Willingness to pay for green electricity: A review of the contingent valuation literature and its sources of error

Abstract

Contingent valuation is widely used due to its flexibility in valuing a wide variety of non-market goods. Although this method has important benefits, its validity and reliability are often criticised. This paper reviews the literature on the use of contingent valuation for measuring willingness to pay (WTP) for electricity generated from renewable energy sources (green electricity). A literature review, conducted on a sample of 57 peer-reviewed studies, shows that the vast majority of contingent evaluation studies stems from developed economies. Furthermore, most frequently used WTP elicitation techniques are open-ended and dichotomous choice approaches, which tend to produce varying levels of WTP. Studies dealing with the antecedents of WTP are predominantly inspired by the theory of reasoned action or by its extension, the theory of planned behaviour. This paper identifies six common errors in contingent valuation methods and discusses a number of remedies to deal with these errors in WTP research.

Introduction

This paper provides the results of a literature review of the frequently used contingent valuation method and its sources of error in the context of willingness to pay (WTP) for green electricity. There is an increasing number of studies that focus on people's WTP for certain (public) goods in general and for “green” goods in particular. For example, between 2000 and 2014,¹ the number of studies with “willingness to pay” in the title increased by about 290%. A large proportion of WTP studies used the so-called contingent valuation method to determine certain economic characteristics of the goods or services under study. Sundt and Rehdanz [1], for instance, reported that almost two-third applied this valuation method in a sample of studies published between 2000 and 2011.

The contingent valuation (CV) method estimates standard economic values such as willingness to accept or to pay using responses to survey questions. The contingent valuation method is part of a wider family of approaches labelled as stated preference methods. The latter methods build on actors' responses to questions about changes in the quality of goods. Because a researcher designed the questions about the characteristics of the goods, the changes investigated are often hypothetical. At the end of WW II, the CV method started its development, when it was proposed to use surveys as a tool to value social goods. Early empirical applications can be found in the valuation of outdoor recreation and cost-benefit analyses of public water infrastructures. In the early seventies, the CV method was applied outside the environmental field, especially in the health care and transportation sector. A major boost for the CV method was the Exxon Valdez oil spill. The state of Alaska's damage claim was to a large extent informed by the loss of so-called passive use value. The use of this latter value for determining the size of environmental damages was heavily debated by the oil industry. This led to the organization of a panel initiated by the U.S. National Oceanic and Atmospheric Administration (NOAA) co-chaired by two Nobel-prize winners. The panel listed a set of good practices for CV and concluded that passive use values can be used.

The contingent valuation method attracted lively academic debate between opponents and proponents. Its proponents argued that the contingent valuation method had three distinct advantages [2]: (1) with the CV method, one can collect useful information in cases where consumer information was not collected; (2) the application of the CV method allows for the development of scenarios in which (re)new(ed) goods are presented that are outside the realm of current user experiences, and (3) the CV method makes it possible to use the Hicksian consumer surplus instead of its Marshallian proxy. In contrast, some opposing scholars [3] argued that the contingent valuation method developed from “dubious to hopeless”. They conclude (also see: [4]) that the contingent valuation method has a number of serious problems, making “the resulting data useless for serious analysis” [3]: pp.43. In this debate, the focus is predominantly on three problems. The first is hypothetical bias, where what people say is different to what they do. Consequently, WTP values are often (very) different from what is called the “true” economic price. The second problem is the gap between what actors are willing to pay and what they are willing to accept. It is argued that economic theory predicts that both values should be the same. Because many empirical studies find differing values, this is regarded as a serious flaw of the contingent valuation method. The third problem is the scope or embeddedness problem, which implies that WTP values for the same goods vary depending on whether the goods are valued separately or as a part of a more inclusive package.

This paper reviews the contingent valuation literature dealing with WTP for green electricity by sampling a number of studies, showing that the contingent valuation method is plagued by a wider range of errors than merely the three identified above. These errors are identified and described and, where appropriate and possible, remedies are suggested. In this review, the focus is especially on elicitation techniques. These are an understudied potential source of error on the one hand, while they have high practical relevance on the other, as they are the actual means whereby WTP data is collected, thus informing policy makers and practitioners. Furthermore, the paper investigates what the contingent valuation literature regards as the main antecedents that influence WTP for green electricity. In this study, antecedents of WTP are defined as factors affecting a person's WTP for green electricity. In an abstract sense, an antecedent can be regarded as a cause of a phenomenon, in this paper an individual's willingness to pay. Combined, it provides the opportunity to reach the three main objectives of this paper. These objectives are to provide a state-of-the-art review of contingent valuation literature and an overview of the possible errors in contingent valuation studies, which result in varying WTP estimates together with their remedies. It also wishes to provide an overview of antecedents of WTP in contingent valuation studies, which helps one explore to what extent a general theoretical framework can be traced in these studies. More broadly, the researchers concur with Haab, Interis, Petrolia and Whitehead [5]: pp. 608, who stated: “The time has come to move beyond endless debates that seek to discredit contingent valuation and to focus instead on making it better.” This statement voices the overall aim of this study.

This paper builds on and extends the work of other scholars who have assessed the contingent valuation method. In this regard, one can refer to studies by Diamond and Hausman [6], Hanemann [7], Carson, Flores and Meade [8] and Carson [9]. These studies are updated with the latest insights from literature, adding a special focus on elicitation issues. The results of this review of contingent valuation literature can be relevant to scholars and practitioners interested in WTP for green electricity, applying the contingent valuation method, as it helps them to quickly identify major caveats and ways to avoid or mitigate them.

The remainder of this paper is structured as follows: Section 2 briefly discusses a definition of green electricity and why it is an interesting good from an economic theory point of view. Furthermore, this section introduces the main methods used to economically value environmental (public) goods. Next, contingent valuation literature is reviewed and a number of its characteristics identified. Additionally, we explore those antecedents are that are often used to explain or predict WTP values that are grounded in the contingent valuation approach. Section 4 discusses important errors of contingent valuation methods, as identified in the literature, and possible ways to avoid or mitigate them. In the last section of the paper, the main findings are briefly summarised and discussed.