Incorporating uncertainty in environmental valuation
Creators: name: Akter, Sonia
Publisher: name: The Australian National University
Year: 2010
Subjects: subject: HC79.E5.A48 2010
subject: Greenhouse gas mitigation Government policy Evaluation
subject: Environmental policy
subject: Environmental policy Evaluation
subject: Uncertainty
subject: Contingent valuation

description: The research reported in this thesis aimed to investigate the influence of uncertainty on individuals' decisions to support a policy intervention in stated preference (SP) studies. Three types of uncertainty were accounted for: (1) scenario uncertainty, (2) policy uncertainty and (3) preference uncertainty. Three analytical models were constructed. The first accounts for both scenario and policy uncertainty in a contingent valuation (CV) study. The second allows testing whether prior beliefs regarding policy uncertainty influence decision making in a choice experiment (CE) study when objective probabilities are provided. Finally, a third analytical model was constructed to determine the sources of preference uncertainty in SP studies. Empirical testing of these models was carried out in Australia using the proposed national Carbon Pollution Reduction Scheme (CPRS), an emissions trading scheme to curb Australia's greenhouse gas emissions, as the case study context. The results of the thesis can be summarised by the following key findings. First, individual decision making in the CV survey was influenced by both scenario and policy uncertainty. The variables expected to explain willingness to pay (WTP) were found to be statistically insignificant at the ten percent level when policy uncertainty was ignored. The regression model delivered theoretically expected results when individuals' perceptions of the likely success of the CPRS were incorporated. Second, individual decision making in the CE survey was influenced by both the subjective and objective probabilities of policy effectiveness. CE studies have been carried out in the past assuming that respondents make decisions on the basis regarding objective probabilities only. The results obtained in this thesis show that this assumption may not hold true. Respondents' prior beliefs of the probability of policy success were found to playa significant role in their decisions regarding the CPRS. Accounting for the V influence of prior subjective probability in the utility function delivered significantly different welfare estimates from better performing models. Third, the quadratic relationship hypothesis (a V-shaped relationship between bid level and stated preference certainty scores) proposed by Loomis and Ekstrand (1998) was examined for theoretical and intuitive validity. It was observed that such a relationship is expected to prevail only if the distribution of sample respondents' WTP for the environmental good is normally distributed across the bid levels. The hypothesis was empirically tested by regressing the certainty scores against the offered bid levels. A V-shaped relationship between bid level and the stated certainty scores was observed in only one out of the four empirical models. The self-reported certainty scores varied depending on respondents' age, education, attitudes (positive and negative) towards the environmental good, knowledge and familiarity with the good and the level of environmental uncertainty (scenario and policy) associated with the valuation framework. While testing the construct validity of the self-reported preference certainty scores, verbal expression based techniques were found to be more appropriate than purely numerical scale based techniques. The regression model estimated using the polychotomous choice certainty scores (a verbal measure of preference uncertainty) provided evidence in support of the hypotheses drawn from the proposed cognitive psychology model of preference uncertainty. The numerical certainty scale method showed poor construct validity. Finally, the relationship between the stated preference certainty scores and number of choice questions was examined in a CE study. It was hypothesised that the stated preference certainty scores increase at a decreasing rate as respondents answer additional choice questions. This is due to the combined impacts of learning and fatigue in the repeated choice exercise. The results provide evidence in support of the hypothesis: the stated preference certainty gain from the second choice question was significantly higher than the preference certainty gain from the third, fourth and fifth choice questions.