economic valuation of environmental of impact

8/2/2019 Economic Valuation of Environmental of Impact

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INTEGRATED ASSESSMENT AND PLANNING FOR SUSTAINABLE DEVELOPMENT1

Economic Valuation of

Environmental of Impacts

Session 5

Nathalie Olsen


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Where are we?

Purpose / category Tools

Environmental assessment 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

Social assessment Poverty assessment Socio-economic analysis Poverty analysis and root causes Stakeholder analysis and mapping Gender analysis

Economic assessment Cost -benefit analysis Regression analysis Scenario development Input-output table Gross margin analysis Partial equilibrium model Contingent valuation

Integrative assessment 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 assessment Sustainability indicators Sustainability standards Sustainability frameworks

. Participatory process 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 toplace it into context in the IAP process


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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

Overview of topics for this session


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What is economic valuation?

Attempts to quantify and express in monetary termsthe full value of environmental resources

For private goods, prices reflect relative scarcity andpeoples willingness to pay

Prices for environmental goods do not exist or do notreflect 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 economicanalysis (CBA)

Goods and services which have quantities andprices can be taken into account in decision-

making process

Economic valuation helps to bring the

environment into decision-making process


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Total Economic Value

Use valuesDirect use (timber, other forest products)Indirect use (ecological functions)

Option value (WTP to conserve for future use)

Non-use valuesExistence 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



Some basic concepts for cost-benefit analysis

Economic versus financial analysisShadow pricing (including externalities)

Discounting

Time horizon With and without project/policy scenarios



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



Techniques to place monetary values on

environmental impacts

Market based methodsProduction function approach

Cost of illness approach

Cost-based approaches



Production function approach

The environment is an input into theproduction of a marketed good

Based on damage function which relates cause

(soil erosion) to effect/damage (reduced soilfertility)

Applicability: deforestation, wetland and reef

destruction, water pollution in agricultural andfisheries

Measures use value of resources

C d fi f i f



Costs and Benefits of Rainforest

Conservation in CameroonCost of conservation project Present values,

million CFA (1989prices)

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 Use of forest products +354

Tourism +680

Indirect use Protection of fisheries +1,770

Flood control +265

Soil productivity +130

Total benefits +3,199

Net benefits to Cameroon at 8% discount

rate

-1,852

Economic rate of return 6.2%

Net benefits to Cameroon at 6% discount

rate

+319



Cost of Illness Approach (1)

Costs of air/water pollution estimated bylooking at costs of human health impact

Dose-response function identifies relationshipbetween 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



Cost of Illness Approach (2)

Applicability: Value health costs of water and air pollution

Limitations

Dose-response functions not available locally Does not measure WTP to avoid illness



Cost-based approaches

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



Opportunity Cost Approach

Uses CBA and market prices to estimatebenefits 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 replacedamaged resource or to restore damagedresource to original state

Applicability:

When remedial action must be taken to meet astandard (air or water quality)

When environmental effect requires expenditure toreplace 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 apre-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 ofpotential 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 muchpeople pay for water from other sources to avoid exposure to water-borne pathogens

Provides lower-bound estimate of social benefits of publicservices

Limitations: There must be no secondary benefits to expenditure



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Travel Cost Method

Uses expenditures (transport costs and time) toreach a site to estimate willingness to pay

Application:

recreational areas, national parks, historic/culturalsites

time spent collecting fuel wood and water

Limitations:

Requires survey, skills

Measures only use value

T l h d Vi i V l f



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Travel cost methodViewing 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 ofan environmental attribute which is embedded in theprice 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/propertyand labour market


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Contingent valuation

Ask individuals what they are WTP for a change inenvironmental 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/similarenvironmental good from another location isused as a rough approximation locally

Application:

Value of recreational and protected areas

Dose-response functions for impact of air andwater 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

Income distribution

Intergenerational equity

Risk and uncertainty (unknown thresholds) Irreversibility (unknown future uses)

Large margin of error


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Choosing Valuation Techniques

economic valuation of environmental of impact

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