Resource

Method Factsheet - Shadow Pricing

Author/Contact:

Prof Mette Termansen,

Department of Environmental Science – Environmental social science,

Frederiksborgvej 399,

Building 7420, K1.05,

4000 Roskilde,

Denmark.

+45 87158645

mter@envs.au.dk

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Resource description:

Shadow pricing is highly appropriate to elicit monetary values and anthropocentric instrumental values of nature's benefits. When society sets environmental targets on the provision of non-marketed ecosystem services it is an implicit valuation of the services. The shadow price is the marginal cost of obtaining an additional unit of the ecosystem service by implementing the environmental target. As an additional unit of the targeted ecosystem service restricts production of other marketed ecosystem services, the change in the mix reflects the relative values. The shadow price society 'pays' for provision of the ecosystem services is the loss from not obtaining the value from producing marketed goods.

Requirements:

  • Shadow pricing is largely based on data already in the public domain including data on ecosystem characteristics, current land use and management.
  • ArcGIS skills and a license are required to manipulate ecological data.
  • Software (such as GAUSS) generally requires both a license and specialist knowledge to derive cost effective alternatives and their price.

Advantages:

  • Shadow pricing is a recognised principle in economics, it draws on modelling relationships between provision of different outcomes using existing data and avoids hypothetical biases related to stated preference methods
  • Well suited to conducting sensitivity analysis as a way of analysing the implications of uncertainty
  • Can be used to provide public policy rationales for providing ecosystem services and can be linked directly to land use policies.

Constraints:

  • Requires the compilation of large data sets
  • Needs extensive modelling competence
  • The method relies on the estimates of the cost and effectiveness of different management measures.

Licence:

  • Free, no licence

Development stage:

  • Full, working product
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