ECONOMICS OF SUSTAINABLE WATER MANAGEMENT

IN ACCORDANCE TO THE WFD, THE MEA AND

SUSTAINABLE DEVELOPMENT GOALS OF THE UN
AGENDA 2030

Theory and application session IV: Benefit

transfer method
Stella Tsani
International Centre for Research on the Environment and the Economy &
Athena RIC, 23rd February, 2018
Outline
• The importance of estimating non-market values
• An introduction to Benefit Transfer
• Why, how, when?
• Limitations
• Quality assessment
• Transfer errors
• Steps to implementation
The importance of estimating non-market values
• Due to market failure associated with natural resources and
the environment, markets do not reflect the full social costs
and benefits of ecosystem goods and services
• Including such non-market costs and benefits into cost-
benefit analysis is crucial for well-informed decision making
 Economic values of ecosystem services
Total Economic Value

Use values Non-use values

Direct use Indirect use Option value Bequest value Existence value

Example: Example: Example: Example: Example:

-Food -Coastal protection - Watch birds in the -Education - Rare species
-Timber -Nutrient removal future -Cultural heritage - Indigenous rights
-Water -Carbon sequestration

Tangible/visible Intangible/hidden

Easy to value Difficult to value

Ecosystem services and their benefits
Ecosystem Ecosystem service Type of benefit

Water supply
Provisioning services
River products

Cultural services Aesthetic quality

Rivers and Species conservation

streams
Supporting services Recreation

Tourism

Hazard protection
Regulating services
Carbon sequestration
Market and non-market valuation methods

Market Valuation Non-market Valuation

Techniques Techniques

Revealed
Stated Preference
Market prices Preference

Replacement cost Hedonic Pricing Contingent Valuation

Avoidance cost Travel Cost Method Choice Experiments

Production function

Use values Use values Use and non-use values

Benefit or Value Transfer

Benefit or Value Transfer
• Definition: the transposition of monetary environmental
values estimated at one site (study site) to another site
(policy site)
• The study site refers to the site where the original study
took place, while the policy site is a new site where
information is needed about the monetary value of similar
benefits
• An alternative to carrying out a new original valuation
study by using existing economic value estimates from
previous studies
• Application of the results of previous environmental
valuation studies to new policy or decision-making
contexts
Why use?
• It saves a lot of time and money
• Applying previous research findings to similar decision
situations is a very attractive alternative to expensive and
time consuming original research to inform decision-
making
• The decision of whether to undertake an original study or
to use existing value estimates can be considered in
terms of the acceptability of errors produced by benefits
transfer and the level of precision sought
Why use?
• Growing demand for including environmental impacts in
economic analysis
 Cost-Benefit Analysis (CBA)
 Environmental Costing/Green taxes
 Green National Accounting
 Compensation Payments in Pollution Incidents

• Primary valuation studies are time consuming,

expensive, and require specific expertise
Approaches
• Unit value transfer
• involves the transfer of a single number or set of numbers from
preexisting primary studies. Unit values can be transferred “as it is”
or adjusted using a variety of different approaches (e.g., for
differences in income or purchasing power, or according to expert
opinion)
• Benefit function transfer
• Derive information using an estimated, typically parametric function
from original research
• Meta-analysis
• Synthesizes results from multiple prior studies, or preference
calibration that constructs a structural utility model using results from
two or more prior studies
Choice of method
• Things to consider: quality of original research, level of
accuracy required and detailed cost benefit analysis of the
approach followed keeping in mind data and resources at
reach

• Function transfers typically outperform unit value transfers

in terms of accuracy although this is not always the case

• Unit value transfers can perform satisfactorily if the study

and policy contexts are very similar
Unit value transfer
• Transfer of welfare estimates but parallel approaches apply for
other estimated outcomes such as elasticities

• Welfare measures for environmental resources, such as WTP,

are estimated primarily using information derived from
individuals expressing their level of welfare based on tradeoffs
observed through choices they either make (revealed
preferences) or would make under hypothetical situations
(stated preferences)

• Empirical studies generally report an aggregate or central

tendency measure (e.g., mean or median) of welfare for a
representative individual in the study sample, for a particular
change in a good or service
Unit value transfer (Cont.)
• The simplest, and often least accurate form of transfer
uses a single unadjusted value
• In this case, one simply assumes that per person (or
household) WTP at the study site is equal to that at the
policy site
• Estimations can be scaled at total population size
(aggregate transferred welfare estimate)
• Any significant “scaling up” or “scaling down” of benefits
to account for quantity differences between the study and
policy site requires strong assumptions, including that per
unit WTP is invariant to the total quantity of the good
consumed (i.e., utility is linear with respect to quantity)
Unit value transfer (Cont.)
• Another form of unit values transfer adjusts the transfer
estimates according to attributes of the policy context or
using expert opinion
• Adjusted unit value transfer is distinguished from benefit
function transfer in that the adjustments in question do not
rely on functions provided by the original primary studies,
but are conducted ex post using an adjustment function
determined by the benefit transfer analyst
• This function may be determined using objective (e.g.,
differences in currency value) or subjective (e.g., expert
opinion) factors
Unit value transfer (Cont.)
• Scaling for the relevant population of beneficiaries can
also occur in this case. These types of scaling
adjustments often involve strong assumptions, the
consequences of which analysts should be aware of
• For example, the simple (e.g., linear) scaling of WTP
estimates according to aggregate measures of income or
purchasing power parity implies strong assumptions about
the structure of preferences
• Ex post scaling or adjustment will not always increase
transfer accuracy. In some cases, it may be the source of
additional transfer error
Unit value transfer (Cont.)
• A variant of adjusted unit value transfer is the use of
administratively approved values
• In this case, transferred estimates are not provided
through a formal, quantitative adjustment of a prior benefit
estimate, but are derived using a subjective and
sometimes arbitrary process within a government agency,
typically based on some combination of “empirical
evidence from the literature, expert judgment, and political
screening”
• This is among the least formal, systematic or theoretically
defensible approaches to benefit transfer, it may be
required when conducting work to meet certain agency
needs
Unit value transfer (Cont.)
• The primary advantages of unit value transfers are ease
of implementation and minimal data requirements
• If the study and policy sites (and relevant changes in the
good) are very similar, unit value transfers can perform
acceptably
• However, the assumptions implied by unit value transfers
lead to larger errors than are observed with otherwise
similar benefit function transfers
Benefit function transfer
• Benefit function transfers use a benefit function derived from a
primary study or set of prior studies to calculate a welfare
estimate calibrated to selected characteristics of a policy

• Two primary requirements for a benefit function transfer:

A parameterized function that enables one to calculate the
empirical outcome of interest, as a function of variables that
include conditions observable at the policy site
Information on at least a subset of these variables is required
for the policy site, in order to adjust the transferred function
from the study site context to the policy site context
Benefit function transfer (Cont.)
• In principle, the ability to adjust benefit estimates
according to observable differences between the study
and policy contexts can lead to more accurate transfer
estimates (i.e., lower transfer errors), and can perhaps
relax the requirement for close similarity between the
study site and a policy site across all relevant dimensions

• However, there is a fair degree of consensus that site

similarity remains an important determinant of transfer
accuracy, even for benefit function transfer
Benefit function transfer (Cont.)
• The primary difference between alternative forms of benefit
function transfer is the source of the benefit function
• The simplest form of benefit function transfer uses an
estimated function from a single primary study to calculate a
calibrated welfare estimate for the policy site
• This is often denoted single-site benefit function transfer
• Functions used for benefit function transfer can be drawn from
many different types of studies; common sources include
recreation demand models, contingent valuation studies and
choice experiments
• Functions are frequently drawn from within a single country, but
may also be estimated from data that span multiple countries
Benefit function transfer (Cont.)
• More sophisticated benefit functions may allow for non-
linear effects of independent variables on the welfare
estimate of interest
• In principal, benefit function transfers can be used to
adjust or calibrate benefit transfer estimates for
differences in such factors as the quantity or quality of the
good being valued, the characteristics of individuals or
populations (e.g., income, education), or other site
characteristics such as the price, quality or availability of
substitutes
Benefit function transfer (Cont.)
• However, these functions should be constructed from
general economic theoretic principles to contain only
those variables about which we have clear, prior
expectations
• Function-based adjustments, for example adjusting for
differences in socioeconomic characteristics of affected
populations, will not always improve transfer accuracy
• Single-site function transfers also require the strong
assumption that the underlying parameterized valuation
function is identical at the study and policy sites
Benefit function transfer (Cont.)
• To account for potential differences in benefit functions
across sites, one may also conduct multiple-site benefit
function transfer, in which functions from different studies
and/or sites are each used independently to derive
distinct benefit function transfer estimates, with the results
combined to provide a range of feasible values for the
policy site
• Multiple-site benefit function transfer generally involves
the use of multiple, independent single-site transfers, the
results of which are then somehow condensed into a
single estimate (e.g., a mean value) or range of estimates
Meta-analysis
• It involves constructing a dataset based on a larger number
of previous studies and then regressing benefit measures
against study characteristics
• Statistical analysis of the findings of empirical studies, i.e.
statistical analysis of a large collection of results from
existent studies for the purpose of integrating the findings
• In meta-analysis regression, the economic values are
modeled as a function of site-specific characteristics (e.g.
physical and geographical characteristics), methodological
characteristics (e.g. valuation method; survey mode), and
socio-economic characteristics (e.g. GDP per capita;
population density)
Meta-analysis (Cont.)
• Applied to identify and test systematic influences of study,
economic, and resource attributes on WTP, characterize
results of the literature addressing certain types of non-
market values, and generate reduced-form benefit
functions for direct transfer applications
• Meta-analysis may provide a viable tool for estimating a
more universal transfer function with distinct advantages
over unit value or other function-based transfer methods
Meta-analysis (Cont.)
• When estimating models, analysts must account for a
variety of potential statistical complications including
sample selection effects, primary data heterogeneity, and
non-independence of multiple observations from
individual studies
• Studies in the literature may violate good practice
guidelines for econometric estimation, although some of
these guidelines are subject to debate
Meta-analysis (Cont.)
• The validity of any meta-analysis and the resulting benefit
transfers depends on the quality, extent and
unbiasedness of the underlying primary data
• Hence, it is critical that analysts use appropriate
approaches to collect, evaluate and screen information
gathered from the literature, and that methods used for
this process are transparent
• The literature suggests steps in meta-analysis data
collection and reporting
• While these steps often complicate the selection of source
studies for a meta-analysis, they have key advantages in
that input studies of lower quality or relevance can be
identified prior to use
Structural benefit transfer
• Benefit transfers, in general, lack a micro-level utility-theoretic
foundation
• Although all benefit transfers should draw on prior primary
studies with a strong grounding in welfare theory, transfers
themselves are almost always a purely empirical exercise; no
additional constraints are placed on the transfer to ensure
compliance with theory
• As such, benefit transfers are considered to have a “weak”
structural basis in utility theory
• Structural benefit transfer (or preference calibration) is
distinguished by a strong and formal basis in an explicit,
structural utility function. This assumed utility structure is used
to combine and transfer information drawn from multiple prior
studies or information sources
Structural benefit transfer (Cont.)
• Structural benefit transfer requires the analyst to specify a
structural preference or utility function able to describe an
individual’s choice over a set of market and non-market
goods, presuming standard budget-constrained utility
maximization
• One then derives analytical expressions that determine a
relationship between each available benefit measure from
existing primary studies and the assumed utility function,
in as much as possible guided by economic theory
• Expressions also should assure the variables assumed to
enter the preference function are consistently measured
across each study and linked to preference parameters
Structural benefit transfer (Cont.)
• Empirical methods are used to calibrate parameters to the
specified utility-theoretic structure
• In some cases preference or utility parameters may be
solved algebraically based on the specified utility
structure; in other cases some form of iterative
optimization is required
• Unlike some other forms of benefit transfer, structural
benefit transfer generally cannot be accomplished without
significant expertise in welfare theory and mathematical
Economics
Best choice (?)
• The choice among different types of benefit transfer is
dictated by a number of different factors, such as:
 type of information and number of studies that are available
 the type of value that is required
 the general similarity (or correspondence) between the study and
policy contexts
 the level of analyst expertise
 the time and resources available to develop transfer methods
 the precision necessary for different types of policy decisions
Best choice (?)
• In general, benefit function transfers are preferred unless
the study and policy contexts are very similar
• Unadjusted unit value transfers are generally treated with
skepticism and considered one of the least appropriate
forms of transfer
• The choice of single-site benefit function transfer versus
meta-analysis depends on factors that include the
availability of sufficient studies for meta-analysis
estimation and the availability of a single, closely
matching study-site function
• The probability of finding a good fit between a single study
site and a policy site is usually low
Best choice (?)
• The development of metadata and estimation of suitable
meta-analysis requires greater time and expertise than is
typically required for other forms of benefit transfer
• Meta-analysis most appropriate when:
 there is a large valuation literature addressing the nonmarket good
in question
 there is no empirical study for a single, closely matching policy
context
 the analyst desires flexibility to estimate benefits for different policy
contexts or outcomes (e.g. scales of improvement in the nonmarket
good)
Best choice (?)
• Structural benefit transfer methods have not yet been
widely adopted for applied work
• Advantages of structural transfer include the imposition of
strong theoretical consistency on the use of prior
information and greater transparency in assumptions
• The method also has limitations, including potential
sensitivity of model results to the assumed utility structure
• The preference calibration method is also more complex
than most alternative transfer methods, and the literature
has yet to demonstrate clearly that this increased
complexity leads to improvements in transfer accuracy
Best choice (?)
• While benefit transfer is often the only feasible option for
estimating values required for policy analysis, analysts
may sometimes have a choice between primary research
and benefit transfer
• This choice can be particularly relevant for smaller
projects or policies, for which the cost of a high quality
primary valuation study can be large compared to
potential policy benefits
• Regardless of the transfer method used, a benefit transfer
can only be as good as the underlying primary studies
Best choice (?)
Necessary conditions to effective benefit
transfer application
Policy context should be thoroughly defined, identifying:
the extent, magnitude, and quantification of expected site
or resource impacts from the proposed action in both
quantity and quality terms
the extent, spatial distribution and characteristics of the
population that will be affected by the expected site or
resource impacts
the data needs of an assessment or analysis, including
the type of measure (unit, average, marginal value), the
kind of value (use, non-use, or total value), and the
degree of certainty surrounding the transferred data (i.e.,
the accuracy and precision of the transferred data)
Necessary conditions to effective benefit
transfer application (Cont.)
The study site data should meet certain conditions for critical
benefit transfers. Studies transferred should be:
based on adequate data, sound economic method, and correct
empirical technique
contain information on the statistical relationship between
benefits (costs) and socioeconomic characteristics of the
affected population
contain information on the statistical relationship between the
benefits (costs) and physical/environmental characteristics of
the study site
adequate number of individual studies on similar sites have
been conducted in order to enable credible statistical
inferences concerning the applicability of the transferred
value(s) to the policy site
Necessary conditions to effective benefit
transfer application (Cont.)
The correspondence between the study site and the policy site
should exhibit the following characteristics:
The environmental resource and the change in the quality
and/or quantity of the resource at the study site and the
resource and expected change in the resource at the policy site
should be similar
The markets for the study site and the policy site are similar,
unless there is enough usable information provided by the
study on own and substitute prices. Other characteristics
should be considered, including similarity of demographic
profiles and cultural aspects
The conditions and quality of the experiences (e.g., intensity,
duration, and skill requirements) are similar between the study
site and the policy site
Quality assessment
• Study quality is an important criterion, which can be
assessed in a number of ways:
Internal validity of the study results, that is, the extent to
which findings correspond to what is theoretically
expected. Internal validity has been extensively
researched over the past three decades in valuation
studies
Studies should contain sufficient information to assess the
validity and reliability of their results (adequate reporting
of the estimated WTP function, including the applied
statistical techniques and the definition of variables)
Quality assessment criteria
• Scientific soundness: Data collection procedures, empirical
methodology, consistency with scientific or economic theory,
statistical techniques

• Relevance: change in environmental quality, baseline

environmental quality, affected services and commodities, site
characteristics of affected commodity, duration and timing of
effects, exposure path and nature of health risks,
Socioeconomics characteristics of the affected population,
property rights

• Richness in detail: definition of variables and means, treatment

of substitutes, cost of time (in Travel cost studies), participation
rates (“extent of market” i.e. number of affected people)
 Transfer errors
• Although benefits transfer is used extensively in practice, relatively little
published evidence exists about its validity and reliability

Errors found in water related economic valuation studies testing benefits

transfer
A transfer error of 50% means that transferring the value from a study site to a
“policy site can be 50% higher or lower than the “true‟ value at the policy site
The range of transfer errors refers to the transfer of average WTP values and WTP
functions
Error sources
• Three important sources of error can be distinguished:

the error incurred when estimating the original unit value

the error incurred when transferring the original unit value

to the new policy context

the error incurred when aggregating the transfer unit

value to the whole population of beneficiaries and
calculation of the Total Economic Value (TEV)
Transfer errors (Cont.)
• Points to consider:
Difficult to say how large the errors can be expected to be
when using existing economic value estimates in new
decision-making contexts
In some cases they can be very low, in other cases they
may be quite high
No distinct differences can be found when comparing
transfer errors for contingent valuation and travel cost
studies
Transfer errors (Cont.)
• Errors in benefit transfer need to be considered in the light
of the purpose for which the user (policy or decision
maker) wishes to use previous valuation results

• In some cases a transfer error of 50 percent may be

considered too high, in other cases such an error may be
acceptable

• The acceptability of the error will depend on subjective

judgement by the user, the purpose and nature of the
evaluation (e.g. CBA, pricing/cost recovery, environmental
liability) and the phase of the policy cycle in which the
evaluation is carried out
Scaling issues
• Scaling of benefits over populations, affected areas or
quantities of change
• Scaling, or multiplication of per unit values by a different
quantity, population or area than was evaluated by the
original source study (or studies), requires strong and
often unrealistic assumptions regarding the invariance of
per unit values to scale, an assumption that holds only in
rare circumstances or for small changes in scale
• Unit values should not be scaled to significantly larger or
smaller geographic areas (or scales) without adjustments
Scaling issues (Cont.)
• Common violations of accepted practice in benefit transfer
involve the scaling of benefit measures in attempts to
quantify the total benefits of an environmental asset at a
planetary, nation/statewide, or ecosystem scale
• Such attempts ignore diminishing marginal utility and the
fact that economic values are meaningful only for clearly
specified changes in a good or service, rather than in an
entire environmental asset
• That is, they ignore the errors that can occur when benefit
transfers scale benefit estimates
Scaling issues (Cont.)
• Among the primary requirements for accurate benefit
transfer is correspondence, or similarity between the site,
valuation context and populations at the study site and
those at the policy site
• This includes similarity in factors such as the availability of
substitutes and complements to the good in question
• The degree and dimensions of similarity that are required,
however, can vary across different types of transfers
• Challenges of site similarity are even greater for
international benefit transfers, given potential differences
in such factors as currency conversion, user attributes,
wealth/income measures, cultural differences and extent
of the market
Choice of appropriate study
• The methods used to select and screen studies for benefit
transfer are important
• There are a variety of methods that can be used to
identify, measure and correct for publication selection
bias, including approaches that weight empirical
estimates by their standard errors to give greater
importance to estimates that have been estimated with
greater accuracy
• Studies should be screened to ensure the fundamental
validity of the estimated welfare measures according to
economic theory. Some studies may be published on the
strength or novelty of their methodological or theoretical
contributions, despite a weak empirical application. Such
studies may not be suitable for Benefit Transfer
Selection criteria
Criteria for evaluating the quality of primary studies for benefit transfer

Source: Johnston et al. (2015)

Steps to Benefit Transfer
• Step 1: Describe the Policy Case
 Establish Decision-Context
 Define Policy Good
 Characterize Affected Population
 Define and Quantify Change in Policy Good

• Step 2: Select Monetary Valuation Evidence

 Where to Find Primary Valuation Studies? Assessing the Quality of
Primary Valuation Studies
Steps to Benefit Transfer
• Step 3: Transfer Values
 Choose Benefit Transfer Method
 Transfer Evidence and Estimate Value of Policy Good
 Aggregation
 Sensitivity Analysis

• Step 4: Report the Results

Steps to Benefit Transfer (Cont.)
• Establish Decision-Context
Is benefit transfer appropriate/feasible?
• Define Policy Good
 Specific ecosystem services provided
Physical characteristics, location, substitutes
• Characterize Affected Population
Who are the users? Are there non-use values? Socio-
economic characteristics of the users and non-users
Steps to Benefit Transfer (Cont.)
• Define and Quantify Change in Policy Good
• Define the baseline conditions (with and without policy)
• Economic baseline (i.e. number of users)
• Environmental baseline (i.e. pollutant concentration)
• Describe the change qualitatively
• Scale (marginal or non-marginal)
• Nature (change in quality or quantity of provision)
• Direction (improvement/increase or deterioration/decrease)
• Timing (immediate, temporary, gradual)
Steps to Benefit Transfer (Cont.)
• Describe the change quantitatively
• Its nature (units of change such as reductions in
tonnes of emissions, increase in size of habitat)
• Risk (i.e. reduction in flood risk by 50%)
• Change in affected population
• What measurement of change means in terms of
ecosystem services (i.e. benefits to people)
• Interdisciplinary expertise essential!
Some concluding remarks
• While benefit transfer provides a quick and cheap alternative to
original valuation research, some conditions must be met if it is
to provide reliable results
• Local circumstances and conditions in the new decision-
making context need to be close enough to the ones prevailing
in the original research
• Risk of obtaining misleading results may be controlled and
reduced by integrating more explanatory variables into the
transfer. However this also increases the data requirements
and the complexity of the analysis
• The possibilities of conducting a sound and reliable benefits
transfer hinge on the number, quality and diversity of valuation
studies available – the larger, the better and the more diverse
the existing set of studies is, the more likely there will be a
primary study that is close enough to the policy site for results
to be transferable
References
• Johnston et al (2015) Benefit Transfer of Environmental and Resource
Values. A Guide for Researchers and Practitioners, Springer
• Brouwer, R. (2000). Environmental value transfer: State of the art and
future prospects. Ecological Economics, 32, 137–152
• Brouwer, R., & Spaninks, F. A. (1999). The validity of environmental
benefits transfer: Further empirical testing. Environmental & Resource
Economics, 14, 95–117
• Nelson, J. P., & Kennedy, P. E. (2009). The use (and abuse) of meta-
analysis in environmental and resource economics: An assessment.
Environmental & Resource Economics, 42, 345–377
• Rosenberger, R. S., & Stanley, T. D. (2006). Measurement, generalization
and publication: Sources of error in benefit transfers and their
management. Ecological Economics, 60, 372–378
• Stapler, R. W., & Johnston, R. J. (2009). Meta-analysis, benefit transfer,
and methodological covariates: Implications for transfer error.
Environmental & Resource Economics, 42, 227–246.
• Toman, M. (1998). Why not to calculate the value of the world’s
ecosystem services and natural capital. Ecological Economics, 25, 57–60