Application of CV Method into Japan
Yoshiaki Kaoru
Professor, Business Administration
Nanzan University

1. Contingent Valuation Method

Awareness on environmental issues has worldwidely increased in recent years, and numbersof discussions have been made on the method for evaluating environmental damage such as an
influence of oil spill caused by tanker accidents. Contingent valuation method (CVM), one of thenon-market valuation methods used to assess the value of environmental conditions and assets notdirectly marketable, like water quality and the ecosystem has been taken note.

In CVM, researchers conduct public questionnaires and ask citizens how much they would
willingly pay for environmental improvement and environmental conservation if they could be boughtwith money.

The researchers then statistically process the questionnaire survey data, estimate

maximum willingness to pay (WTP) per household, and multiply the WTP by total households to obtaintotal assessed value for the environment.

People are usually asked about their WTP for

environmental improvement and conservation.

The assessed value of environmental damage(environmental degradation) is thought to essentially correspond to the WTP for prevention against thedamage.

This is because the maximum amount people are willing to pay to prevent against

environmental degradation can be considered the same amount as the loss they would pay if thedegradation actually occurred.

2. The case of the Exxon Valdez Incident

As an example, I will introduce the case of the Exxon Valdez incident in Prince William Soundin 1989, which resulted in an environmental damage assessed up to $2,800,000,000. The state ofAlaska conducted an interview survey covering 1,043 households all over U.S.

At the first,

investigators explained to the respondents about the extent of damages incurred due to the spill.
Secondly, they suggested a program that the government would provide escort vessels for oil tankers
passing through Prince William Sound for the next 10 years to prevent damage from repeated incidents
in the area. Then they asked the respondents how much amount each household willing to pay as theSpecial Federal Tax to cover the indicated program scheme at once to all basis, using the following
questionnaire.

At present, government officials estimate the program will cost your household a total of$.... This money would only be used for the program to prevent damage fromanother oil spill in Prince William Sound.

In the actual questionnaire, one of four dollar amounts, $10, $30, $60 or $120, was randomly
selected and placed into the blank space. The investigators asked the respondents if they would pay
the indicated amount or not. When the respondents answered Yes,

the investigators raised theamount to $30, $60, $120 and $250, and then repeated the same question...

When the respondents

answered No, at the first question investigators reduced the amount $5, $10, $30 and $60 and thenasked them whether the respondents would pay the reduced amount.
As the result of the survey, the average WTP per household was $94. And the median of WTP was$31. Since the yes-no answer formality in this survey was so-called referendum formality, it wasdetermined that median WTP should be used as the reasonable base followed by the past experience.
By multiplying the above median WTP by the total number of households in the U.S., the environmental
damage from the Exxon Valdez spill was assessed at $2,800,000,000.

However, during discussion on the result of survey, some structural problem that CVM
survey assessed for Existence Value but no Use Value of the environment, was brought up. In
this context, a member of the committee insisted to reduce the original figure by 50%.
Further, the following discussion that CVM contains potential uncertainty, i.e., 1) strategic
bias, a tendency of overestimation / under estimation of the respondent, 2) information bias, 3) range
bias, a feeling reflected to the figure itself, etc. Eventually, the state of Alaska and Exxon agreed toset the environmental damage at $1,000,000,000.

3. A damage assessment example on an oil spill in Tokyo Bay

Though there is few example case on AVM assessment in Japan, the following is a caseconducted by Takeuchi, Kuriyama and Washida in 1999. *They made a simulation assuming a

15,000-kiloliter oil spill at the same point that the Diamond Grace run aground in Tokyo Bay in 1997.
In this case, they defined that 100% damage as the damage that the coast of Tokyo Bay would haveincurred if no measures had been taken.

The researchers asked the questionnaire to the respondents

how much amount they would paid for the response costs if the damage could have been reduced by

竹内･栗山･鷲田 （1999） 「油流出事故の沿岸生態系への影響−コンジョイント分析による評価−」『環境評価ワークショップ−評価手法の現状−』 築地書館*

certain percentages when some oil spill response (OSR) measures were taken place, including providing
escort vessels and deploying oil containment booms.

In this particular example, theConjoint analysis method was applied for the survey.

respondents are presented the following four patterns of oil spill response, and be requested toindicate their first-choice and second-choice responses.
PatternsofMeasure
ExtraBurden(Tax Increase)
Recreation area
including bathing
beachesandfishing spots
Numberof
person who feel
offensive smell
or dizzinessTidal flat
Fishery harbors

1234¥5,000¥90,000¥10,000¥0

Protect 93% of
the areaProtect 24% of
the areaProtect 69% of
the areaProtect 7% of thearea

Suppress to0

Suppress to0

Suppress to
10,000Suppress to
10,000Protect 87% oftidal flatProtect 100% offishery harbors

Protect 40% of
tidal flatProtect 100% offishery harbors

Protect 60% of
tidal flatProtect 66% offishery harbors

Protect 13% oftidal flatProtect 66% offishery harbors

The measures were to be taken in the next 10 years, and each household was to bear thecost by paying once for all tax.

In the table for one above the tax amount and environmental

protection rate were presented to each respondent in different combinations.

The researchers statistically processed these data and calculated the amount of tax increasethat each household would accept in return for a 1% increase in protection of bathing beaches andfishing spots, or in return for a decrease of one person troubled by offensive odor or feeling ofdizziness. The sums of money calculated, known as the marginal WTPs, are shown below:

Marginal WTP
Recreation area including bathing
beaches and fishing spots (increaseof protection by 1%)
Number of person who feel offensive
smell or dizziness (decrease by oneperson)
Tidal flat (increase of protection by1%)

¥26

¥146
¥182

Fisheryharbors
protection by 1%)(increaseof¥363

4. Reliability of environmental damage assessment by CVM

Among the non-market assessment methods, several are based on revealed preference data
reflecting on the actual behaviors of citizens. In CVM surveys, the assessment is based on a set of
hypothetical WTP (stated preference) data associated with a hypothetical environmental protection
indicated in a questionnaire.

However, there has been some concern about the reliability of the

hypothetical WTP, and manner or attitude for the interview, which will resulted so called a biasproblem.

Firstly, we need to classify the nature of environmental damage like a tanker oil spill. The
damage to recreational facilities such as contamination of bathing beaches and fishing spots causes
loss of use value, the damage of not being able to use the contaminated environment. On the otherhand, for about the issues concerning to destruction of ecosystem, desertification, ozone-hole, somepeople impute value to a protected environment that they never see or use. This type of value is called
existence value.

Loss of use value can be estimated from behavioral data on actual users. Loss of existencevalue, on the other hand, can only be assessed through CVM with person-to-person inquiry. When weneed to include existence value in environmental damage assessment, we need to use CVM

Secondly, for the reliability of CVM, it has been the subject of many arguments in the U.S. over
the years. As a final conclusion to their arguments, environmental economists frequently cite the final
report issued by a blue-ribbon panel organized by National Oceanic and Atmospheric Administration.†
A group of distinguished economists sitting on this panel reached the following conclusion:"Thus, the Panel concludes that CV studies can produce estimates reliable enough tobe the starting point of a judicial process of damage assessment, including passive-usevalues."

In the above statement, CV means CVM and passive-use value means existence value.
According to the statement, CVM is sufficiently reliable to provide a starting value for damage

Natural Resource Damage Assessment under the Oil Pollution Act of 1990, Federal Register, pp.
4601-4614, Vol. 58, No. 10, January 15, 1993.
†assessment in judicial proceedings.

Of course, the panel listed various points to be noted for

conducting CVM surveys and suggested a guideline for reliable CVM surveys.

Today, everyone understands the importance of environmental isuues. In Japan, however,cit seems to me that comprehensive discussions on the amount of damage from environmental
degradation has been confined.

In many judicial cases, the existing methods may not provide

sufficient grounds for calculating compensation.

While CVM may not be 100% accurate, it does

provide grounds for calculation in the judicial process, affording both the defendant and plaintiff
opportunities to discuss the estimated value of damage and agree on a reasonable settlement. In
recent years, there has been an especially strong need to incorporate the opinions of citizens in thepolicymaking process at national and local administration levels. CVM incorporates only the value
assessed by the citizens.

5. CVM applications in Japan

CVM assessment has been developed mainly in the U.S. Several points or difficulties arepointed out while we can expect to encounter when this method is applied in Japan. In doing so, I am
not denying the validity of CVM surveys in Japan.

Now that CVM is becoming a global standard

commonly adopted in Europe, the U.S., and other places in the world, it is difficult for us to remain
indifferent to this method. In this sense, we need to think about how to cope with the issues.

5. a. Differences in the environmental regulations and judicial processes between the U.S.
and Japan
Impelled by the fact of the Love Canal case in New York in 1978, the U.S. government
enacted Comprehensive Environmental Response, Compensation, and Liability Act in 1980. Under theact, the government establishes what it calls Superfunds to clean up areas polluted by hazardous
waste, and then uses the funds to implement the cleanups.

The government also identifies thepersons responsible for waste pollution, and orders them to pay the cleanup expenses andenvironmental damage as compensation. The act is usually called the Superfund Act, after the nameof the fund.

Ever since the Superfund Act was enacted, polluters have been strictly held accountable, andmany lawsuits have been filed to claim compensation for environmental damages. Since then, theterm natural resource damage assessment has been commonly used for the process.

The Exxon Valdez spill, the worst environmental disaster in the U.S. history, broughtdiscussions of environmental damage to their peak, and the media took up the matter as a major publicconcern.

Since marine pollution fell under the purview of the Superfund Act, the officials demandedthat Exxon pay compensation based on cleanup and natural resource damage assessment. Later, in1990, the Oil Pollution Act was enacted to cover marine pollution caused by maritime incidents,including oil tanker accidents.

This act also uses the notion of natural resource damage assessment

to define compensation.

In 1981, President Reagan issued Executive Order 12291. Under the order, a Regulatory
Impact Analysis must be conducted in any case where new regulations or amendments of ongoingregulations generate a burden to the national economy of more than $100 million a year. In effect,
this analysis is a cost-benefit analysis. That is, when environmental regulations and other laws andpolicies cost generate considerable expenses in the economy, the benefit from the environmental
improvement achieved through such regulations must be assessed in monetary terms.

In Japan, the Environmental Impact Assessment Law does not require the value assessmentof environmental impact in monetary terms. We have no law governing strict business liability or
requiring natural resource damage assessment. Moreover, the government has no policy operations
equivalent to Executive Order 12291, a legislation based on the value of environment in dollar andcost-benefit analysis.

Given that Japan s legal controls differ from those in the U.S., there may be little room foracceptance of natural resource damage assessment at the judicial level. Such cases may follow thepattern seen in compensation suits involving divorces and sexual discrimination in the workplace,
namely, the wide gap between the amounts awarded by Japanese and American judges. Moreover,regarding the assessment of the value of environmental damage, there may be differences between thetwo countries in the types of judicial processes.

In addition, U.S. society generally adheres to the notion that, based on the principle of publictrust, environmental resources are national assets, the citizens are trustors of the assets, and thegovernment, as a trustee of the assets, preserves and manages the resources. Can we say that sucha notion exists in Japan?

5. b. Participation of resident for questionnaire survey
In the U.S., referendums are frequently held and people are actively involved in policies atfederal and local levels. By comparison, Japan lags behind.

If we were to conduct a CVM

questionnaire in Japan, I have apprehensions that people would not actively respond. Many Japanesethink of environmental issues as matters to be handled exclusively by central and local governments. If
presented with a CVM scenario where residents purchase a specific environmental improvement, theJapanese might feel it odd.

And since the Japanese tend to have a follow-the-crowd mentality, many

may feel awkward thinking up an amount to write down without consulting someone else.

Those who have been involved in ordinary commercial research probably can understand thedifficulty of conducting mail-in, telephone, or field questionnaires in Japan.

For instance, if you

conduct a survey with telephone, at what hours should you call the respondent? You can get thehousehold WTP only when the respondent is in with all of his family members. Interview surveys arealso much more difficult to perform in Japan than in the U.S.

5. c. The range of existence value
As shown in the example of the damage assessment from the Exxon Valdez spill, concerning
existence value, the damage amount is highly dependent on the number of total households multipliedby the average or median WTP per household. There is no denying that some people find value in theexistence of something they never use. In Japan, however, it would be very difficult to assess theexistence value that the public assigns to an oil-damaged beach...

5. d. Instability of assessed value by time
When assessing environmental damage, the amount assessed immediately after the incident
will differ from the amount assessed one year later or three years later. As can be seen in the Europe
and the U.S., the final assessed value tends to be influenced by the scale and emotional slant of themedia coverage. While the temper of Japanese widely known as easily warmed up but just as easily
cooled down, it is more important to know at what point we should assess the damage and how theassessed value changes over time.

5. e. Lack of fundamental information on the environmental problems
After an oil tanker accident off the coast of California, a suit was filed for compensation forthe closure of a beach. The most critical question in this suit was not the reliability of the CVM
survey or estimated existence value, but the estimation of the number of people who used the beachper day.

The U.S. compiles more environmental data than Japan, including data from surveys ofnational park visitors, numbers of persons that participate in outdoor recreations, their expenses, theamounts of discharged pollutants, and so on. However, even the U.S. sometimes lacks the basic
information mentioned above...

When an incident occurs, we cannot estimate the environmental damage without correctly

understanding the number of people who regularly use the area and the environmental status before
the incident. As baseline information in Japan, we need to record the actual usage of each beach andrecreation area, the water quality in those areas, and the status of their ecosystems in time sequentialorder.