Freshwater values framework. A review of water valuation methods utilised within total economic valuation

Executive summary

The Unitary Plan requires a freshwater values framework as a part of implementing the National Policy Statement for Freshwater Management (NPS-FM). The purpose of this report is to identify what economists mean by water values and related issues on Cost Benefit Analysis (CBA) framework, Total Economic Values (TEV) framework and valuation tools and methods, and explore their potential application to informing water policy development.

As Auckland’s population grows, freshwater resources will come under progressively increasing pressure. In economic terms, this means freshwater resources will become scarcer; with regards to both quality and quantity. Under conditions of scarcity and growing competition among water users, economic efficiency becomes an important social matter (Young 2005).

Evaluation of the trade-offs necessary to allocate resources between competing uses requires consideration of their economic, social, environmental and cultural values. In particular, efficient and sustainable resource allocation requires knowledge of the marginal value or benefits of the resource in its alternative uses, including non- consumptive uses, and non- use values. This is why water valuation is an important consideration for effective water management.

Different management options will yield different net benefits (or losses). A specific project or policy represents a welfare improvement if the net benefits are positive. The option with the highest net benefits is the preferred or optimal one. However, a cost benefit analysis of a policy or project with environmental impacts is complex because many environmental resources (including most water resources) are public goods and are therefore difficult to value.

Most resource allocation decisions produce a range of benefits and costs, many of which are not commonly expressed in dollar terms and therefore are not easily comparable. Non-market valuation is a term that describes a range of techniques (eg, Hedonic Price Method, Travel Cost Method, Contingent Value Method and Choice Modelling), which have been developed to meet the needs of decision makers trying to allocate scarce resources to their most valued uses, including non- consumptive uses. In many cases, it is desirable to compare social, economic and environmental values using a common indicator.

Young (2005) argues that environmental benefits and costs are typically measured by either willingness to accept (WTA) compensation or willingness to pay (WTP). WTP means the measurement of the maximum amount that an individual would be willing to pay to either receive a benefit, or avoid a cost of a worsening of a condition. WTA is the measurement of the minimum amount that an individual would be willing to accept to abandon a good or to put up with something negative, such as pollution. The fact that whether the person in question has an existing right to either receive a benefit or avoid a cost determines the selection of either WTA or WTP.

This review of the Total Economic Value (TEV) framework and the non-market valuation methods presented, shows that there are several methods and approaches appropriate to estimate WTP and WTA in monetary terms for freshwater, and that each method is suitable for a specific usage and service for which freshwater provides. Therefore, appropriate method for valuing a freshwater catchment would be a suite of various approaches depending on its freshwater services.

Auckland Council working report, WR2013/001

February 2013