Valuation Of Environmental Resources

The popular overall measures of economic well-being of a country, such as the GDP, do not include measures of environmental quality as one of its components. Even worse, environmental destruction (such as oil spills, deforestation, burning of oil wells in wartime) that result in massive cleanup efforts and medical support to those affected, are in fact counted as additions to the GDP [21]! The value of the environmental assets lost that resulted in these services being mobilized is ignored completely. Manufacturing processes typically use resources inadequately titled to any single entity. These, such as atmospheric and water resources, are a part of the territorial or even global commons and is freely accessible by anyone. Damage to the atmosphere, the deep-sea environment, layers of topsoil, or the inland water resulting from industrial processes represent a real but invisible cost. It is a cost silently borne by the biosphere and by the society at large including even future generations and is further exacerbated by the large disparity in the levels of production of commodities (that tap these resources) in different countries. Since the cost of using these resources is often excluded from the conventional accounting practices, they are sometimes referred to as externalities. The flawed belief is that these environmental goods are in plentiful supply and therefore have no marginal value has precluded their recognition within conventional accounting. While comprehensive accounting of that ethanol was the additive of choice, but unlike tetraethyl lead it was not patentable. GM went along with the lead-based additive although its own medical committee delivered a highly cautionary report on the additive. Had the precautionary principal been followed, the U.S. environment would have been free of the lead from 7 million tons of the lead-based additive (C&E News, 78(16), 29 (2000)).

28 The other school of thought prescribes the use of Baysean approach of maximizing the expected utility in decision making under uncertainty.

all resources, including the "commons" resources, would marginally increase the market cost of products, it could also generate a stream of funding for conservation and environmental management. More importantly it would provide the consumer with a valid measure of the true cost of production of the products of interest. The practice of ignoring the value of natural resources and environmental assets also extends into the assessment of national economies29 sometimes with very undesirable consequences.

Valuation suggests a method for converting to monetary value things (such as environmental goods) not typically sold in a marketplace. This is an inherently difficult and to some extent subjective undertaking. Environmental accounting is impossible without reliable and good valuation procedures. Early attempts at valuation of "externalities" were primarily via life-cycle analysis (LCA) [22]. Cost-benefit analysis (CBA), for instance, assumes that if environmental goods and services were assigned a monetary value then the environmental effects will be properly accounted for in decision making [23]. However, as most of the relevant externalities do not have readily identifiable markets, this is not easy to achieve and is inadequate for the purpose. A generally used methodology is the contingent valuation method (CVM) [24] where a scenario is developed setting up a hypothetical market for the environmental goods and services in question. The affected consumers are surveyed to assess their "willingness to pay" for a particular intangible commodity, obtaining an estimate of the monetary value of the goods and services.

These approaches, however, are not entirely satisfactory. In the recent past approaches such as LCA were exploited by manufacturers eager to present their products as being "greener" than those of their competitors. Placing a reasonable monetary value on environmental goods is difficult because it forces consumers to value intangible fragments of the environment taken in isolation, ignoring the overall impacts on the whole complex system. The thought processes used in valuation of an environmental asset should involve long-term considerations of the intangible benefits to the community. These are very different from those used in valuing capital goods or services intended for immediate consumption. Consumers have little experience in placing a dollar value on such intangible diffuse commodities. For instance, what is the damage of releasing an ozone-depleting substance (ODS) such as a Freon into the air versus that of releasing waste chromium into the water in an estuary? Or, what is the relative impact of a continuous low-level release of a pollutant versus the same quantity released at once into the atmosphere? Using inadequate approaches in the valuation of environmental assets is not necessarily better than using no valuation at all because of the political and economical implications of such exercises. Particularly worrisome is the manner in which these types of analyses might be used and the impact they can have on public policy and legislation.30

29 The United Nations System of National Accounts, for instance, has done little to correct the inconsistency in its treatment of natural resources [65].

30 A World Bank-funded project in Brazil resulted in rapid deforestation in the state of Rondonia and increased the denuded area of the state from 1.7 to 16.1% during 1978-1991] [66].

In 1993 the UN Statistics Division published the handbook Integrated Environmental and Economic Accounting, which is being revised by the London Group on Environmental Accounting (their report was expected to be released in 2002). This document attempts to integrate the different methods available for environmental accounting into a single framework. It proposes a series of versions or "building blocks" for the construction of the accounts and includes calculation of depletion and estimation of the maintenance costs required for sustainable use of resources.

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