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Structural Benefits Transfer: Tying Ecosystem Valuation to Utility Theory

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A key limitation of conventional approaches to ecosystem valuation is that they propose partial equilibrium solutions to fundamentally general equilibrium problems. A more comprehensive and theoretically consistent approach to ecosystem valuation will require a strategy for integrating information from a wide variety of sources. By drawing on and extending "preference calibration" methods for benefit transfer and general equilibrium modeling approaches, we will develop an approach that we refer to as "structural benefits transfer." We propose to test and expand the preference calibration logic to include a wider array of environmental resources and services and, in the process, develop guidelines for practical and defensible benefits assessment methods for broad-based environmental initiatives.

Objective:
Our objective is to continue the process of developing innovative and integrated approaches to benefit transfer for broad-based environmental policy evaluation. A key part of this process is to test the robustness of the preference calibration method via a set of interrelated conceptual and empirical tasks. By linking benefits transfer to the underlying preference structure in a variety of settings and by exploring its applications to green accounting, we hope to strengthen and broaden the scope of benefit transfer for ecosystem valuation.

Approach:
The investigators' testing strategy will leverage conceptual frameworks, meta-data sets, and research collaborations we have developed. Specifically, they will conduct three applications of preference calibration for air, forest, and wetland resources; and estimate preference parameters using generalized method of moments on a meta-data set of water quality values.

Expected Results:
By tying benefits transfer methods to the underlying preference structure, the proposed research will develop guidelines for practical and credible methods for estimating benefits of broad-based environmental policies. The case study applications and extensions of the preference calibration approach will evaluate the feasibility of developing fully integrated benefit assessment methods, including structural meta-analysis using multi-sample generalized method of moments.

Supplemental Keywords:
preference calibration, generalized method of moments, Economic, Social, & Behavioral Science Research Program, RFA, Scientific Discipline, Economics & Decision Making, Social Science, decision-making, benefits transfer, decision making, ecosystem valuation, environmental decision making, environmental policy, models, preference formation, structural benefits transfer

Metadata

EPA/NSF ID:
R830923
Principal Investigators:
Pattanayak, Subhrendu
Smith, V. Kerry
Van Houtven, George L.
Technical Liaison:
Research Organization:
Research Triangle Institute
North Carolina State University
Funding Agency/Program:
EPA/ORD/Valuation
Grant Year:
2002
Project Period:
May 1, 2003 to October 31, 2004
Cost to Funding Agency:
$260,000
Project Status Reports:
2003
Objective:
The overall objective of this research project is to continue the process of developing innovative and integrated approaches to benefit transfer for broad-based environmental policy evaluation. A key part of this process is to test the robustness of the preference calibration method via a set of interrelated conceptual and empirical tasks. By linking benefits transfer to the underlying preference structure in a variety of settings, and by exploring its linkages to computable general equilibrium (CGE) calibration, we hope to strengthen and broaden the scope of benefit transfer for ecosystem valuation.

Our testing strategy will leverage conceptual frameworks, meta-data sets, and research collaborations that we have developed. The specific objectives of this research project are to: (1) conduct three applications of preference calibration for air, forest, and wetland resources; (2) estimate preference parameters using a generalized method of moments on a meta-data set of water quality values; and (3) integrate multiple uses and multiple resources to calibrate common preference parameters.

Progress Summary:

Background

A key limitation of conventional approaches to ecosystem valuation is that they propose partial equilibrium solutions to fundamentally general equilibrium problems. A more comprehensive and theoretically consistent approach to ecosystem valuation will require a strategy for integrating information from a wide variety of sources. By drawing on and extending “preference calibration” methods for benefit transfer and general equilibrium modeling approaches, we will develop an approach that we refer to as “structural benefits transfer.” The researchers propose to test and expand the preference calibration logic to include a wider array of environmental resources and services and in the process develop guidelines for practical and defensible benefits assessment methods for broad-based environmental initiatives.

The investigators' progress during this research project can be organized under the following four categories, which are summarized in the paragraphs below: (1) benefits transfer bibliography; (2) forest resources case study; (3) processing of a meta-data set on water quality valuation; and (4) lessons from CGE calibration.

Benefits Transfer: Annotated Bibliography

We have updated our review of the environmental and natural resources economics literature on benefit transfer studies. We now have a list of approximately 50 papers. The primary focus of these studies is to conduct a split sample test (i.e., estimate values for one site, transfer to the second site, and compare the transferred and actual values). Two recent benefits transfer studies and Freeman’s (2003) revision of his nonmarket valuation book (which has a section on benefits transfer) have acknowledged the preference calibration approach for benefits estimation. The review provides some candidate studies for our three case studies, particularly the one on forest quality. It also provides the material for a review article on benefits transfers.

Forest Resources: Calibration

We have identified two published studies (Loomis, et al., 2001; Loomis, et al., 1997) that have estimated economic values for changes in forest resources resulting from fire control using contingent valuation and travel cost methodology. We have developed a common index of forest fire conditions and identified all of the other data (income, travel cost, willingness-to-pay) needed for a calibration exercise. We have conducted a preliminary calibration using MATLAB and currently are verifying the utility parameter estimates. We also have identified two independent data sets—two Ph.D. theses at North Carolina State University—that use property value data to estimate the value of forest fires. These hedonic data sets and the literature reviewed in the thesis provide additional material for extending the forest resources case study.

Water Resources: Structural Estimation

Under this subtask, we revisited a meta-data set of water quality values, which was collected under a U.S. Environmental Protection Agency task order project led by George Van Houtven. We have short-listed approximately 250 water quality values from two types of studies: travel costs and contingent valuation. These data were used to estimate a structural model of water quality values by applying the “generalized method of moments” (GMM) approach that was described in the proposal. Although the results are preliminary and need a thorough review and evaluation, the sign and size of the estimated coefficients suggest that this is a promising estimation strategy.

CGE Calibration: Lessons Learned

Kerry Smith worked with a postdoctoral associate at North Carolina State University (Jared Carbone) on CGE modeling and calibration to draw out essentially two insights for ecosystem valuation using structural benefits transfer. First, environmental amenities cannot be treated as separable from all market commodities in the utility specification. This has implications for the functional forms that we use (i.e., the recommended specification is a nested constant elasticity of substitution), the properties of preference functions (e.g., homotheticity) that we apply, and the parameters that we estimate or calibrate for structural benefits transfer. Second, if ecosystem valuation entails large-scale policies, we cannot assume that many critical variables will be exogenous to the model. For example, we will expect to see changes in the relative prices of goods exchanged in the economy and the ripple effect on consumption and production choices resulting from substitution and income (output) effects. Moreover, ecosystem services and environmental amenities potentially will be endogenous to the system because the economywide production and consumption choices will feed back into the environment and impact the production of ecosystem services. The paper uses an economywide gas tax example and conducts a CGE analysis to highlight some of these lessons.

All of the investigators have written several working papers on related methodological issues: calibration and estimation for environmental risk valuation. These papers are available on the Web at http://www.rti.org/enrepaperexit EPA. These papers have direct implications for the objectives and methodology proposed for this grant and provide material for at least one, if not two, case studies. This process has provided another source of peer review for the preference calibration logic.

Future Activities:
The investigators will: (1) write a short paper that summarizes the state of the benefits transfer, with special attention to ecosystem valuation; (2) complete forest resources calibration and write a working paper for that exercise; (3) develop the water resources case study based on the GMM estimation of the meta-data set on water quality values; and (4) translate the insights from CGE calibration into lessons for benefit transfer by detailing the data requirements and the methodological steps, and apply these lessons to developing an air quality case study. Some subset of these activities will be presented at the EPA Benefits Transfer Workshop scheduled for February 2004 in Washington, DC.

Supplemental Keywords:
preference calibration, generalized method of moments, Economic, Social, and Behavioral Science Research Program, economics and decision-making, social science, decision-making, benefits transfer, ecosystem valuation, environmental decision-making, environmental policy, models, preference formation, structural benefits transfer, , Economic, Social, & Behavioral Science Research Program, RFA, Scientific Discipline, Economics & Decision Making, Social Science, decision-making, benefits transfer, decision making, ecosystem valuation, environmental decision making, environmental policy, models, preference formation, structural benefits transfer

 
Relevant Websites:
http://www.rti.org/enrepaperexit EPA

http://www.rti.org/pubs/Chesapeake_Navrud-Ready.pdfexit EPA

http://www.rti.org/pubs/rtipaper_03_03.pdfexit EPA

http://www.rti.org/pubs/rtipaper_03_02.pdfexit EPA

http://www.rti.org/pubs/Pref_Calib_QALYs.pdfexit EPA

http://www.rti.org/pubs/rtipaper_03_04.pdfexit EPA

Project Reports:

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