Measuring Willingness to Pay for Green Options



Measuring Willingness to Pay for Green Options

Authors

C Choudhury, RAND Europe, UK and Massachusetts Institute of Technology, US; F Tsang, RAND Europe and University of Cambridge, UK; P Burge, C Rohr, RAND Europe, UK; R Sheldon, Accent, UK

Description

This paper reports recent research findings from stated preference choice exercises, across a number of sectors including transport, to measure willingness to pay of users for sustainable options and explores the associated methodological issues.

Abstract

Following the Stern Review and Eddington Study in the UK, it is generally believed that there is an increased awareness of environmental issues. But does awareness translate into willingness to pay (WTP) for greener options?

In a number of recent studies, across a number of public sectors, we are observing positive valuations from users for future investments targeting carbon emissions and improving sustainability. This paper reports recent research findings from stated preference (SP) choice exercises, across a number of sectors, to measure WTP of users for sustainable options and explores the associated methodological issues. The SP choice exercises have been conducted in contexts involving transport and utility services. In transport, consumer choices relating to car ownership and use under an emission-based charging system have been studied. Among utility sectors, the research has been conducted among residential and business customers of five water service providers and fourteen energy suppliers. The variables evaluated in the exercises vary, depending on the context. Examples of evaluated variables include reduction of carbon emission and other green house gases, sustainability of water extraction procedure, improvements in disposed waste water quality, replacement of habitats affected by service operations, use of renewable energy sources and provision of advice on energy efficiency. The richness of the data allows us to explore the heterogeneity in WTP among respondents of different backgrounds in different contexts as well as to investigate some of the methodological issues associated with using SP choice exercises for quantifying environmental benefits.

The heterogeneity in WTP has been a key issue for choice modelling (Horowitz and McConell 2002, Sonnier et al. 2007) and environmental cost benefit analysis (Swallow et al. 1994, Hanley et al. 1998, Morey et al. 2003). In this paper, the systematic variations in WTP with the socio-economic characteristics of the respondents (e.g. income, gender, age, education level etc.) as well as the contexts of the choice experiments have been investigated in detail.

The classical problems associated with measuring WTP for environmental benefits using SP choice exercises (Green et al. 1998, Kahnemann 1999, Carlsson and Martinsson 2001) have also been investigated in this paper. In particular, the issue of overstating the WTP through the aggregating of values from multiple experiments has been tested through two methods: (i) package experiments where the group of variables related to environment and sustainability are jointly evaluated with other general groups of variables and (ii) direct contingent valuations (stated intentions) which explore willingness-to-pay for the ?best possible? service levels. Preliminary results show evidence of such overstatements.

Another issue explored in this study is testing if the SP exercises only capture the attitude to prefer sustainable options or if there is a definite trend showing linear/diminishing increase in WTP proportional to the levels of improvement. The hypothesis that people have higher WTP to compensate for improvements that relate to direct human externalities (e.g. number of beaches affected by waste water disposal) compared to preventive measures (e.g. use of renewable energy sources) has also been tested and supported by the preliminary analysis.

The preliminary findings from the studies are very encouraging and provide useful practical insights in measuring WTP for sustainable options in transport as well as other sectors. This is of particular importance given the limited availability of corresponding revealed preferences for policy analyses.

Publisher

Association for European Transport