The valuation of external costs and benefits will be difficult but necessary if the full cost or benefit to society and the environment is to be realised. These difficulties in valuing the environment though should be made aware in order to qualify and justify the numbers calculated and subsequent decisions made.
Firstly, environmental values should not be reducible to a single one-dimensional standard that is only expressed in monetary terms. This is because a single standard such as the value of a wetland, will differ in monetary calculation depending on various factors such as location, scarcity, and biodiversity of habitat. The multi-dimensional factors may therefore deny the ability to apply economic measures to some intangible factors. For instance, there is room for debate in how and what measured value can be applied to complex external benefits such as improved quality of life, protection of endangered species, and preservation of scenic or historic sites.
Secondly, uncertainty of whether some items identified actually exist may make measurement and valuation meaningless. For example, the full effects of global warming and climate change are uncertain therefore difficult to fully apply a cost value of the damage. A way to account for such uncertainties, any calculation of costs or benefits of an item (e.g. flood damage to property) could assign a worse-case value (e.g. $2Bn worse case cost) to the uncertain outcome of current activities (e.g. climate change).
Thirdly, a problem in economic valuation of the environment is that ecological inter-connections may be missed if the values of components in a system are made separately. This is because, ecologically speaking, entities in the natural environment (an animal species, a valley, a river, humans etc.) should be based on the overall sustainability (entire health) of the ecosystem. As such to value one element in the ecosystem such as a particular species of plant will been worth a different value in its connection to another species, as say a food source for another species. If this connected value is larger than the individual values (e.g. for each species) this will mean that the whole (ecosystem) is greater than the sum of the parts.
A fourth issue in economically valuing externalities such as the environment in a CBA is due to economics (urban and environmental) not being an exact ‘laboratory’ science of physical objects. Economics in part is part of the social sciences that means that it seeks to analyze and describe the production, distribution, and consumption of wealth – but not necessarily provide absolute truths as many natural science disciplines do, such as providing a unifying theory of gravity as in physics.
In valuing various environmental and social phenomena it is important to note that this valuation process creates a new set of implications and concerns. In applying a monetary value it implies that environmental goods and services are not free and can be traded in the market. This commodification enables such goods and services to be taken seriously as items that have responsibility taken for them, but it also leaves these items open for exploitation if responsibility can be put onto the market rather than a person.
Valuing environmental goods and services also forces rational decision-making as the number attached to items encourages behaviour to think in terms of gains/losses or costs/benefits rather than as a moral responsibility to the environment. As a final consideration of valuing environmental resources, it is the value of ‘priceless’ goods that are different to the technical difficulty of valuing environmental goods and services. Here it is argued that even ‘priceless goods can be valued in models such as CBA, in that their economic value, if lost, is a cost of infinite value and thus would render a project invalid and should not go ahead.
Relevance and Practicalities of Valuing the Environment
Despite some of these pitfalls and considerations in valuing environmental resources used in urban areas, there is still great practical relevance of valuing the environment (and included in a CBA) to ensure full costs and benefits are incorporated in a project. The justification and relevance of such valuation are because environmental impacts matter in society and therefore need to be measured in practice.
Many government departments use a computerised approach to CBA that enable a standard programme template to be adapted to local conditions in terms of the relevant parameters over different time values. To avoid like for like comparison of items in monetary value (e.g. a wetland in different locations will be valued differently) some departments will explicitly reject specific monetary valuation listings but have specific listed metrics for environmental impacts. This enables practical analysis in instances where monetary evaluation is infeasible but where environmental impacts clearly matter.
From a pragmatic perspective, various methods, economic instruments and valuation are necessary as there is a need to value external costs such as the environmental impact caused by pollution. This in turn can generate legal valuations of what should be financially compensated to the 3rd parties that are impacted on whilst being external to the market transactions of others. As a large scale example of compensation, governments can seek monetary compensation from those parties responsible for natural resources that are injured or destroyed by spills (e.g. oil) and releases of hazardous waste. Further practical reasons for valuation is in the need to value the services provided by the environment, such as in the provision of utilities such as clean drinking water.
In applying an example to compensation in the justification for valuation of environmental resources, the assessment of the level of compensation from pollution (e.g. Oil Spill or say Urban Traffic Congestion) will need careful economic analysis, particularly in assessing the level of damage. Several steps can be taken in taking the point of pollution to placing a monetary value for compensation.
Firstly, following pollution, an authority will need to identify categories that may be affected (e.g. fishing industry or car drivers).
Secondly, once categories have been determined, there is an estimate of the physical relationship between the pollutant emissions (e.g. oil from a tanker or pollution from a car) and damage caused to the affected categories (e.g. entities on the shoreline or resident respiratory health).
Thirdly, a value judgement can be placed on the response by the affected parties to avert proportion of the damage. In essence, this is a judgement as to whether steps had been taken to reduce the risk, using the oil spill example this would be whether the hull of the tanker was sufficiently strengthened or whether the ship stock was seaworthy.
Finally, once categories, physical connectivity and assessment of risk have been determined, a monetary value on the physical damages can then be applied, such as the compensation given according to the number of fish sales foregone due to the spill (or for example productivity of residents due to ill health).