integrated assessment and planning for sustainable development 1 economic valuation of environmental...

INTEGRATED ASSESSMENT AND PLANNING FOR SUSTAINABLE DEVELOPMENT1

Economic Valuation of

Environmental of Impacts

Session 5

Nathalie Olsen


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


Aim of the Session

• To introduce economic valuation and to place it into context in the IAP process


• 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


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


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 decision-making process

• Economic valuation helps to bring the environment into decision-making process


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


Some basic concepts for cost-benefit analysis

• Economic versus financial analysis– Shadow 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 methods– Production function approach– Cost of illness approach– Cost-based approaches


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


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 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 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


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 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


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


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


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 water-borne pathogens

• Provides lower-bound estimate of social benefits of public services

• Limitations:– There must be no secondary benefits to expenditure


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


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


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


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


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


Limitations of valuation

• Income distribution

• Intergenerational equity

• Risk and uncertainty (unknown thresholds)

• Irreversibility (unknown future uses)

• Large margin of error


Choosing Valuation Techniques

integrated assessment and planning for sustainable development 1 economic valuation of environmental...

Documents

integrated assessment

sustainable development

process economic valuation

planning process

economic valuation important

session slide

monetary valuation important

derived slide