The Role of Nonmarket Valuation in Hydropower Relicensing: An Application of a Pattern Modeling Approach

By Stephenson, Kurt; Shabman, Leonard | Journal of Economic Issues, June 2001 | Go to article overview

The Role of Nonmarket Valuation in Hydropower Relicensing: An Application of a Pattern Modeling Approach


Stephenson, Kurt, Shabman, Leonard, Journal of Economic Issues


Requests for economic analysis in environmental policy decisions are increasing. Many professional economists have responded by crafting benefit-cost guidelines for monetizing people's preferences for environmental services. The nonmarket valuation literature, which includes such techniques as contingent valuation (CV), hedonic price models, and travel cost methods, often explicitly rests on the premise that monetizing environmental amenities is a precondition for environmental interests to be adequately reflected in policy decisions. For example, a well-known CV practitioner recently asserted "failure to quantify ecosystem values in commensurate terms with opportunity costs often results in an implicit value of zero being placed on ecosystem services (Loomis et al. 2000, 104). Increasingly, ecologists are also calling for use of nonmarket valuation techniques in environmental policy making. One highly publicized effort to quantify the value of the world's ecosystems justified the effort on the premise that " because ecosystem services are not fully 'captured' in commercial markets or adequately quantified in terms comparable with economic services and manufactured capital, they are often given too little weight in policy decisions" (Costanza et al. 1997, 253). However, surprisingly little systematic research has been conducted into whether and how nonmarket valuation analysis is used in environmental policy making and whether the absence of such valuation does result in "an implicit value of zero" being placed on ecosystem services. It is simply not known whether participants involved in making environmental decisions find nonmarket valuation legitimate, compelling, and influential.

Assessing what kinds of analysis decision participants find credible is hampered by the long-recognized complexity and recursive nature of public decision making (Lindblom 1979, 1990; Simon 1957; March 1982). Many attempts to address the role of economic analysis in policy making deal inadequately with this complexity. For example, in advocating the application of benefit cost analysis, J. Kenneth Arrow et al. (1996, 222) cited a study by Arthur G. Fraas (1991) as evidence that "benefit-cost analysis has played an important role in decision making." However, the Fraas paper simply reported that two regulatory decisions coincided with the results of a benefit-cost analysis. In another study, Fraas and Vincent G. Munley (1989) reported a weak statistical relationship between the cost-effectiveness studies made of pending environmental regulations and the rules promulgated. However, a simple one-way correlation between the time an analysis was completed and the time a decision is made is insufficient evidence f or concluding that benefit-cost or nonmarket valuation influenced the decision made.

This paper describes how a distinctly institutional approach--a pattern model--can be used to better understand the contribution of nonmarket valuation in environmental decision making. Specifically, a pattern model is used to investigate the role of nonmarket valuation techniques in the Federal Energy Regulatory Commission (FERC) hydroelectric dam re-licensing process. The FERC relicensing process is appealing as a policy study because the FERC is required to directly address changes in ecosystem services on a regular basis. In every relicensing case, the FERC must not only balance strictly economic outcomes (low cost power) against environmental changes (change in fish composition and numbers, habitat, aesthetics) but also decide against competing environmental ends (air emissions and disruption in riparian ecosystems). In fact, John B. Loomis (2000) suggested that nonmarket valuation studies play a significant role in such dam relicensing decisions. What needs to be understood is whether such decisions ar e informed by economic calculations of any kind.

Pattern Model Approach to Examining the Role of Nonmarket Valuation at FERC

A pattern model approach (Commons 1961; Rutherford 1994; Diesing 1971; Wilber and Harrison 1978) can identify the contribution of economic analysis in FERC dam relicensing decisions. …

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