INTEGRATED ASSESSMENT AND PLANNING FOR SUSTAINABLE DEVELOPMENT 1 Economic Valuation of Environmental...
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Transcript of 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
INTEGRATED ASSESSMENT AND PLANNING FOR SUSTAINABLE DEVELOPMENT2
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
INTEGRATED ASSESSMENT AND PLANNING FOR SUSTAINABLE DEVELOPMENT3
Aim of the Session
• To introduce economic valuation and to place it into context in the IAP process
INTEGRATED ASSESSMENT AND PLANNING FOR SUSTAINABLE DEVELOPMENT4
• 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
INTEGRATED ASSESSMENT AND PLANNING FOR SUSTAINABLE DEVELOPMENT5
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
INTEGRATED ASSESSMENT AND PLANNING FOR SUSTAINABLE DEVELOPMENT6
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
INTEGRATED ASSESSMENT AND PLANNING FOR SUSTAINABLE DEVELOPMENT7
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
INTEGRATED ASSESSMENT AND PLANNING FOR SUSTAINABLE DEVELOPMENT8
Some basic concepts for cost-benefit analysis
• Economic versus financial analysis– Shadow pricing (including externalities)– Discounting– Time horizon
• With and without project/policy scenarios
INTEGRATED ASSESSMENT AND PLANNING FOR SUSTAINABLE DEVELOPMENT9
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 DEVELOPMENT10
Techniques to place monetary values on environmental impacts
• Market based methods– Production function approach– Cost of illness approach– Cost-based approaches
INTEGRATED ASSESSMENT AND PLANNING FOR SUSTAINABLE DEVELOPMENT11
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
INTEGRATED ASSESSMENT AND PLANNING FOR SUSTAINABLE DEVELOPMENT12
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
INTEGRATED ASSESSMENT AND PLANNING FOR SUSTAINABLE DEVELOPMENT13
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
INTEGRATED ASSESSMENT AND PLANNING FOR SUSTAINABLE DEVELOPMENT14
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
INTEGRATED ASSESSMENT AND PLANNING FOR SUSTAINABLE DEVELOPMENT15
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
INTEGRATED ASSESSMENT AND PLANNING FOR SUSTAINABLE DEVELOPMENT16
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
INTEGRATED ASSESSMENT AND PLANNING FOR SUSTAINABLE DEVELOPMENT17
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
INTEGRATED ASSESSMENT AND PLANNING FOR SUSTAINABLE DEVELOPMENT18
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
INTEGRATED ASSESSMENT AND PLANNING FOR SUSTAINABLE DEVELOPMENT19
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
INTEGRATED ASSESSMENT AND PLANNING FOR SUSTAINABLE DEVELOPMENT20
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
INTEGRATED ASSESSMENT AND PLANNING FOR SUSTAINABLE DEVELOPMENT21
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
INTEGRATED ASSESSMENT AND PLANNING FOR SUSTAINABLE DEVELOPMENT22
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
INTEGRATED ASSESSMENT AND PLANNING FOR SUSTAINABLE DEVELOPMENT23
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
INTEGRATED ASSESSMENT AND PLANNING FOR SUSTAINABLE DEVELOPMENT24
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
INTEGRATED ASSESSMENT AND PLANNING FOR SUSTAINABLE DEVELOPMENT25
Limitations of valuation
• Income distribution
• Intergenerational equity
• Risk and uncertainty (unknown thresholds)
• Irreversibility (unknown future uses)
• Large margin of error