How to value environmental and non-market goods: a guide for legal professionals.

• Author: Keske, Catherine M.H.
• Position: Sustainable Development, Corporate Governance, and International Law

Putting a price on environmental goods may seem impossible. Without a market, how does anyone determine the value of a good? Complicating matters, some environmental "non-market" goods such as pristine wilderness or endangered species may at first seem "priceless." Nevertheless, people will have conflicts that involve environmental goods without markets. Imputing no value at all for environmental goods or declaring them priceless does not allow for negotiation. However, valuing environmental goods is routine for environmental economists, who are equipped with a "toolbox" of valuation and statistical approaches. While damage compensation awards often reflect loss of use, for legal purposes, a complete economic valuation may also include a good's "indirect use," "nonuse," and "existence" values.

This article serves to inform legal professionals about methods that can be used to value the environment, including non-market goods. An in-depth discussion about how to use "stated preference" valuation methodology, is also provided. The take-home message is that accounting stance (that is, who is viewing the problem) matters. For full accounting of an environmental or nonmarket good, both use and non-use values should be considered. However, each case is different, and it is up to the legal professional to decide what additions and subtractions to make to the ledger and to which side the adjustment should be made.

Use, Nonuse, and Option Values

Environmental goods consist of "use" and "nonuse" values. There are a variety of different methods that can be used to measure each of these dimensions. General examples are provided in Figure 1. Figure 1 is further described in the text that follows, and the concepts described in Figure 1 are provided in a threaded example using petroleum.

Figure 1. Use Values and Nonuse Values. Use Values Direct Use Consumptive Petroleum extraction Harvesting plants Indirect Use Carbon sequestration Clean air Clean water Non-consumptive uses Wildlife viewing Passive recreation Nonuse Values Option Values Conservation of topsoil Grasslands preservation Petroleum reserves Future recreation Existence Values Natural areas (intrinsic value) Pristine wilderness Natural wetlands Bequest Value Passing a resource to future generations Use Values

Use values reflect the most intuitive measure of an environmental good. As shown in Figure 1, the use dimension is divided into two classes: direct use and indirect use. It is critical to recognize that environmental economists use the terms direct and indirect slightly differently when they are dealing with an ecosystem, rather than a regional or national economy. (1) This article refers to "use value" the way it is presented in Figure 1, and in a manner that is consistent with the environmental economics literature.

Direct use in environmental economics occurs when humans utilize a resource. Direct use can be either consumptive or non-consumptive. Economists value direct uses when raw materials are extracted, developed, or cultivated for human ends. (2) Use value is measured as the quantity of the good produced multiplied by the price of the good. (3) A simple example is a forest, where the value of the property is reflected in the number of trees that are harvested multiplied by the price per tree. Determining a good's direct use value is relatively straight forward when there are prices and quantities that are associated with the resource.

The concept of direct use should be relatively intuitive to legal practitioners, who often use this method to determine lost income or wages in damage claims. In the BP oil leak in the Gulf of Mexico, environmental damages could be calculated by lost revenues to BP, whose commodity skimmed the Gulf's shores rather than filling fuel tanks. Likewise, lost income to shrimpers who are no longer able to catch shrimp could also be calculated as damages. With direct use values, the circle of those who experience a loss of use can be greatly expanded. But how big should that circle be? Tongue in cheek, it is only limited by the number of attorneys willing to become involved, which relates to the concept of transaction costs. If the value of the lost use is less than the cost of pursuing compensation (which includes costs associated with retaining counsel), then the transaction costs are greater than the amount of the damages and damage claims won't be pursued. Realistically, in the case of large, catastrophic environmental damage, it is likely that a number of legal practitioners will argue that their clients should be included in those who have experienced a direct loss of "use value," because the transactions costs are relatively lower than non-catastrophic events. (4) However, when other economic values are considered, the total economic value may rise significantly higher than the transactions costs.

"Non-consumptive uses" are a sub-category of direct uses. These values typically reflect aesthetic quality and recreation. Non-consumptive uses can be quantified, and these values can be considered in addition to direct use values. (5) "Non-consumptive uses such as recreation are generally thought not to be outwardly destructive, but at large enough levels of use, environmental damage may occur." (6) To expand upon the Gulf of Mexico example, non-consumptive uses might include visits to the beach. Valuation of non-consumptive uses consists of two elements: (7) visitor expenditures and local income generated (also known as "value added").

Visitor expenditures include things like food, gas, lodging, and other costs. Most recreation studies calculate expenditures made for that particular trip. Often times the researcher will distinguish whether the expenditures were made close to the recreation site (20-30 mile radius) or in a larger geographical space. It is generally accepted that the further people live from the attraction, the more money people will spend on the activity. Local income generated, or "value added" is a bit more complex, but it is an important measure of economic activity. The purchase of an energy bar at a local convenience store before heading out to the beach adds value to the economy in several different sectors. The purchase has helped pay for the convenience store clerk's wages. This is a gain to the local economy. The transport of the food to the convenience store, the production of the energy bar and the growing of the raw ingredients used to make the sports bar are contributions to the state economy where the energy bar is produced. In other words, almost every purchase that is made is part of a "domino effect" or "multiplier effect". The multiplier effect can be measured on the local, state or national level. (8) Resource use also encompasses "indirect uses" derived from an ecosystem, such as carbon sequestration, clear air, or clean water. Indirect use refers to supporting ecosystem functions that are only indirectly related to output. For example, ecosystem services such as the capacity of the Gulf of Mexico to assimilate an oil spill, or a forest to sequester carbon, can provide life-giving services and functions even when humans do not directly use the resource. (9) It would be ideal to know the indirect value of an ecosystem function...