Blog archive: April 2016

It is not about money!

April 7, 2016 by Bo Weidema

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The first working draft for ISO 14008 on monetary valuation of environmental impacts has now been sent out for commenting among the standardisation body members. The chair of the ISO Working Group is Bengt Steen, who already in the early 1990’ies introduced monetary valuation to Life Cycle Impact Assessment with his EPS method.

In the Life Cycle Assessment (LCA) community there is a growing awareness that valuation is needed, and that the “ban” on weighting for comparative assertions that was introduced in the ISO 14044 LCA standard is not a viable position. Valuation serves the purpose of facilitating comparisons across different environmental midpoint impact categories, by applying weights (values) that reflect their relative importance (ISO 14040). Without valuation it becomes impossible to recommend the best decision when the options score best on different impact categories.

But not everyone is comfortable that monetary valuation is the best answer. In their recent expansion of the European Union Product Environmental Footprint (PEF) pilot tests to include a comparison of results when using different forms of weighting, monetary valuation methods were explicitly excluded, stating that “monetisation approaches (e.g. EPS2000, STEPWISE), will have to be dealt with separately”.

This leads me to highlight some frequent and important misunderstandings about monetary valuation, and here I first have to say: It is not about the money! Most of the criticism of monetary valuation applies to any form for valuation, including that of panel weightings and distance-to-target methods:
The values discussed in monetary valuation (and in comparative valuation in general) are the marginal values referring to trade-offs between alternative resource allocations, not the general moral values like the general value of democracy or the value of human life as such, that cannot be subject to quantified measurement and trade-offs. Much critique of monetary and marginal valuation comes from a confusion of these two types of values.

Valuation is often criticised for being anthropocentric. This critique is correct, but it is also irrelevant in its essence. Valuation has to be anthropocentric, since its purpose is to support human decision-making. Any concern for other species (or for that matter for any other group than the one that has the power to take the decision) must necessarily come as a concession from those who perform the valuation. However, the fact that it appears very difficult – or rather impossible – to design a truly non-anthropocentric valuation scheme, does not make it unimportant to raise the issue and seriously contemplate its relevance when deciding on the design of a valuation method. It should also be noted that an anthropocentric valuation does not necessarily imply a low valuation of nature; nature does have high value for humans, both use value (today often referred to as ecosystem services) and non-use values (existence value and bequest value).

Monetary valuation is also criticised for giving more weight to people who have more money. While this critique may seem intuitively correct, it is not true if equity-weighting is performed correctly. A simple weighting proportional to the inverse of the income will ensure that the same impact will be weighted equally across all levels of income. More advanced, empirically determined utility-weights can be applied, which lead to larger weights to poor population groups than to richer. Such equity-weighting should also be applied if values are expressed in non-monetary units! Because it is about values, not about the money!

Money is just a unit of exchange. You could equally well use units of Quality Adjusted Life Years, happiness-years, eco-points, or “Environmental Load Units” (ELUs) as Bengt Steen suggested. It is not about the money or the unit; it is about making things comparable. However, research has shown that when people are asked compare two goods with a monetary equivalent, their answers are more egoistic – less altruistic – than when asked to compare the same goods in a context where money is not mentioned explicitly. So the unit does matter, but only in the sense that answers given in the two different contexts can only be compared after adjustment for the context-dependent bias. This is just one out of many biases that can be introduced when asking people about their values:

It is a widespread critique of valuation methods that they assume that participants exhibit rational, utility-maximising behaviour when making valuations, while empirical evidence show that people do not exhibit this rational behaviour, neither in normal market transactions nor in experimental settings, but are influenced by the framing of the decision situation. A large body of literature on behavioural economics suggests improvements to the survey techniques to control and adjust for the systematic biases caused by the contextual and informational setting of the valuation.

When comparing items for which trade-offs between alternative resource allocations are in reality being made, as is most often the case in LCA, the problem of choice is unavoidable, and an outright rejection of valuation – monetary or not – is not a viable position.

However, a lot of the criticism of current valuations is valid. Many current valuations suffer from insufficient inclusion of equity-weighting, from many of the unnecessary biases described above, and from unnecessarily high uncertainties. But these are problems that can be solved, that need to be solved, and that we are working on solving, both in the ISO working group on monetary valuation and in our new crowd-funded Monetarisation Club that I urge anyone with interest in this development to join.