Valuation Methods

The table below provides instructions on what types of valuations to use

Valuation techniqueDescriptionCommentsApplicable for the following ecosystem servicesSuitability for valuation of individual ecosystem services in Ecosystem Accounting (SEEA-EA)
Unit resource rent / Net factors of productionPrices determined by deducting costs of labour, produced assets and intermediate inputs from market price of outputs (benefits).Estimates the average value of ecosystem service, not marginal. Estimates will be affected by the property rights and market structures surrounding production. For example, open access fisheries and markets for water supply often generate low or zero rents.Provisioning services involving harvest or abstraction (e.g. concerning timber, fish, crops, livestock, etc.) Potentially, also applicable to cultural services such as recreation provided by established businesses.In principle, this method is appropriate but care is needed to ensure that the residual estimated through this approach is limited to the target ecosystem service.
Production function, cost function and profit function methodsPrices obtained by determining the contribution of the ecosystem to a market based price using an assumed or estimated production, cost or profit function.In principle, analogous to resource rent but generally can be better targeted to focus only on specific ecosystem services and models more able to take into account ecological connections. Can reveal marginal value of ecosystem service. However, more data intensive and require benefit transfers methods for higher level aggregates.Prices for all type of ecosystem services may be estimated using this technique provided an appropriate production or similar function can be defined. This will require that the ecosystem services are direct inputs to the production of existing marketed goods and services. It is likely to be of most relevance in the estimation of prices for provisioning services and for certain regulating services that are inputs to primary production, e.g. water regulation.Appropriate provided the market based price being decomposed refers to a product rather than an asset – e.g. value of housing services rather than the value of a house.
Payment for Ecosystem Services (PES) schemesPrices are obtained from markets paying for specific regulating services (e.g. in relation to carbon sequestration)Estimates will be affected by the type of market structures put in place for each PES (see SEEA EEA 5.88-94). Because payments are not typically conditional upon ecosystem service delivery, prices do not represent true consumer or producer surplus.Given the most common focus of PES schemes, the price information will be most applicable to the valuation of regulating services, e.g. carbon sequestration.Possibly appropriate depending on the nature of the underlying institutional arrangements.
Hedonic pricingPrices are estimated by decomposing the value of an asset (e.g. a house block including the dwelling and the land) into its characteristics and pricing each characteristic through regression analysisVery data intensive approach and separating out the effects of different characteristics may be difficult, unless there are large sample sizes.Most commonly applied in the context of decomposing house and land price information and hence will be relevant for those ecosystem services that impact on those prices. Examples include access to green space, amenity values and air filtration. A challenge is attributing the estimated prices to the location of supply.Appropriate in principle, if an individual service can be identified. Heavily used in the pricing of computers in the national accounts.
Replacement costPrices reflect the estimated cost of replacing a specific ecosystem service using produced assets and associated inputs.This method requires an understanding of the ecosystem function underpinning the supply of the service and an ability to find a comparable “produced” method of supplying the same service. Overestimates value when no reasonable replacement is available.The idea of replacement cost assumes that a service can be replaced, i.e. that a man-made alternative can be developed. In general, this engineering type focus will mean that the method would be applied for various regulating services such as water regulation, water purification and air filtration.Appropriate under the assumptions (i) that the estimation of the costs reflects the qualities of the ecosystem services being lost; (ii) that it is a least-cost treatment; and (iii) that it would be expected that society would replace the service if it was removed. (Assumption (iii) may be tested using stated preference methods and should take into account the potential scale issues in replacing the service.)
Damage costs avoidedPrices are estimated in terms of the value of production losses or damages that would occur if the ecosystem services were reduced or lost due to ecosystem changes (e.g. as a result of pollution of waterways).May be challenging to determine the value of the contribution/impact of an individual ecosystem service.Similar to replacement costs, the focus will generally be on services provided by ecosystems that are lost due to human activity impacting on environmental condition, particularly through pollution. Regulating services are likely to be the most commonly estimated using this method.Appropriate under the assumptions (i) that the estimation of the damage costs reflects the specific ecosystem services being lost; (ii) that the services continued to be demanded; and (iii) that the estimated damage costs are lower than potential costs of abatement or replacement.
Averting behaviourPrices are estimated based on individual’s willingness to pay for improved or avoided health outcomes.Requires an understanding of individual preferences and may be difficult to link the activity of the individual to a specific ecosystem service.Coastal communities may experience health risks due to polluted marine waters, such as from untreated sewage or agricultural runoff leading to pathogen contamination. This can increase the risk of waterborne diseases (e.g. gastrointestinal illness). Residents or tourists may purchase bottled water, avoid swimming, or install water filtration systems to reduce their exposure to contaminated coastal waters.Possibly appropriate depending on the actual estimation techniques and also noting the method relies on individuals being aware of the impacts arising from environmental changes.
Restoration costRefers to the estimated cost to restore an ecosystem asset to an earlier, benchmark condition. Should be clearly distinguished from the replacement cost method.The main issue here is that the costs relate to a basket of ecosystem services rather than a specific one. More often used as a means to estimate ecosystem degradation but there are issues in its application in this context also.For example, the cost of rehabilitating a degraded mangrove forest to restore its natural capacity to buffer storm surges, support fisheries, and sequester carbon. The total amount paid to restore the degraded mangrove reflects how much people value the mangrove and the services it provides in its original condition.Likely inappropriate since it does not determine a price for an individual ecosystem service but may serve to inform valuation of a basket of services.
Travel costEstimates reflect the price that consumers are willing to pay in relation to visits to recreational sites.Key challenge here is determining the actual contribution of the ecosystem to the total estimated willingness to pay. There are also many applications of this method with varying assumptions and techniques being used with a common objective of estimating consumer surplus. Finally, some travel cost methods include a value of time taken by the household which would be considered outside the scope of the production boundary used for accounting purposes.This will relate to valuation of recreational ecosystem services. This is most suited to valuing places where tourists visit or recreate, such as coastal reefs for SCUBA diving. Possibly appropriate depending on the actual estimation techniques and whether the approach provides an exchange value, i.e. excludes consumer surplus. A distinction here is that the total of actual travel costs is not a measure of the value of the ecosystem services but it may be appropriate to use the demand profile associated with the travel cost (the estimation of this demand curve is referred to as use of the travel cost method).
Stated preferencePrices reflect willingness to pay from either contingent valuation studies or choice modelling.

These approaches are generally used to estimate consumer surplus and welfare effects, and non-use (bequest and existence) values.

Contingent valuation uses surveys to ask participants what they would be willing to pay for an ecosystem service or associated attribute.

Choice modelling/Choice experiments offers survey respondents a range of choices or scenarios that include different levels of ecosystem service and ask them which scenario they prefer at a certain price.

Within the range of techniques used there can be potential biases that should be taken into account.

Suitable for valuing hypothetical changes in ecosystems. For example, how much local communities are prepared to pay to protect their coastal mangroves from being destroyed. The willingness to pay could be used to value both use and non-use values. Non-use values include cultural and spiritual values. Stated preference methods are suitable for valuing cultural ecosystem services. Stated preference methods could also be used to estimate how much monetary compensation people are willing to accept to forgo what they currently have. For example, local communities may be willing to accept financial compensation from property developers or the government to forego harvesting timber and fish from their coastal mangroves.Inappropriate since does not measure exchange values. However, while the direct values from stated preference methods are not exchange values, it is possible to estimate a demand curve from the information and this information may be used in forming exchange values for ecosystem services.
Marginal values from demand functionsPrices are estimated by utilising an appropriate demand function and setting the price as a point on that function using (i) observed behaviour to reflect supply (e.g. visits to parks) or (ii) modelling a supply function.This method can use demand functions estimated through travel cost, stated preference, or averting behaviour methods. The use of supply functions has been termed the simulation exchange value approach (Campos & Caparros, 2011)In principle, may be applied for many types of ecosystem services but most likely to be relevant in the estimation of values for regulating and cultural services.Appropriate since aims to directly measure exchange values. However, the creation of meaningful demand functions and estimating hypothetical markets may be challenging.
Useful references (external link)