Environmental Values and Water Policy

237

Australian Geographical Studies

•

November 2003

•

41(3):237–250

Environmental Values and Water Policy

JEFF BENNETT

,

National Centre for Development Studies, Australian National University

Abstract

The emergence of water markets has heralded the prospect of increased efficiencyin the use of the resource for extractive purposes. However, water markets havenot encompassed all elements of demand for the resource. Notably, demands forthe environmental public goods provided by river flows have not been revealedin markets. State Governments have instituted regulations requiring ‘environ-mental flows’ to be quarantined from the market allocation process. This policyhas triggered negative responses from irrigators and conservationists. Lobbygroups have found that the process of determining environmental flows is aprospective site for rent seeking. To avoid policy being driven by rent seeking,information on the costs and benefits of environmental flows is useful. Whereasthe costs of environmental flows are readily assessed through reference to mar-ket data on irrigators’ surpluses foregone, the benefits must be estimated throughthe use of non-market, stated preference valuation techniques. These techniques— including contingent valuation and choice modelling — remain controversial.Some argue that they should not be used on ethical grounds. Others argue thatthey cannot be used on technical grounds. These arguments are discussed in thispaper, using the context of the water policy debate. The evidence is that statedpreference techniques are being used, and applications have been performed inAustralia in the context of riverine health. However their use remains restrictedrelative to the scale of the Australian natural resource management task. Somepossible explanations for this limited up-take are provided along with somesuggested ways forward.

KEY WORDS

Water policy; environment; non-market valuations

Water allocation

The processes by which Australia’s waterresources are allocated have undergone funda-mental changes over the last two decades. Thecentralised command and control process ofallocating water extraction licences to specificparcels of land has begun to give way to a moredecentralised, market-based approach. This hasbeen achieved in the lower, regulated reaches ofrivers primarily through defining property rights

to water as separate from land title. It has alsobeen driven by defining (quantification andseparation) rights to harvest water in the upper,unregulated reaches of river systems and phasingin competitive water-supply practices (includingpricing) by State Government authorities underthe Council of Australian Governments (COAG)water reform agreement. The result has been thedevelopment of markets in which temporary andpermanent licences to extract can be transferred.

238 Australian Geographical Studies

© Institute of Australian Geographers 2003

With the formation of water markets, compet-itive pressures have resulted in higher prices forwater, relative to the effective prices implicit inthe licence fees previously fixed by governmentfiat. Licence transfers have seen water reallocatedfrom lower to higher value uses (for instance,irrigated pasture to vineyards). The higher waterprices — together with technological advances— have resulted in increased substitution ofcapital for water (for instance, the introductionof computer-monitored, drip irrigation systemsin place of flood irrigation techniques). In otherwords, the efficiency of water for extractive usehas improved.

Water and the environment

Although far from complete, the reforms under-pinning the growth of water markets have alreadydemonstrated the power of market forces togenerate improvements in social welfare relativeto the command and control alternative. Theseimprovements have, however, all been enjoyedin the use of water to provide private goods,notably irrigated produce. Greater and morevaluable output is being created with the sameamount of water. For such output, the pricesignals sent by the water market trigger theprofit motive to individuals and that in turnmotivates efficient resource use in both the staticand dynamic sense.

Water does more than act as an input in theproduction of marketed goods. Amongst anarray of other uses, it is consumed directly, actsas a waste sink, is the focus of recreational andtourist interest and it provides for and is a com-ponent of ecosystems that in themselves are val-uable to people for numerous reasons. In manycases, the use of water for extractive purposescarries with it an opportunity cost of the fore-gone benefits associated with these alternativeuses. For instance, the storing of water and itslater release to irrigate crops may mean thatbird-breeding events in downstream wetlandsare either not triggered to begin or prematurelyterminated because water levels drop below athreshold level necessary to keep breeding pairsat the nesting site.

Many of the non-extractive, environmentalwater uses such as habitat maintenance andaesthetic beauty are non-excludable and/or jointin consumption. It is unlikely that they will besupplied to their socially optimal level given thecurrent structure of water rights and hence watermarkets. Their non-excludability under currentdefinitions of property rights gives rise to freerider problems. The transaction costs for a profit-motivated person seeking to buy water rights inorder to supply environmental benefits will morethan likely outweigh any potential profits fromsales. The large number of potential benefici-aries and the costs associated with searching forthem provide an immediate obstacle to potentialprofit-motivated private suppliers. Even morelimiting are the costs of preventing non-payingusers of the environmental goods taking advantageof their provision. Furthermore, some government-imposed restrictions on the operation of watermarkets, such as limitations on who can ownwhat rights to water, are barriers even to non-profit private suppliers.

Recognising these limitations, governmentshave introduced policies to ensure the supply ofenvironmental benefits from water flows. Mostcommonly, they have quarantined from themarket allocation process, a proportion of waterflows in rivers. These are usually known as‘environmental flows’. So while water marketsare allowed to operate for flows that have beendesignated for extractive purposes, environ-mental flows are not available for trade and aregenerally managed by State Government agencies.

The aim of this paper is to review the processof determining environmental flows in rivers: inparticular, the role of non-market valuation tech-niques in providing information argued to becritical in avoiding rent seeking in the process.A case study involving New South Wales riversis outlined and conclusions are drawn regardingpotential future developments.

Determining environmental flows

Setting the amount of water to be allocated as anenvironmental flow presents numerous challengesto policy makers and their advisers. Ideally from

Environmental Values and Water Policy 239


an economic efficiency perspective, the environ-mental flow for each river should be set so thatthe benefits generated from an additional mega-litre allocated to the environment are equal to themarginal costs. From another perspective, riverflows should be allocated to extractive uses suchas irrigated agriculture until the marginal benefitsso created fall to equal the marginal environ-mental costs such allocations cause. Whereasthe market can ensure that the extractive uses ofwater are ‘ranked’ according to the marginal valuethey create in the water allocation ‘queue’, thecut-off point where the marginal environmentalcosts exceed these benefits is not signalled.

Various processes have been instigated bygovernments to set this threshold. The mostwidely visible process was that by which theVictorian and New South Wales Governmentsdecided to allocate water to restoring flows inthe Snowy River rather than divert it through theSnowy Mountains Hydro Electricity Scheme tothe Murray and Murrumbidgee Rivers for use inirrigated agriculture and other purposes includ-ing salinity mitigation. That process involvedthe formation of a formal commission of inquiry.Under that inquiry (Snowy Water Inquiry, 1998),extensive modelling of flows and their resultantimpacts on the value of hydropower generationand irrigation was undertaken. In addition,assessments of the environmental condition ofthe Snowy River, both as it is and how it wouldbe under different flow conditions, were carriedout along with some rudimentary estimation ofthe values the community placed on the changesin environmental condition.

In addition, individual State Governmentshave sought to set environmental flow targetsthrough the inception of various water manage-ment plans, river management plans and catch-ment management plans. A feature of most ofthe processes used to develop these plans iscommunity consultation. Advisory committeesmade up of representatives of extractive usergroups (for instance, Irrigator Councils), con-servation groups (for example, The AustralianConservation Foundation, World-Wide Fund forNature; sometimes local, otherwise from the

State capital cities) and other locals join withdelegates from the State Government resourcemanagement agencies (Agriculture, EnvironmentalProtection Authority, Land and Water). Thesecommittees generally perform an advisory roleto the relevant State Government Minister.

The transaction costs imposed by the ‘com-munity consultation’ process are significant notonly in terms of the resources devoted to publichearings, committee meetings and other activ-ities but also in terms of the conflict they cancause within communities. Furthermore, there islittle to guarantee that the process will provideoutcomes that are in the best interest of societyat large. First, the composition of the com-mittees is unlikely to be ‘representative’. Com-mittee members are appointed by the relevantMinister and are hence likely to be chosen onthe basis of their pre-disposition to certain out-comes. However, they are also self-selecting inoffering their services and hence self-interested.Individuals on the committees are given anopportunity to pursue their individual goals, andministers in appointing members are given theopportunity to meet their own goals. The recipeis one that is prone to rent seeking. Governments,through these committees, have the power toconfer rents on extractive users by allocatingthem more water (or at least not taking away asmuch water as they may otherwise do). Theyalso have the power to confer rents to thosewho enjoy the environmental values of riversby increasing environmental flows.

Current debates regarding property rightsover resources such as water and native vegeta-tion in rural Australia are fundamentally aboutthis process: competing demand interests arejostling for government supplies of rent streams.

Consistent with other demonstrations of rentseeking, it is unlikely that the best interests ofsociety at large will be served. Considerations ofequating marginal social benefits and marginalsocial costs are likely to be swamped by polit-ical considerations. The Snowy River decision isillustrative. One interpretation of the final deci-sion that was taken in that case is that it wasmore determined by the fate of one marginal



seat in the Victorian Parliament than any of theinformation put together during the SnowyWater Inquiry.

Benefits and costs

Information is the key to preventing the conse-quences of rent-seeking behaviour. With betterinformation regarding the nature, extent anddistribution of the marginal benefits and costs ofalternative water policy outcomes, people arebetter able to recognise the consequences ofdecisions that may be driven by rent seekingrather than the maximisation of social welfare.

The benefits of extractive uses of water arerelatively straightforward to estimate. Extractiveuses generate surpluses for buyers and sellersof final products through market transactions.Reference to market data allows the estimationof changes in consumers’ and producers’ sur-pluses. That is not to understate the complexityof the estimation process. The information pro-vided by markets is far from complete. Forinstance, the market prices of agricultural prod-ucts are often distorted by intervention bothdomestically and internationally. In addition,inappropriate value estimation procedures canbe employed. An example of this is the use ofexpenditure multipliers as the basis for thecalculation of ‘spill-over’ benefits arising fromirrigated agriculture (Powell and Chalmers,1996). Such multipliers relate to the extent ofexpenditure resulting from activities and notnewly created surpluses.

More problematic is the estimation of thenon-market values associated with the environ-mental benefits of water use. Without recourseto market data on these benefits, their estimationin monetary terms to enable a direct comparisonwith the marketed extractive use values presentsa stumbling block to economic analysis. Thechallenge has been the development of tech-niques to generate dollar value estimates whereno directly relevant market data are available.

Non-market valuation

Two broad types of valuation techniques havebeen developed to meet this challenge: revealed

preference techniques and stated preferencetechniques.

Revealed preference techniques rely on dataon people’s preferences for a non-marketedgood or service that are revealed in markets forspecifically related goods and services. Hence,markets for residential property may be usedto estimate the aesthetic value of a river thatflows through an urban environment throughthe application of the hedonic pricing technique,just as Fraser and Spencer (1998) estimated thevalue of an ocean view using the hedonic pric-ing technique.

Furthermore, the value of rivers as the sitesfor recreational pursuits can be estimated usingthe travel cost method. Under this technique, thecomplementary relationship between peoples’expenditures on travel and their use of recrea-tional sites is exploited to infer monetary valuesfor those sites. For example, Walpole (1991)estimated the value of sites along the Ovens-King River system in northeast Victoria usingthe travel cost method.

Revealed preference techniques are limited.They are only capable of estimating the valuesof changes that relate to past experience. Wherea new set of circumstances arise in the contextof a resource management issue, no relatedmarket data covering the event will be avail-able. Similarly, the techniques cannot be appliedwhen the environmental good or service underconsideration has no related goods that are mar-keted. This is of particular relevance where theenvironmental values involved are the so-called‘non-use’ values that do not require any directcontact with the environment for people to enjoya benefit. Notable amongst this class of value isthe existence benefit that people enjoy from theknowledge that ecosystems or species are pro-tected from the threat of extinction.

To estimate the values associated with thecomplete range of values associated withenvironmental flows in rivers, there is a needto go beyond revealed preference techniques.This need has been met by stated preferencetechniques. This type of method involves thequestioning of a sample of those people who



are potentially affected by a policy changeregarding their preferences for the alternativeoutcomes. Best known of these techniques isthe contingent valuation (CV) method wherebypeople are asked if they are willing to pay apre-assigned amount to secure an environmentalimprovement or avoid some environmental harm(Mitchell and Carson, 1989). Through varyingthe amount of the pre-assigned cost across sub-samples of respondents, a relationship betweenthe probability that a respondent will agree topay and the amount of the payment can be estim-ated. From that relationship, mean and medianwillingness to pay can be estimated.

Largely because of the hypothetical nature ofthe payment question asked in a CV question-naire — that is, intentions rather than actionsform the empirical base — the technique hasbeen controversial. This was demonstrated inAustralia over the case of a proposal to mineCoronation Hill adjacent to Kakadu NationalPark (Imber

et al.

, 1991) and in the UnitedStates regarding the Exxon Valdez oil spill(Portney, 1994).

The criticism of CV has lead to the steadyevolution of stated preference techniques. Con-tingent Valuation itself has been advancedthrough the recognition of numerous require-ments for estimates to be valid (Portney, 1994)and other methods have developed. Prominentamongst these is choice modelling (CM). Alsoknown as choice experiments and contingentchoice, CM was originally developed in themarketing and psychology literature and hasbeen used extensively in the field of transporteconomics. Application to the estimation ofnon-market environmental valuation is morerecent (Bennett and Blamey, 2001).

Like CV, CM is theoretically based in theRandom Utility Model (Louviere

et al.

, 2000).Respondents to a CM questionnaire are asked toselect their preferred option from an array ofalternatives. Each alternative is described torespondents in terms of a number of ‘attributes’.The alternatives are differentiated from eachother by the attributes taking on different levels.The set of attributes will contain descriptors of

the non-market value outcomes and a financialcost to the individual. This type of question(known as a choice set) is presented to respond-ents a number of times. Each choice set involvesdifferent alternatives — apart from one altern-ative representing the ‘business as usual’ casethat appears in each choice set to form a baselevel.

By presenting respondents with a fraction ofthe full factorial of possible combinations ofattribute levels in the sequence of choice sets,CM enables the analyst to observe the ways inwhich various respondents trade off betweenoutcomes. Choices made allow the estimationof a relationship between the probability ofan alternative being selected, the levels of theattributes describing the alternatives and thesocio-economic characteristics of the respond-ent. This probabilistic relationship allows theestimation of marginal rates of substitutionbetween the attributes. Of particular interestare the ‘implicit prices’ of the non-monetaryattributes: the amount respondents, on average,are willing to pay to secure an increase of oneunit in the non-monetary attribute,

ceteris paribus

.Furthermore, the values of specific bundles ofattributes representing the business as usual andchange scenarios can be estimated and a mar-ginal benefit of the change can be calculated.

Can it be done (well)?

With the level of technical refinement now evid-ent in stated preference techniques, it is appro-priate to ask whether the estimates now beingproduced are technically valid. In other words,are the estimates accurate and reliable measuresof changes in social welfare? Can non-marketvaluation be done well?

The difficulty in answering this question isthat the very nature of the value that is beingestimated prevents a ‘benchmarking’ exercise.There is no well-defined ‘right’ value againstwhich estimates can be judged. For instance, itis not appropriate to compare peoples’ statedwillingness to pay against what they would payshould the hypothetical situation under whichthe bids were made become real. The ‘real’ bids



would then become prone to classic free-riderincentives of understatement. Rather, what ispossible is a sequence of indirect tests of valid-ity. Some studies (for instance, see Blamey andBennett, 2001) have sought to validate non-market valuations by comparing results againstmarket data. To do this requires a relationshipbetween marketed and non-marketed goods.Where no such link exists, direct validationremains problematic.

To provide some examples of indirect tests,and to demonstrate the capacity of the CM tech-nique, a study (Bennett and Morrison, 2001)designed to estimate the environmental values ofNSW rivers is outlined below.

The environmental values of New South Wales rivers

The approach taken in this study was to invest-igate the environmental values provided by asample of rivers from across New SouthWales.For this purpose, the State was divided into five‘bio-geographic regions’. One river from withineach region was selected, and the environmentalvalues of the rivers in these ‘representative’ riverswere estimated in five separate CM applications.

The four attributes used to describe the envir-onmental condition of the rivers were:

1. water quality, as indicated by the suitabilityof the river for alternative recreational uses(riverside picnicking, boating, fishing andswimming);

2. healthy riverside vegetation and wetlands;3. native fish species present, and4. waterbirds and other fauna species present

.

After consultations with river ecologists andpolicy advisers, regions and ‘representativerivers’ were selected. The rivers selected foranalysis (along with their regions of location)were the:

1. Bega River (southern, coastal);2. Clarence River (northern, coastal);3. Georges River (urban);4. Murrumbidgee River (southern, inland), and5. Gwydir River (northern, inland).

To investigate the impact on value of proximityof residence to a river, respondents were selectedfrom populations living within and outside theriver catchments. Within-catchment samples wereselected for all rivers, and outside-catchmentsamples were chosen for the Murrumbidgee andGwydir Rivers.

The questionnaires

Five separate questionnaires were designedaround the five ‘representative’ rivers for thewithin-catchment surveys. In order to ensurethe comparability of results from each survey, thequestionnaires used were structurally identical.Differences between the questionnaires relatedto divergent biophysical characteristics of therivers only. Maintaining the questionnaire struc-ture across the samples enabled statistical test-ing for differences between the attribute valuesestimated for each river and its local population.These tests enable the detection of differences inattribute values that are due to differences (andsimilarities) in the biophysical features of therivers and socio-economic characteristics of thelocal residents.

The ‘outside-catchment’ questionnaires weredesigned to parallel their respective ‘within-catchment’ questionnaires. This again was toensure comparability of results across the ques-tionnaire versions.

The questionnaires, copies of which are avail-able from the author on request, contained severalelements:

1. background information about the catchment;2. a scenario description (i.e., explaining why

people should have to pay for improvingriver health and what this will achieve);

3. a series of choice sets to answer, and 4. debrief questions.

An additional attribute was included as a meansby which respondents could pay for river healthimprovement options. This payment vehicle wasa one-off levy on water rates for all householdsin the catchment during 2001. An examplechoice set is shown in Figure 1.



The samples

To implement the research design, seven samplesof 900 respondents were drawn from ‘Australiaon Disk’, a listing of people based on the White

Pages telephone directory. For the five ‘within-catchment’ samples, respondents were selectedat random on the basis of postcodes relating tothe corresponding river catchments. For two of

Figure 1 Example of a choice set.



the catchments (Gwydir and Murrumbidgee)further samples of 900 respondents were drawnfrom ‘outside’ of these catchments across thewhole State.

A four-stage surveying process was employed.First, an introductory letter advising those drawnin the sample that they would shortly be receivinga questionnaire was dispatched. Those receivingthe letter were given the option of withdrawal.As well as emphasising the significance of thesurvey, this preliminary letter was designedto filter out redundant names and/or addressesfrom the sample — such as people who hadmoved, were incapable of answering or whowere deceased. The effective sample size wasreduced to account for these sample frame inad-equacies. The second stage of the surveyinvolved the mailing of the questionnaire withan accompanying letter and a reply paid enve-lope. A reminder card comprised the third stageand a re-mail of the questionnaire to those yet torespond completed the process.

The useable response rates for all of the sur-veys are shown in Table I. The overall responserate was 37.8%, ranging from 28.7% to 45.9%.For the within-catchment samples, the responserate averaged 40%. This response rate comparesfavourably with other mail surveys of this genre(Mitchell and Carson, 1989).

The socio-demographic characteristics of thesurvey samples are shown in Table II.

Modelling the data

To estimate the values of the environmentalattributes, the choice data collected in the sur-veys were analysed using a nested logit model(Kling and Thompson, 1996). In nested logitmodels, a ‘tree-structure’ of the choice processused by respondents is pre-specified. Tree struc-tures reflect the existence of homogeneous setsof choice alternatives that have correlated errors.They can have multiple levels. All of the altern-atives are in the branches at the bottom of thestructure. These alternatives are then grouped

Table I Survey Response Rates.

Bega Clarence Georges Gwy-within

Gwy-outside

Murr-within

Murr-outside

Overall

Useable responses 336 346 210 307 228 278 255 1 960Successfully

delivered732 763 731 752 751 719 703 5 181

Response rate 45.9% 45.3% 28.7% 40.8% 30.4% 38.7% 36.3% 37.8%

Table II Socio-demographics of the survey samples.

Clarence Bega Georges Murr-within

Murr-outside

Gwy-Within

Gwy-Outside

Age (yrs) 55.9 52.6 51.1 50.5 52.9 51. 5 52.4Sex (%

female)41% 41% 30% 45% 39% 34% 36%

Children 87% 83% 89% 84% 85% 85% 80%Education# 3.9 4.3 4.1 4.1 4.3 4.1 4.3Income $32 256 $38 899 $46 069 $50 548 $50 251 $43 517 $47 989

# Score on a scale with boundaries: 1-never went to school and 6-tertiary degree.



at the next level using the limbs of the tree. Thetree represents the choice process used byrespondents when deciding between alternat-ives. Hence, it is assumed that respondents firstdecide if they want to support any change inriver management (that is, they choose betweenthe ‘business as usual’ alternative and the otheroptions). Subsequently, if they have not ‘selectedbusiness as usual’ then they are assumed tochoose between the ‘change’ alternatives on thebasis of their attributes.

The variables used in the nested logit models,and their expected signs, are presented inTable III. Note that, for the socio-demographicvariables, the expected signs are opposite to whatwould normally be expected because these vari-ables have been interacted with the alternativespecific constant (ASC) representing the con-tinuation of the current situation option.

The nested logit models are presented in Table IV.

Value estimates

The coefficients estimated using the nestedlogit model were used to derive estimates of thevalues of unit increases in the environmentalattributes. These attribute values (implicit prices)are calculated as follows, where utility is a linearfunction of all attributes:

IP

=

β

A

/

β

M

(1)

where IP is the implicit price,

β

A

represents thecoefficient of the A

th

non-monetary attribute,and

β

M

represents the coefficient of the monet-ary attribute.

The attribute values so estimated are pre-sented in Table V. They represent the amount,on average, that a respondent household waswilling to pay to see an additional unit of eachattribute achieved.

Assessing the technique

The data collected and models estimated allowa number of tests of validity to be performed.These tests relate to assessments of the reliabil-ity and accuracy of the value estimates.

First, the strength of the statistical models thatunderpin the estimates provides a means ofassessing the validity of the analysis. The modelsestimated for this study are able to explain arelatively large proportion of the total variabil-ity displayed in the raw data with the adjustedrho-squared ranging from 0.21 to 0.41. That is,the models are extremely good at explaining thechoice behaviour of the respondents

1

. Second, the attributes used to describe the

outcomes of river management strategies were

Table III Variables used in the nested logit models.

Variable Definition Expected sign

ASC1, 2 Alternative Specific Constants ?RATE Increase in water rates −VEGET % healthy native riverside vegetation +FISHSPEC Number of native species present +FISHINGa Suitable for fishing +SWIMMING Suitable for swimming +FAUNA Number of waterbirds and other fauna present +PROGRE Progreen environmental orientation −PRODEV Prodevelopment environmental orientation +AGE Age (years) +INCOME Income ($) −INCDUM Dummy variable that takes on a value of

one if a respondent did not report their income?

a FISHING and SWIMMING have been included in the model as effects codes rather than dummy variables.



consistently found to be significant in determin-ing respondents’ choices. The p values for theattribute coefficients in Table IV are consistentlybelow the 0.05 level. Furthermore, the directionsof the relationships between attribute levelsand choices were as predicted by theory. Forinstance, it was consistently found that rivermanagement options that were more costly wereless frequently chosen by respondents whilst

options providing more species of fish werechosen more frequently.

Third, respondents’ ages, their incomes andtheir attitudes to environmental issues had sig-nificant influences on choice behaviour and indirections that are predicted by theory. Notably,respondents with higher incomes were preparedto pay more for environmental improvementsthan lower income respondents.

Table IV Nested logit model parameters*.

Variables Bega Clarence Georges Gwy-in Murr-in Gwy-out Murr-out

ASC1 0.199 0.161 0.230 0.272 0.201 0.111 0.124(0.036) (0.150) (0.051) (0.013) (0.041) (0.242) (0.173)

RATE −0.015 −0.018 −0.015 −0.015 −0.015 −0.013 −0.013(0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000)

VEGET 0.035 0.036 0.023 0.022 0.021 0.026 0.027(0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000)

FISH 0.112 0.008 0.032 0.035 0.038 0.045 0.048(0.000) (0.870) (0.050) (0.007) (0.000) (0.000) (0.000)

SWIM 0.767 0.644 0.573 0.834 0.548 0.391 0.573(0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000)

FISHING 0.399 0.426 0.363 0.384 0.397 0.192 0.192(0.000) (0.000) (0.000) (0.000) (0.000) (0.008) (0.005)

FAUNA 0.014 0.033 0.010 0.028 0.024 0.007 0.023(0.016) (0.001) (0.175) (0.000) (0.010) (0.251) (0.013)

ASC2 −3.060 −2.053 0.978 −1.940 −1.687 −1.387 −0.819(0.000) (0.008) (0.049) (0.000) (0.001) (0.026) (0.246)

PROGRE 0.030 0.018 −0.011 −0.288 −0.163 −0.440 −0.705(0.000) (0.000) (0.054) (0.001) (0.065) (0.000) (0.000)

PRODEV −0.003 −0.014 0.000 0.193 0.217 −0.218 0.576(0.223) (0.000) (0.000) (0.085) (0.224) (0.440) (0.001)

AGE 1.260 0.675 −0.602 0.025 0.025 0.005 −0.005(0.000) (0.001) (0.020) (0.000) (0.000) (0.528) (0.413)

INCOME 0.400 0.368 0.408 −0.003 −0.015 −0.015 −0.023(0.000) (0.000) (0.000) (0.182) (0.000) (0.000) (0.000)

INCDUM 0.199 1.000 0.230 1.089 −0.078 −1.454 −0.518(0.036) (0.000) (0.051) (0.000) (0.729) (0.000) (0.094)

IV −0.015 0.161 −0.015 0.306 0.440 0.429 0.302(0.000) (0.150) (0.000) (0.000) (0.000) (0.001) (0.007)

Log-likelihood −114.694 −1 092.060 −742.764 −896.269 −898.699 −711.923 −783.802Rho-squared adj 0.262 0.191 0.200 0.223 0.299 0.383 0.410N 1304 1274 832 1027 1108 929 1075

* p-values are shown in brackets under their associated coefficient estimates. p-values indicate the significance level of the coefficients (i.e., a p-value of 0.05 or lower indicates that the associated coefficient is significant at the 5% significance level).



A further factor indicating the strength of thevalue estimates is the strong response ratesachieved in the surveys. The response ratesachieved for the Bega and Clarence surveyswere greater than 45%, a higher rate than isgenerally expected from a mail-out, mail-backformat. Even the two poorest response ratesamples (Georges and Gwydir-outside) were inexcess of 25%, a rate that is commonly acceptedas reasonable for mail questionnaires of thislevel of complexity.

These tests provide some confidence in theviability of the CM technique and the reliabilityof the estimates it provides. However, it is salut-ary to note that some weaknesses are evident.For instance, a number of the implicit prices arenot significantly different from zero withoutclear reason. An example of this is the value ofan additional fish species in the Clarence River.All other models yielded positive and relativelyconsistent values for this attribute but it wasinsignificant for the Clarence model.

Furthermore, the results of a separate but par-allel exercise to estimate the value of improvingriver health across the whole State (rather thanin a single river) demonstrated the presence offraming effects. Put simply, the value estimatedfor improving all the rivers of the State was less

than the aggregated values of improvements inthe five rivers that were studied as separate en-tities. The question remains how much of thisframing effect is to be expected as a result of theeffects of the income constraint and rivers actingas substitutes for each other and how much is‘perfect embedding’. The latter effect occurswhen respondents are not responsive to the sizeof changes in the good that is offered in a statedpreference questionnaire and is a clear breach ofthe behavioural axioms of the random utilitymodel. Research into this phenomenon is on-going (Rolfe

et al.

, 2002).

Should it be done?

The controversy regarding the use of stated pref-erence techniques is not limited to questions oftechnical capability. There is also an ethicaldimension to the issue. Some regard the conceptof assigning monetary values to environmentalimpacts as immoral (Sagoff, 1988). The notionprevails that environmental values are held on adifferent plane and should not be compared withvalues that are exchanged in markets.

The question of comparability of environmentalvalues with the values of marketed goods andservices can be addressed without recourse to eth-ical argument. It is clear from casual observation

Table V Attribute Value Estimates ($ per household).

VEG (per % of river covered with healthy native vegetation)

FISH (per species)

FAUNA (per species)

FISH (across whole river)

SWIM (across whole river)

Within catchment samplesBega $2.32 $7.37 $0.92 $53.16 $50.14Clarence $2.02 $0.08* $1.86 $47.92 $24.73Georges $1.51 $2.11 $0.67* $48.19 $27.28Murrum. $1.45 $2.58 $1.59 $53.43 $20.35Gwydir $1.49 $2.36 $1.89 $51.31 $60.21

Outside catchment samplesMurrum. $2.17 $3.81 $1.80 $30.50 $60.68Gwydir $2.01 $3.43 $0.55* $29.19 $30.35

* insignificant coefficients in model at the 5% level.



of the ways in which people behave, that trade-offs between monetary and non-monetary con-siderations are made by everyone. By drivingcars, switching on lights, flushing the toilet,buying phosphate-free laundry detergent or sub-scribing to ‘green’ power schemes, for example,we all make decisions that impact on the envir-onment. In making those decisions we implic-itly decide that the values to us of transportation,power and sanitation are worth the environ-mental damage or enhancement we cause throughour actions. We may not explicitly estimate avalue for the marginal benefits and costs involvedbut we still make choices that trade-off marketand non-market values.

Similarly, as a society, we make decisions thatimplicitly involve comparisons between marketand non-market benefits and costs. For instance,when a government decides to allow logging ina forest rather than declaring it a nature reserve,there is an implicit determination that the forest’snature protection benefits are worth less thanthe monetary surpluses generated from logging.If the environment did hold trump status overmarketed values, it is difficult to imagine howhumanity could justify its own existence, if thedefinition of what is ‘natural’ excludes humaninfluence.

Hence, the only real question facing societyis not whether the valuation of non-marketed,environmental impacts in monetary terms shouldbe done but rather whether it should be doneexplicitly or implicitly. Transparency of thedecision-making processes and the avoidance ofrent seeking require explicit valuation.

Will it be done (regularly)?

It has been argued that, technically, the resultsof CM applications undertaken in a rigorousfashion are capable of delivering estimates ofnon-market values that can be defended asvalid. Furthermore, the ethical concerns aboutthe process are largely unfounded. Hence, thesefactors should not be regarded as barriers to theuse of stated preference techniques as sources ofinformation on matters such as the allocationof environmental flows in rivers. The question

remaining is whether the removal, or at leastlowering, of these barriers can be expected toincrease the regularity with which stated prefer-ence techniques are employed.

A number of factors support a negativeresponse to this question and they all concernissues of rent seeking. For instance, would oneexpect the vested interest groups in the environ-mental flows debate to support the call for strict-benefit cost analysis of alternative strategiesincluding the estimation of environmental val-ues? This is unlikely because there is a risk thatsuch an analysis would deliver a finding that thespecific option a vested interest group is sup-porting for personal benefit would not be in thebest interests of the broader society. Withoutthe information, the vested interest groups canpresent vague and possibly emotive argumentsto support their case and to detract from theiropponent’s case.

Similarly, it is unlikely that the politiciandecision-makers would support transparency.The better informed the public is on the prosand cons of alternatives, the less likely a politi-cian would be able to introduce a policy alternat-ive that meets rent seekers’ demands and henceprovides political survival. Allowing the collec-tion and collation of more information on relativebenefits and costs may be seen by politicians asan effective loss of power.

Ways forward

There are, however, some potential sources ofsupport for non-market valuation specificallyand benefit-cost analysis more generally. First,there are always competitors for public funding.If one vested interest group is consistentlysuccessful in securing rents in the absence ofexplicit value estimates, groups who are alsoseeking funding may feel that their quests wouldbe more successful if they were based onexplicit value estimates. One such group may bethe agricultural sector. Whereas a cooperativearrangement was struck between the AustralianConservation Foundation and the NationalFarmers’ Federation to institute the decade ofLandcare and the two versions of the Natural



Heritage Trust, it would seem unlikely that theaffiliation could continue beyond some thresh-old level of conservation. For instance, effortsby conservation groups to quarantine morenative vegetation from agricultural productionand to allocate more water away from irrigationare points of obvious conflict. Either side of thedebate may feel that its efforts would be moreeffective with recourse to benefit-cost analysisincluding estimates of the non-market values.

There may also be pressure from the tax-payingpublic to require greater scrutiny of public policyin natural resource management. As ex-postinformation regarding inefficiencies becomesavailable to the general public, more people mayseek increased rigour in the determination ofpolicy. A movement in this direction followedthe review of the first round of the NaturalHeritage Trust, which found that little by way oflandscape outcomes had been achieved (Bards-ley

et al.

, 2002). The criticism focussed on thethin spread of the projects funded. Subsequently,the National Action Plan for Salinity and WaterQuality has been designed to focus on a re-stricted number of catchments. Unfortunately,the selection of these catchments was not basedon any formal assessment of relative benefitsand costs. Furthermore, the inefficiency of thefirst round of the Natural Heritage Trust isbeing addressed (admittedly to only a very minordegree) through the introduction of market-basedinstruments as natural resource managementpolicy mechanisms. Again, it is unfortunate thatthe parameters defining the extent of these poli-cies (such as the total amount of funding to beallocated) have not been defined with referenceto net social benefit. So while progress has beenmade, there is still some distance to travel.

Finally, it must be recognised that policymakers will often face competing rent seekerswhere no clear-cut political decision is apparent.For instance, the number of seats in Parliamentto be gained or lost from a decision may beapproximately the same whichever option ischosen. In such circumstances, politicians maydecide to fall back on ‘independent’ advice thatcould include non-market value estimates as

part of a benefit-cost analysis of the alternatives.By adopting this strategy, politicians may hopeto escape some of the negative electoral con-sequences of a decision. In such circumstances,the loss of power experienced by adopting thisstrategy may be the key to electoral survival.

If more non-market valuation exercises areundertaken, the opportunities should be taken toexpand the body of knowledge regarding thetechniques. In other words, there is still a lot tobe learnt about the techniques and an activeresearch agenda should be pursued. One avenuefor this is the use of the benefit transfer process.

Where time or resource constraints limit theapplication of non-market valuation techniques,estimates of values may be transferred fromother, already-completed valuation exercises.Significant caveats are attached to this process.Contextual similarities must prevail betweenthe ‘source’ and ‘target’ sites. These relate to thebiophysical attributes of the sites, the socio-economic characteristics of the populationsaffected and the magnitude of the changesinvolved. Clearly, the number and variety of val-uation studies already performed — the pool of‘source’ studies — are important in determininghow likely it is that an existing applicationsuited for transfer is available. So while benefittransfer offers the promise of affordable inclusionof non-market value estimates, it also requires asignificant capital investment in the establish-ment of an adequate data-base of studies. Fur-thermore, that data-base will require on-goingsupplementation to ensure that the temporalcontext of studies (associated for instance withchanging community preferences over time) ismaintained and that advances in methodologiesare also incorporated.

Significant progress has been achieved in thedevelopment of the techniques that can aidthe incorporation of non-market values intothe process of developing water policy. How-ever, there are still avenues of further researchthat call for additional work. It is important toacknowledge the role of critical appraisal of thetechniques of non-market valuation in their pastand future development. Much of the research



impetus in the field has come from the oftenstrident criticism that has been levelled at non-market valuation.

Correspondence

: Jeff Bennett, Professor of EnvironmentalManagement, National Centre for Development Studies,Australian National University, Canberra, ACT 0200,Australia. Email: [email protected].

NOTES

1. Hensher and Johnson (1981) conclude that rho-squaredvalues between 0.2 and 0.4 are indicative of modelsproviding extremely good fits to the data.

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