Economic Valuation of Environmental Impacts PDF

Economic Valuation of Environmental Impacts  Objective: How economic valuation of the environmental impacts can be used to support and strengthened the environmental assessment and decision- making process, particularly at the project level. Significance Economic valu...

Economic Valuation of Environmental Impacts  Objective: How economic valuation of the environmental impacts can be used to support and strengthened the environmental assessment and decision- making process, particularly at the project level. Significance Economic valuation of the environmental impacts strengthen the EA process in many ways like: Allows the size of different environmental impacts to be compared Allow different environmental impacts to be aggregated into a single measure.  Allows total –ve env impacts (env costs) to be compared with total +ve env impacts (env benefits) Provide the basis for clear and defensible decision- making criterion for accepting or rejecting a developmental proposal. Promote consistency in environmental assessment and decision making Allow comparison and ranking of different development proposal in terms of their env. impacts  Allow environmental impacts to considered along with other economic benefits and cost of development proposal, thereby integrating EA into a more comprehensive cost benefit analysis  Concept of Economic Value Economics  making choice. Choice is made  when resources are limited and scarce therefore that imparts an economic value to good or services. Like in market individual make choices on how to use their limited resources by comparing the price of good or service with their subjective judgment of how much the consumption able item contributes to the welfare or wellbeing.  If individual is willing to pay given amount of income for the good, it is assumed that the willingness to pay is equal to the value which an individual is attached to the good or the services in question. Therefore willingness to Pay measures  her/ his economic value  Thus economic value of an environmental impact to an individual is the money payment that s/he is willing to pay in order to secure it (if positive) or to avoid it (if negative) Alternatively it the money payment s/he willing to accept (WTA) as compensation for environmental impacts (If negative) Example: Goods and services are brought and sold in the market by an individual consumer and the producers. The market price can be then used to calculate the individual willingness to pay and hence to economic value of the good to the person.  The same principle underlies the economic valuation of environmental goods and services. In case of Environmental Assets , they are not traded in the market, and therefore they do not have a market price. Important environmental goods are Air, Oceans, biodiversity, common land  they are all unpriced as they are public goods , which are available to everyone and generally can not be denied to anyone. Therefore it is impossible to charge for its use. Although these goods are available to all they are often depletable i.e. one-person use reduce the availability to other In other words, there is a scarcity problem, choices must be made and then  environmental goods acquire an economic value. In the absence of market price, the task of environmental economist is to find alternative methods of estimating consumers’ willingness to pay for environmental assets and the services they provide. Environmental public goods are just one example of market failure, where the market mechanism fail to signal the relative scarcity and economic value of different resources through their price  Market failure and the environment Market failure might be complete, as in case of public goods. Market failure also occur when market generate prices do not sufficiently reflect  such prices convey misleading information about market scarcity and provide inappropriate incentives for the management, efficient use and conservation of environmental resources. Sources of Market Failure Public Goods a good that is available to everyone and as a consequence it is impossible to charge for its use. The use of the good however, often results in its depletion Example: Fish caught in the international waters Externalities: The effect of development on other parties that are not considered by its owner. Example: A factory discharge harmful effluent into the river used for the drinking and fishing by the local community.  Ignorance and Uncertainty: Environmental processes are often poorly understood, and market may fail to signal emerging resource scarcity and future environmental consequences Example: The impact of increasing atmospheric pollution on the climate change Short-sightedness: Consumers and producers may not be interested in long term environmental cost and benefits which are likely to occur after their lifetime Example: Neglect of long-term costs of de-commissioning nuclear power facilities  Irreversibility: Certain environmental changes can not be reversed. It may be desirable to maintain the option of using the non-renewable and replaceable assets later, but markets will not readily allow for this option value Example: Flooding of scenic valley for the hydroelectric scheme which effectively remove the option of preserving the existing landscape for future generation. Willingness to pay is also effected by Ability to pay For this reason low economic countries pay little value to environment as compare to high economic countries Similarly poor communities pay little value to environment as compare to richer communities in same country. Component of Total economic Value Another way to calculate the total economic value (TEV) of the environmental impacts of the project is to disaggregate the impact into individual components of value Reason? The environmental impacts have different attributes, some of which can be more easily measured than the others. The TEV can be divided into five components 1. Direct use Value 2. Indirect use value 3. Option value 4. Existence value 5. Bequest value As we move from first to fifth, the difficulty in estimating the economic value increases, with direct use value being the simplest and straight forward component of TEV to estimate and existence and bequest being most complicated. 1. Direct Use Value Direct use value refers to benefits that accrue from direct use of the environmental assets in question. It is the easiest component of TEV to value where it relates to the observable quantities of resources or products whose market prices can be observed. 2. Indirect Use value It derives from services that the environment provides, in addition to and separately from, direct use value. For example: A wetland may act as a filter, which indirectly improves water quality for users, or a forest may indirectly help to protect watersheds 3. Option Value: It is the value obtain from retaining an option on the future use of an assets. No use is made for the asset now but there is value in retaining it for possible use in the future. 4 & 5. Existence and Bequest value Existence and bequest value are the both nonuse value elements in TEV. The non-use value derives from the benefit that environment provides that do not involve using it in any way. Existence value is derived from the knowledge that something exist. Thus people play a value on the protection of rare animals from extinction, even if they do not expect to see them. Bequest value is the value derived from the knowledge that something is being passes on to one’s descendants.  Example of Tropical forest can be used to illustrate these different type of economic value. Direct Use Value it is in form of Timber, pharmaceutical products, and the recreational use value. Indirect Use Value includes flood and storm protection, air quality protection through absorption of Carbon dioxide. Option Value retention of the forest for the potential future use value Existence and Bequest Value Knowledge of the forest’s continued existence and its intrinsic value for the cultural and other purposes to present and future generation. Valuation techniques  There are range of valuation techniques that can be used to estimate the five components of total economic value  Choice of techniques  depend upon 1. the environmental impact under consideration 2. and on the availability of the data. In some instances it is possible to apply several techniques to the valuation of the same environmental impacts, which can provide a useful cross-check on the reliability of the estimates obtained.  In all cases, the underlying approach is the same  to estimate what individuals would be willing to pay (or willing to accept in compensation) for a specific change in an environmental good or services. There are three ways of calculating these values: 1. Using market prices 2. Using information on individual’s preferences 3. Benefit Transfer Valuation using Market Prices a. Change in Productivity This method values the environmental change by observing physical changes in the environment and estimating what differences they will make to the value of marketed services and the goods. This approach is applicable in calculating direct and indirect use value. Water pollution can reduce fish catches, and air pollution can effect the growth of the crops. In both instances, the environmental impacts reduces marketed output, which may valued using market prices. b. Human Capital Cost valuation This method can be used to value the environmental impact of environmental hazards on human health. Environmental ‘Bads’ such as air and water pollution or the use of pesticides reduce the quality of human capital cost and therefore lower the economy’s productive capacity. To apply the human capital cost methods it is necessary to determine the relation between the hazard and human health, by expressing the health impact in term of premature death, sickness or absenteeism. Coastal Forest Protection Project, Croatia Reforestation activities were estimated to result in increased wood production, which would be harvested at various intervals in the future. Using the estimates of increased output. (in terms of quality and quantity) and expected prices at the tie of harvest, it was possible to calculate the economic value of the increased wood production Sickness can be valued using medical and health care costs. Absenteeism is valued in term of lost earning (this assumes that earning measures the contribution that the absent worker would have made the output). Air pollution Cost in Mexico city The 1991, World bank study used the cost of illness approach to estimate air pollution cost. The study used the three steps procedure Determine the ambient concentration of various pollutants Using dose-response relationship to determine the incremental incidences of disease including both morbidity and mortality in the population Estimating the cost of increase in morbidity and mortality, as measured by the treatment cost, loss of wages and loss of lifetime earning.  Valuation using Information on Individual’s preferences Often it is not possible to determine to link the environmental impacts to the change in marketable outputs, in such cases willingness to pay must be estimated indirectly, using a range of other techniques, such as: a. Replace Cost of Preventive expenditure method The economic value that individuals attach to the environment can be inferred from the cost of preventing unwanted environmental impacts, or of restoring an assets to its original state after it has been damaged. For example the cost of the air pollution-related acid deposition could be estimated using the cost of restoring damaged physical infrastructure , or the cost of soil erosion could be estimated using the cost of providing preventive terracing. Flood Control and Soil Conservation Project, Yellow River basin. China This was intended to reduce flooding and deposition of sediment in the lower reaches of the Yellow River by the number of measures undertaken in the upstream area; construction of structure to trap sediments; modification of land forms; And modification of land use. The flood prevention benefits were valued indirectly in terms of avoided expenditure-preventive expenditure on raising dikes, restoration costs of de silting irrigation system and the opportunity cost of water used for flushing sediments. Contingent Valuation Methods (CVM) It relies on direct questioning of people to determine their willingness to pay valuation of an environmental impacts. A detailed description of the environmental impact is provided, and interviewee are then asked what they would be willing to pay (WTP) for the hypothetical environmental improvement, or to accept (WTA) as compensation for an environmental deterioration. National Park Project Madagascar CVM was used to value the loss of benefits to local community to refrain from using Mantandia National Park. Local were asked whether they would be willing to accept specified level of compensation to forego access to the forest. This estimate then use as a measure of the cost imposed on local community by the local of access to the park. c. Surrogate Market Valuation Whilst env. Services and goods may not be traded directly , it is possible to find the good or services related to non- marketed environmental items, that is sold in the market. In such cases a person may reveal his or her preference for the market or non-market goods and services when making a purchase. It may then be possible to separate the env. Component of value from the observed market price. In this way use this component of market price as a ‘surrogate’ for the environmental value. Two main techniques for this 1. Travel Cost value 2. Property Value (hedonic value) a. Travel Cost value Many travel resources are used for recreational purposes This method bases its valuation on the money and the time cost of visitors to such recreational facilities. b. In this differences in the property prices can be used to infer the value which individual attached to the differences in the price of two properties which differ only in local air quality. 3. Benefit Transfer It involves deriving estimates of economic value in one context for use in different context, where data required for estimates are not readily available. For example, the value derived in one country might be transferred for use in different country Class Task Compare Env Value Methods Their advantages and disadvantages