Putting a Price Tag on Nature: Contingent Valuation and Other Approaches

Imagine there was a market for environmental goods, where consumers could pay to receive fresher air or protect the rainforest—how much would they pay? Asking consumers this questions is one common way of evaluating the economic cost of nature. In fact, this practice of contingent valuation (CV) is often used to inform policymakers on issues regarding environmental protection and litigation.

In a 2015 study, Mel W. Khaw, Denise A. Grab, Michael A. Livermore, Christian A. Vossler, and Paul W. Glimcher investigate the valuation process for different kinds of goods from a neurological perspective, including environmental protection. The researchers analyze brain activity via functional magnetic resonance imaging (fMRI), while people decide how much they are willing to pay for different types of goods, such as snacks and environmental goods. The researchers conclude that neural activity associated with the valuation of environmental proposals functions very differently from that of market goods.

During the experiment, researchers scanned participants’ brains while participants looked at different items from all four good categories on a screen. In a second step, the participants decided how much they were willing to spend on a snack food item, which consumer good they preferred given two choices, how pleasurable a certain daily activity would be, and what they would be willing to spend on a certain environmental protection proposal. The six proposals included animal protection and environmental clean up.

For all three traditional classes of goods, consumers’ revealed preferences correlated with neural activity in valuation areas of the brain, which light up when individuals make value-based decisions. In contrast, environmental protection proposals did not light up the same areas of the brain. This highlights the idea that the valuation process for intangible environmental goods and services is different from that for typical goods and services, which is supported on a neurochemical level.

This makes sense: Researchers hypothesize that this is a result of the ‘warm glow’ effect of feeling like a good person by placing a high valuation on environmental goods. In practice, contingent valuation is often conducted by interest groups surveying people in exactly the same way as the researchers in this study did, in order to inform and influence policymakers’ decisions.

Several attempts have been made to measure the value of natural resources in both the public and private sector. A global initiative, The Economics of Ecosystems and Biodiversity, was formed by the environmental ministers of the G8+5 countries in 2007 to make environmental values “visible” in economic terms. The structured approach defines indicators for both natural and species resource stocks (e.g. timber, water, birds, mammals) to track their development over time and compare them with indicators for economic growth.

At the same time, via regulation or voluntary action, an increasing number of companies report the use of natural resources, set targets, and track improvements. The most prominent attempt to evaluate the true costs of businesses’ impact on nature is the Environmental Profit & Loss Account, published by Puma since 2011. Ratings of companies’ environmental performance also become increasingly relevant, providing consumers and investors with better information. Examples of such reporting frameworks include CDP, CDSB, GRI, IIRC, and SASB.

While these developments are promising, it remains difficult to define how much exactly, say, a rainforest is worth to society. There are many more steps yet to take in the joint effort of academics, private sector, and consumers to fully understand the often indirect and long-term impacts that environmental changes might have.

Article Source: Khaw, Mel W., Denise A. Grab, Michael A. Livermore, Christian A. Vossler, and Paul W. Glimcher. “The Measurement of Subjective Value and Its Relation to Contingent Valuation and Environmental Public Goods.” PLOS One, 2015.

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