objective of the study was the damage to anglers from fish consumption advisories caused by PCB – a hazardous substance – contamination in


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Green Bay and the Lower Fox River of Wisconsin. The PCBs were released into the Lower Fox River by local paper companies mainly during the late 1950s and the mid-1970s. Through the food chain process, PCBs accumulate in fish and wildlife. As a consequence of the elevated PCB concentrations in fish in 1976 the first fish consumption advisories (FACs) were issued for the Wisconsin waters of Green Bay. They were followed by FACs for the Michigan waters of Green Bay in 1977. As Breffe et al. (2006) report, these FACs for the water of Green Bay continue today and may continue for 100 years or more although a sig-nificant removal of PCD contaminated sediment has taken place.

FACs may, for instance, damage anglers because they may start to change where and how often they fish, change what they fish for and what they keep, change how they prepare and cook the fish they catch, and experience reduced enjoyment of the fishing experience. Breffe et al. (2006) classified the recreational fishing damages from FCAs into four catego-ries: 1) reduced enjoyment from current Green Bay fishing days; 2) losses by Green Bay anglers from fishing at substitute sites; 3) losses by Green Bay anglers who take fewer total fishing days; 4) losses by other anglers or non-anglers due to the fact that members of both groups may completely forego fishing in the waters of Green Bay.

In order to determine the compensable damage a mail survey of anglers who had partici-pated in open-water fishing was finally used (647 useable questionnaires). At the core of the survey was a series of eight choice questions used to assess damages for reductions in en-joyment for open-water fishing days. On each choice card, respondents were provided two alternatives, each with different levels of fishing characteristics for the waters of Green Bay and asked to state whether they prefer alternative A or alternative B. Fishing characteristics included catch rates and FCA levels for yellow perch, trout and salmon, walleye, and small-mouth bass. The monetary attribute was presented as the anglers share of the daily launch fee.

The estimated WTP value per Green Bay fishing day for the absence of FCAs is $7.71 for 1998. It is an estimate of the reduced enjoyment for a Green Bay fishing day to eliminate the need for FCAs. Breffe et al. (2006) point out that this value is within the range of per-day es-timates for FCAs reported in the valuation literature. Their estimate of the average annual expected compensation variation for the elimination of the Green Bay FCAs is $111 (95% confidence interval $96 - $128). The yearly damage claim the authors calculated was $2.67 million.

5. Discussion and Conclusion

Natural resource damage assessment aims at making the public whole after damages to the natural environment following, for example, an oil spill. The U.S. congress had established a basis for NRDA with the CERCLA act. In the following, the economic approach to assess the natural damages has first been ascending but was marginalized in the end. In today’s U.S. liability regime the use of non-market valuation methods is rather an exception, non-monetary techniques – in particular the habitat equivalence analysis – dominate. The same


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applies to the European liability regime that follows to a large extent the U.S. rules when it comes to damages assessment. One reason for this development might be that decision makers, as Flores and Thacher (2002) point out, may hope to avoid some political unpleas-antries such as the big-number problem by avoiding money in NRDA. Other reasons might be found in the fact that the alternative natural-numéraire based approaches for damage assessment have the advantage that they are part of an established practice of planning and siting compensation measures with a professional community which leaves considerable more space for negotiation between the agency and the responsible party. Furthermore, at the present the costs of using monetary valuation favour natural based approaches as their costs are known and are subject to standardized solutions for small damages.

But avoiding money may prove to be a drawback with respect to the objective of making the public whole after damage to the natural environment occurred. Even if it is not intended to compensate the public in monetary terms the use of money as a numéraire may be advan-tages over methods such as the habitat equivalent analysis. Flores and Thacher (2002) show that assessing the compensatory restoration without using money could fail to determine adequate compensatory restoration. However, we are aware of the challenges of measuring the actual monetary value of natural resource damages. As Grafton et al. (2004) for instance point out even when only use values are considered to be damaged by an incident there can be significant challenges to non-market valuation. The challenges comprise, among other things, the availability of substitute recreation sites, the impact on recreation site choice ver-sus the frequency of recreation trips. And the challenges might be even bigger when hypo-thetical markets have to be used in order to determine use but also non-use values. More-over, the validity of the stated preference methods is still debated in the literature – looking at the leading journals in environmental and resource economics as well as agricultural eco-nomics quickly confirms this.

Accordingly, we are not arguing that non-market valuation methods are already perfectly working and are just waiting for their application. There are still open questions with respect to the validity and reliability. But this does apply not only to economic valuation methods. Techniques such as the habitat equivalent analysis are also far from being perfect. The more important question is whether economists want to stay respectively get involved in NRDA or whether they prefer to become bystanders. The recent development seems to suggest that the latter is happening and at least for European countries such as Germany we do not see that economists care much about being bystanders. Non-market valuation is still a marginal-ised topic among academics in Germany. But without a sound theoretical basis and experi-ence with empirical applications it will not be possible to challenge non-monetary assess-ment techniques such as the habitat equivalent analysis and to ensure that the advantages economic analysis could provide will be realized. One thing that is very high on the agenda is to develop a widely accepted theory of economic measurement as Bishop (2003) points out in his outlook on the future direction of non-market valuation. The goal should be a compre-hensive set of criteria for evaluating the validity of non-market valuation studies and meth-ods. At the moment, Bishop argues, we are suffering from the lack of such a theory because


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the past shows that debates about the contingent valuation – the CV War, as Bishop calls it – would have been much more productive if all protagonists had started from widely agreed-upon first principles of measurement. Accordingly, there is much work left to be done calling for further workshops on the rationale and methods for measuring environmental impact not only in India or Germany.

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