Transcript Economic Valuation of Environmental of Impacts Session 5 Nathalie Olsen INTEGRATED ASSESSMENT AND PLANNING FOR SUSTAINABLE DEVELOPMENT.

Economic Valuation of
Environmental of Impacts
Session 5
Nathalie Olsen
INTEGRATED ASSESSMENT AND PLANNING FOR SUSTAINABLE DEVELOPMENT
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Where are we?
Purpose / category
Environmental assessment
Social assessment
Economic assessment
Integrative assessment
Sustainability assessment
. Participatory process
Tools
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Trend analysis
Problem analysis
Dose-response relations
Cause-effect chains
Environmental impact matrix
Life cycle analysis
Risk assessment
Identification of key sustainability issues
Environmental problem analysis and root causes
Poverty assessment
Socio-economic analysis
Poverty analysis and root causes
Stakeholder analysis and mapping
Gender analysis
Cost -benefit analysis
Regression analysis
Scenario development
Input-output table
Gross margin analysis
Partial equilibrium model
Contingent valuation
Comparative trend analysis
Partial equilibrium model
Inter-sectoral cause-effect chains
Environmental valuation methods
Options appraisal
Multi-criteria analysis
Comparative risk assessment
Vision development
Scenario development
Sustainability indicators
Sustainability standards
Sustainability frameworks
Participatory Rural Appraisal – PRA
Stakeholder workshop
Steering committee or technical committee
Focus group discussions
Key informant interviews
Collective expert judgement
Involving key stakeholder groups
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Aim of the Session
• To introduce economic valuation and to
place it into context in the IAP process
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Overview of topics for this session
• What is economic valuation?
• Why is economic valuation important?
• Techniques for economic valuation
– Market-based techniques
– Travel Cost Method
– Hedonic Methods
– Contingent Valuation
– Benefit transfer
• Limitations of economic valuation
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What is economic valuation?
• Attempts to quantify and express in monetary terms
the full value of environmental resources
• For private goods, prices reflect relative scarcity and
people’s willingness to pay
• Prices for environmental goods do not exist or do not
reflect full value of resource
• Nature of environmental goods and services
– Not well-defined (ecological functions)
– Unclear property rights (fish stocks, groundwater)
– Public goods (clean air)
• Economic values need to be derived
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Why is monetary valuation important?
• Planning process is influenced by economic
analysis (CBA)
• Goods and services which have quantities and
prices can be taken into account in decisionmaking process
• Economic valuation helps to bring the
environment into decision-making process
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Total Economic Value
• Use values
– Direct use (timber, other forest products)
– Indirect use (ecological functions)
– Option value (WTP to conserve for future use)
• Non-use values
– Existence value (WTP to know an asset exists)
– Bequest value (WTP to pass on asset to next
generation)
• TEV = Direct Use Value + Indirect Use Value
+ Option Value + Existence Value
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Some basic concepts for cost-benefit analysis
• Economic versus financial analysis
– Shadow pricing (including externalities)
– Discounting
– Time horizon
• With and without project/policy scenarios
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Steps to link environmental impacts with their
valuation
• Based on an environmental assessment physical indicators
• List all environmental issues to be examined in
the planning process
• Set priorities based on which issues are most
important for most stakeholders
• Quantify in physical terms the impact/damage
• Identify which impacts/damages could be
valued in monetary terms
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Techniques to place monetary values on
environmental impacts
• Market based methods
– Production function approach
– Cost of illness approach
– Cost-based approaches
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Production function approach
• The environment is an input into the
production of a marketed good
• Based on damage function which relates cause
(soil erosion) to effect/damage (reduced soil
fertility)
• Applicability: deforestation, wetland and reef
destruction, water pollution in agricultural and
fisheries
• Measures ‘use’ value of resources
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Costs and Benefits of Rainforest
Conservation in Cameroon
Cost of conservation project
Present values,
million CFA (1989
prices)
Resource costs
-4,475
Foregone forest benefits –
Timber
-353
Foregone forest benefits –
forest products
-223
Total costs
-5,051
Benefits of conservation project
Direct use
Indirect use
Use of forest products
+354
Tourism
+680
Protection of fisheries
+1,770
Flood control
+265
Soil productivity
+130
Total benefits
+3,199
Net benefits to Cameroon at 8% discount
rate
Economic rate of return
-1,852
Net benefits to Cameroon at 6% discount
rate
+319
6.2%
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Cost of Illness Approach (1)
• Costs of air/water pollution estimated by
looking at costs of human health impact
• Dose-response function identifies relationship
between level of pollutant and degree of health
effect (water quality and diarrhoea)
• Value health effect based on cost of illness,
including
– cost of medicine, doctors visits, hospital stays,
other incidental expenses
– Loss of earnings due to illness
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Cost of Illness Approach (2)
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Applicability:
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Value health costs of water and air pollution
Limitations
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Dose-response functions not available locally
Does not measure WTP to avoid illness
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Cost-based approaches
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Opportunity cost approach
Cost effectiveness analysis
Replacement cost approach
Defensive expenditure approach
Limitations:
– Costs significantly underestimates benefits
– Use when not possible to quantify benefits
• Applicability
– When benefits are very difficult to value
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Opportunity Cost Approach
• Uses CBA and market prices to estimate
benefits of alternative use of resource
• Cost of conservation = foregone income from
alternative use of land
• Application: resources for which difficult to
quantify benefits such as
– Tropical forests, wildlife sanctuaries,
cultural/historical sites
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Replacement Cost Approach
• Estimates the costs required to replace
damaged resource or to restore damaged
resource to original state
• Applicability:
– When remedial action must be taken to meet a
standard (air or water quality)
– When environmental effect requires expenditure to
replace natural asset (roads, dams, soil, water)
• Limitations:
– Assumes complete replacement or restoration is
possible
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Cost-effectiveness analysis
• Choose the most cost-effective means of reaching a
pre-set target
• Applicability:
– Social programmes (health and population)
• Examples:
– maximum level of exposure to a waterborne disease agent
– emission standard for industrial facilities
• Limitations:
– Compares alternative means of reaching target, but can not
identify whether alternative are all too costly
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Defensive/Preventative Expenditure
• People act to pre-empt damage
• Expenditures provide estimate of minimum valuation of
potential damage to health or environment
• Applicability:
– Assess demand for public services (water supply, electricity, rubbish
collection)
• Example:
– to assess demand for urban water supply project, look at how much
people pay for water from other sources to avoid exposure to waterborne pathogens
• Provides lower-bound estimate of social benefits of public
services
• Limitations:
– There must be no secondary benefits to expenditure
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Travel Cost Method
• Uses expenditures (transport costs and time) to
reach a site to estimate willingness to pay
• Application:
– recreational areas, national parks, historic/cultural
sites
– time spent collecting fuel wood and water
• Limitations:
– Requires survey, skills
– Measures only use value
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Travel cost method – Viewing Value of
Elephants, Kenya
• Survey of tourists and expenditures at national park
• Results:
– tourists were willing to pay an extra $20-24
million per year to ensure that they saw elephants
– Information used to set park admission prices
– Revenue from parks could be far greater than
revenues from ivory trade and other uses of land
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Hedonic Methods Approach
• Uses market price of a good to estimate the value of
an environmental attribute which is embedded in the
price of the marketed good
• Example: house (size, construction, location,
environmental and aesthetic attributes, e.g. clean air)
• Application
– property prices and air pollution/aesthetic traits and access
to water supply and rubbish collection
– Job markets and risks to life
• Limitations:
– requires survey, lots of data, economic theory/econometrics
– Relies on existence of properly functioning land/property
and labour market
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Contingent valuation
• Ask individuals what they are WTP for a change in
environmental attribute
• Based on hypothetical market
• Requires that respondents understand well the good
they are being offered and that they answer truthfully
• Application:
– Changes in the provision of public services
– Only method to measure existence value
• Limitations
– Requires rigorous survey, economic skills
– Due to hypothetical nature, subject to many biases
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Benefit transfer
• A valuation estimate for the same/similar
environmental good from another location is
used as a rough approximation locally
• Application:
– Value of recreational and protected areas
– Dose-response functions for impact of air and
water pollution on health
– Damage functions for agriculture (soil erosion)
• Limitations: studies must exist, differences
must be adjusted for
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Limitations of valuation
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Income distribution
Intergenerational equity
Risk and uncertainty (unknown thresholds)
Irreversibility (unknown future uses)
Large margin of error
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Choosing Valuation Techniques
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