Economic Valuation of Environmental of Impacts

Session 5
Nathalie Olsen

INTEGRATED ASSESSMENT AND PLANNING FOR SUSTAINABLE DEVELOPMENT

Where are we?

Purpose / category Environmental assessment Tools 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

Social assessment

Economic assessment

Integrative assessment

Sustainability assessment

. Participatory process

INTEGRATED ASSESSMENT AND PLANNING FOR SUSTAINABLE DEVELOPMENT

Aim of the Session

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

INTEGRATED ASSESSMENT AND PLANNING FOR SUSTAINABLE DEVELOPMENT

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

INTEGRATED ASSESSMENT AND PLANNING FOR SUSTAINABLE DEVELOPMENT

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 peoples 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

INTEGRATED ASSESSMENT AND PLANNING FOR SUSTAINABLE DEVELOPMENT

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
INTEGRATED ASSESSMENT AND PLANNING FOR SUSTAINABLE DEVELOPMENT

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 Foregone forest benefits Timber Foregone forest benefits forest products Total costs Benefits of conservation project Direct use Use of forest products Tourism Indirect use Protection of fisheries Flood control Soil productivity Total benefits Net benefits to Cameroon at 8% discount rate Economic rate of return Net benefits to Cameroon at 6% discount rate

-4,475 -353 -223 -5,051

+354 +680 +1,770 +265 +130 +3,199 -1,852 6.2% +319

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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)

Applicability:
Value health costs of water and air pollution Dose-response functions not available locally Does not measure WTP to avoid illness

Limitations

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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
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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

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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