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3. Total economic value

Total economic value, as illustrated in Figure 1, provides a convenient framework for organising the different classes of value that might be associated with water resource development in the Waitaki Catchment.

  • Use values: Use value derives from actual use of the water resource. For example, water as an input into dairy production; the energy potential in water to generate electricity; angling and hunting; and so on. As noted earlier, use value necessarily involves the combination of other factors of production with the resource. Use values can be further broken down into:
    • Commercial value, where water is combined with other factors of production and the output sold (eg, milk and electricity)
    • In situ use value, where the services of the water resource are directly (eg swimming) or indirectly (eg hunting) used, but the output (utility in this case) is not marketed
    • Option value, where, although individual's/firm's are not currently using the resource, they might be prepared to pay for the right to use the services of the resource at some later date (Weisbrod, 1964; Freeman, 1993). Option value is not related to current use and is typically used to measure the value attached to future use opportunities. To be consistent, option value need not be exclusively related to "recreational use". For example, dryland farmers in the Waitaki Catchment might be willing to pay for the opportunity to withdraw water from the Waitaki River in the future. Similarly, anglers not currently fishing the Waitaki River might be willing to pay for a future opportunity to fish in the Waitaki River
    • Quasi-option value is a term used to describe the welfare gain associated with delaying a decision when there is uncertainty about the payoffs of alternative choices, and when at least one of the choices involves an irreversible commitment of resources. Quasi-option value stems from the value of information gained by delaying an irreversible decision to develop a natural environment; it is not a value that individuals attach to changes in the natural resource (Freeman, 1993).
  • Non-use values: These are independent of the individual's present use of the resource and are variously described as "existence value", the value from knowing that a particular environmental assets exists (eg endangered species); and "bequest value", the value arising from the desire to bequeath certain resources to one's heirs or future generations (eg habitat preservation).

Figure 1. Total economic value

Potential changes to the Waitaki River, whether emanating from hydro-electric energy development, irrigation, natural processes or for other reasons, can result in changes to natural character and to use of the environment. Changes in natural character affect the values that citizens perceive to be embodied in the environment. The signs on existence and recreation use value changes cannot be known a priori; they depend upon the nature of the proposed changes. For example, development activities can create or enhance recreational opportunities - or they can destroy them, depending on the type of development and its specific design and operation parameters. Consequently, development activities can reduce or enhance recreation use values (and existence values).

Total Economic Value (TEV) is the sum of all benefits obtained from a resource.

TEV = Use Value + Option Value + Bequest Value + Existence Value

= Use Value + Non-Use Value [We include option value under "non-use value" to distinguish it from existing/current "use values".]

Because it is extremely rare for a resource to be completely eliminated because of management actions (although that is possible), TEV normally has little meaning by itself. Most management decisions entail partial changes to the resource, which means that the components of TEV change between states of the world, but may not be zero in any case. Consequently, in a policy context or for application of cost benefit analysis, it is sufficient to know the change in TEV between different states of the world.

Applying the "with/without" criterion to TEV we get

∆TEV = TEVWith the project - TEVWithout the project

= (Use Value + Option Value + Bequest Value + Existence Value)With the project

- (Use Value + Option Value + Bequest Value + Existence Value)Without the project

= ∆Use Value + ∆Option Value + ∆Bequest Value + ∆Existence Value

Figure 2 illustrates how components of TEV can be combined and used to examine the economic efficiency of alternative allocation policies. In this example, the net marginal benefits from water abstraction $∆UV (say, for irrigation) are shown to be balanced against the net marginal non-use benefits of leaving water in the Waitaki River (say, for habitat preservation) $∆IV (Sharp, Kerr and White, 2000). Without this information, we can't draw efficiency conclusions about alternative allocation policies.

The recently completed analysis of Project Aqua and called-in Waitaki submissions provides some insights into community issues (Harte & Comfort, 2004). For example, of the issues listed under "Waitaki called-in applications"; the use values "fisheries" and "recreation" are ranked 1 and 2 respectively, and the non-use value "ecology/ecosystems: in-stream/in-river" was ranked 7. We note that the ranking are based on the number of submissions raising the issue and not on preferences.

Figure 2: Balancing water use values with non-use values

Valuation methods differ in their ability to measure elements of value. For example, travel cost studies can measure use values, but are unable to measure any other components of TEV. Contingent valuation and other stated preference approaches, on the other hand, are capable of measuring TEV, but are generally unable to identify the values associated with individual TEV components. Recent advances in stated preference methods provide opportunities to separate use and non-use components.

Use value

Use values can derive from market-related activities or non-market activities. These may be extractive or non-extractive. For example, agricultural extraction of irrigation water produces marketed benefits (a use value) that accrue to the farmer as additional profits compared with non-irrigated farming. On the other hand, recreational kayakers are non-extractive users of river water who obtain benefits (a use value) that are not normally captured in a market. Non-commercial recreation bestows benefits that do not pass through a cash register or enter into a balance sheet. Changes in resource management rules have the ability to affect both marketed and non-marketed user values derived from resources.

Recreational use value

Monetisation of recreational use values is based on the premise that people who undertake recreational activities receive benefits from their recreation, despite not having to pay directly for those activities. Monetisation normally entails measurement of how much extra money recreators would be willing to pay, if they had to, in order to continue their recreation activities at current levels under existing conditions. Examination of non-market recreation benefits is beyond the terms of reference for this study. However, recreation benefits can be a major component of total economic value. Kerr (2004) has estimated New Zealand recreation benefits in the order of $36 per angler-day for freshwater sport fishing and $21 per recreator-day for other activities. Kerr (2004) estimated total recreational activity on the lower Waitaki River to be in the order of 60,000 recreator-days per year, yielding annual recreation benefits in the order of $2 million.

Option value

Option value is related to potential, but uncertain, future resource uses and is likely to be small in the presence of close substitutes. For example, if there are no unique biophysical components on the Waitaki then option value is not diminished by changes in the Waitaki River environment. Similarly, when option value is construed as a type of insurance premium in case of future changes in recreational preferences, that insurance policy would have little value if plentiful substitutes were available at low cost or if planned changes to catchment management have little impact on availability of recreational opportunities. Consequently, option values for jet boating might be expected to be significant under a proposal like Project Aqua, which would have dramatically diminished in-stream flows and reduced large flow, braided river jet boating opportunities. On the other hand, provision of another lake in the Waitaki Catchment, which is already well served by lake recreation opportunities, is unlikely to have any significant impact on option values associated with boating.

Existence value

Changes in natural character affect the values that citizens perceive to be embodied in the environment. These changes are independent of use of that environment and are commonly termed "existence values", "passive use values", or "non-use values". In this report the term existence value will be used to cover all non use-related benefits. The signs on existence value changes cannot be known a priori; they depend upon the nature of the proposed changes and the views of the people doing the valuing. Introduced species provide a good example. Some people are horrified by the ecological damage caused by Himalayan tahr residing in the upper Waitaki Catchment. For these people, tahr have negative existence value. Other people (non-hunters) are delighted by knowledge of the presence of tahr, on the basis that New Zealand tahr may one day be important in preservation of the species, which is endangered in the Himalayas.

Development and mitigation activities can reduce or enlarge existence values. For example wetland drainage for agriculture may reduce existence values, whereas wetland enhancements caused by elevated groundwater levels because of irrigation may increase existence values.

Existence values can be very large, especially when aggregated over a sizeable population. For example, the Exxon Valdez oil spill in Prince William Sound Alaska entailed losses of existence value in the order of several billion dollars (Carson et al, 1994). That case was unusual in that it entailed a very large physical impact in a unique, pristine natural environment that was perceived to have significant value by a large proportion of the whole United States population. On the other hand, small changes in highly altered, non-unique environments with low population densities may not generate any existence value changes.

Existence values can derive from the built environment as well as from the natural environment. Of particular importance are large scale engineering works and items of historical and cultural heritage. The Māori rock art of the lower Waitaki is a notable element in this category. Some people are fascinated by human-made structures and their existence value may exceed the existence value of the natural environment they replace. For example, it is likely that most people value the existence of the Egyptian pyramids and the ruins at Macchu Picchu in Peru more highly than they value the existence of the original natural environments in those locations. In the Waitaki Catchment context, some people may value the existence of large scale engineering works.

It should be noted that existence values are measured within the context of alternative water allocation plans viz what is measured is the change in existence value between two states (alternative plans). Therefore it is important to define what the two states are. The relevant states are with, and without, a specific project. The Waitaki River and its environs are in a state of change, so the status quo (as the river is now) may not form a relevant benchmark for with/without analysis of specific development proposals.