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8/2/2019 Economic Valuation of Environmental of Impact
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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
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Some basic concepts for cost-benefit analysis
Economic versus financial analysisShadow 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
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Techniques to place monetary values on
environmental impacts
Market based methodsProduction function approach
Cost of illness approach
Cost-based approaches
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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
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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
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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
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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
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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 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