Transcript SUSTAINABILITY

Incorporating Environmental Impacts
into Investment Analysis
Randall Kramer
Professor of Environmental Economics
[email protected]
Methods for Valuation of Environmental Impacts
1. Travel Cost Method
(recreational benefits only)
2. Contingent Valuation Method
(most widely applicable, but controversial)
3. Hedonic Property Value Method
(appealing because relies on property characteristics)
4. Productivity Analysis
(useful where biological resources affected by pollution)
5. Opportunity Cost Analysis
(can be applied when there is a clear substitute)
CV Method – Example 1
Water Quality CV (Kramer and Eisen-Hecht, 2002)
Now, assume a vote is being held today to approve or reject this management
plan. Your payment for this plan would be collected through an increase in your
usual state income taxes. All residents in counties within the Catawba River
basin would make identical payments. This money would only be used for
implementing this management plan for the Catawba River basin. If a majority
of Catawba basin county residents vote in favor of this management plan, it will
go into effect. Before you answer the following question, please consider your
current income, as well as your expenses.
Suppose that this management plan would cost you $____ (5, 10, 25, 50, 100,
150, 200, 250) each year for the next five years in increased state income
taxes. Would you vote in favor of the management plan?
1
2
D
R
Yes
No
Don’t know (do not offer, record only)
No response
Estimates of the lower-bound mean
willingness to pay (WTP)
Mean WTP for all respondents
$139
Comparison of mean WTP based on state of residence
Mean WTP for North Carolina respondents
$135
Mean WTP for South Carolina respondents
$150
R.A. Kramer and J.I. Eisen-Hecht, “Estimating the Economic Value of Water Quality in the
Catawba River Basin,” Water Resources Research 38 (2002): 1-10.
CV Example 2 – Global Ecosystem
Benefits of Protected Areas
• Mail survey of random sample of U.S. residents with
questions on knowledge and attitudes on rainforest
conservation, socioeconomics and willingness to pay
(WTP)
• Used contingent valuation method to gauge WTP for
a Save the Rainforest Fund to double the amount
of national parks and nature reserves in tropical
countries
Key Results on Global Rainforest Services
• 91% of respondents familiar with tropical rainforest issues
• 67% believed industrial nations should share the cost of tropical
rainforest protection.
•
Willingness to Pay by U.S. Residents for protection:
Measure
Estimated Value
Mean WTP/household
$24
Total WTP
all households
$2.18 billion
R. Kramer and E. Mercer, “Valuing a Global Environmental Good: U.S. Residents’ Willingness to Pay to Protect Tropical Rain
Forests,” Land Economics, 73 (1997): 196-210.
Hedonic Example - Water Quality in
Chesapeake Bay
•
Leggett and Bockstael’s investigated water quality effects on
residential property values along the Chesapeake Bay.
• Used data from waterfront property sales from 1993 to 1997 in
Anne Arundel County, Maryland.
• Used fecal coliform data from samples collected at 104 sites
along the county’s coastline and constructed a water quality
measure based on the distance of each property from the
nearest monitoring station.
Leggett, C.G., and N.E. Bockstael. 2000. “Evidence of the Effects of Water Quality on Residential Land Prices.”
Journal of Environmental Economics and Management 39: 121-144.
Hedonic Model Water Quality Results
• Results showed that coliform levels had a significant
and negative impact on property values.
• Modest reductions in fecal coliform counts in the
middle and upper reaches of the inlet increased
property values by 2 percent.
• Potential gains across all properties in the county
could amount to more than $12 million if water quality
was improved by a similar amount elsewhere.
Opportunity Cost Example - Land Set
Aside for National Park in Madagascar
• Opportunity cost to villagers of losing access to the land set
aside for the Mantadia National Park based on data from
survey of 351 households.
• Cash-flow models constructed for each village group to estimate
income from agricultural and forestry activities. Lost access to
forest land estimated from aerial photos.
• The mean annual extent of these losses was estimated to be
$91 per household.
• Assuming a 3-percent rate of population growth and 10-percent
discount rate, we estimated an NPV of the opportunity costs
over 20 years to be $566,000.
P. Shyamsundar and R.A. Kramer, “Biodiversity Conservation - At What Cost? A Study of Households in the Vicinity
of Madagascar’s Mantadia National Park,” Ambio 26(1997): 180-184.
What if there are insufficient funds or time
to do an original non-market valuation
study of ecosystem services?
Benefit Transfer
• In benefit transfer, benefit estimates from one site are
transferred to another site. Study site => policy site
• Avoids the cost of another survey based study.
• Benefit transfer is increasingly used by regulatory agencies such
as USEPA and the European Commission
• Research to date shows some success as long as there is a
careful matching of site characteristics.
• Benefits transfer website: www.evri.ca
Benefit Transfer Example:
Drinking Water Provision as an
Ecosystem Service
• An important ecosystem service is water purification
• Water treatment plants process raw water to produce
drinking water
• Treatment costs are higher when raw water quality is
lower:
– Turbidity (from sediment)
– Other pollutants
Y. Kraus Elsin, R.A. Kramer, W.A. Jenkins, ‘Water Quality
Benefits for Drinking Water Treatment in the Neuse Basin: A
Benefit Transfer Approach,” Working paper, Nicholas School of
the Environment and Earth Sciences, Duke University,
December 2007
Avoided water treatment costs
• Avoided water treatment
costs is a way to value water
purification ecosystem
service
• Connected to upstream land
use
Drinking Water Benefit Transfer
• Found 4 studies estimated water treatment costs as
relate to quality of raw water input
– Each use different set of variables
• Turbidity (from sediment)
– key WQ variable in common
• Study areas:
– Great Lakes, OH, TX, Nat’l
Drinking Water Benefit Transfer
• Two BT methods applied:
– Point transfer
– Function transfer
• Data from 9 of the 10 largest water treatment plants
in Neuse River Basin
– Avg turbidity, avg amount of water processed
(MGD), annual O&M costs, annual chemical costs
Results - Drinking Water Benefits
Net Present Value (NPV)
Turbidity
Change
BT
method
5%
Elasticity
transfer
10%
Function
transfer
Elasticity
transfer
20%
Function
transfer
Elasticity
transfer
30%
Function
transfer
Elasticity
transfer
Function
transfer
$$(2,000,000)
$(4,000,000)
$(6,000,000)
$(8,000,000)
$(10,000,000)
$(12,000,000)
$(14,000,000)
$(16,000,000)
$(18,000,000)
Forster
Murray
Dearmont
Holmes
Average
• For a 5% decrease in turbidity, NPV of cost savings in the
Neuse Basin ranged from $0.4 to $2.7 million
• For a 30% change, NPV of cost savings ranged from $2.6 to
$16.5 million
Conclusions
• Ecosystem valuation is challenging due to uncertainties,
interdependence among services, and varying geographic
scope
• Valuation of ecosystem services can help:
– inform environmental policy decision making intended to
balance human activity and conservation
– develop mechanisms to enable landowners to capture
ecosystem benefits, e.g. nutrient trading
– target conservation efforts.
Further Reading:
G. Stavros, D. Whittington, D. Pearce and D. Moran, Economic
Values and the Environment in the Developing World, 1997.
J. Dixon, et al., Economic Analysis of the Environmental Impacts of
Development Projects, 1988.
OECD, Environmental Policy Benefits: Monetary Evaluation, 1989.
C.D. Kolstad, Environmental Economics, 2000.
http//:www.ecosystemvaluation.org
http:// www.evri.ca