PROJECT AND THE ENVIRONMENT

Transcription

1 SESSION 3.2 PROJECT AND THE ENVIRONMENT Introductory Course on Economic Analysis of Investment Projects Economics and Research Department (ERD)

2 2 Global Value of Eco-system Functions Resources (soil, water, pollination, food, raw materials).. 12% Sink/assimilation (nutrient recycling, waste, erosion control, biological control).. 62% Amenities (recreation, culture)..12% Existence (climate regulation, biodiversity).. 14%

3 Externalities: Examples of Project Environmental Impact On-site Impacts Off-site Impacts 1 Crop production increments Chemical pollution in rivers flowing through plantations 2 Increased forest area Micro and meso climate change 3 Increased tourism Downstream solid waste pollution 4 Reduced soil erosion Reduced downstream siltation, more regular river flow and increased hydropower generation 5 Enhanced mangrove breeding grounds for fish Increase in fish stocks in nearby coastal waters 3

4 4 Types of Project Environmental projects wetlands, power rehabilitation Projects with significant by-product effects logging, fishing, dams, power Projects with minor by-product effects- most projects have some effect

5 5 World Bank: Operational Policy 4.01 Category A projects with significant and irreversible adverse environment al impacts where comprehensive assessment required Category B projects with potential adverse impacts where mitigation feasible and included in design Category C minimal adverse impacts

6 6 ADB Policy EIA mandatory for large projects Lists impacts Follows polluter pays principle Requires mitigation be included in project costs Eg resettlement, air and water treatment, wildlife protection Problem is unanticipated or unmitigated effects eg climate change

7 7 Valuation Methodologies Market based approaches (eg costs of damage or mitigation) use market prices. Change in production Indirect/Implicit markets (eg hedonic pricing, travel cost) where environment effects some markets. Revealed Preference Direct surveys (contingent valuation) where no price information is available. Stated preference

8 8 Change in Production Method Common to focus on foregone output eg loss of agricultural yields due to soil erosion, or output losses due to flooding Needs a) clear link environmental impact and change in output, b) estimate of without impact case, c) prices to use Effects must be weighted by probability of damage occurring; eg risk of sea level rise due to global warming Similar approach with health effects; dose-response method Estimated value of bringing pollution in Hong Kong to WHO standards is 12% of annual government expenditure

9 9 Revealed Preference/Implicit Markets Where impact felt in other markets, so indirect price data can be used Defensive/preventive expenditure ex ante Or ex post shadow project to mitigate damage; eg BP settlement for Deepwater Horizon accident 2010 to clean-up beaches Travel cost approach uses cost of travel to infer value users place on environmental sites (beaches, beauty spots etc) Derived demand for trips including travel cost and allowing for location and household characteristics Change in number of trips related to cost, where higher cost leads to less trips creating implicit value of beenfit from each trip; Eg Philippines case

10 10 Revealed Preference/Hedonic Pricing Based on theory that value of a product due to a mix of product characteristics, including environmental Hence tries to isolate impact of environmental features on price Use of a model to explain property prices to infer cost of noise pollution or air pollution eg due to proximity to airport extension or new road P = f (H, X, E) Where P is property price, H is house characteristics, X is area characteristics and E is environmental impact Study of housing in Hangzhou, PRC, found 20% of house prices determined by location characteristics. Distance to lake had negative coefficient of -3.6 implying 1 extra km from lake reduced price by 36,000 RMB

11 11 Contingent Valuation Survey approach, applied in settlement of Exxon Valdez spill in Alaska Apply repeated bids to establish willingness to pay to preserve environmental feature - eg scenic view, open spaces, wildlife Same methodology can be applied as in water, including benefit transfer Difficulty in explaining idea of paying for environment

12 12 Contingent Valuation The probit model will be of the form Y = α + β 1 X + β 2 B + ε y is the yes/no response, X is vector of variables reflecting household or other characteristics, B is the bid price in this case for environmental services Mean WTP is derived from the expression ( (β 1* X a )/ β 2 )*-1 where X a is the mean value of X variables.

13 13 Contingent Valuation Applied to ecosystem services of Ejina region in Hei river basin in PRC Households were asked how much they would be willing to pay to restore river basin eco system in level of early 1980 s 92% sampled said they were willing to pay something Median WTP 20 RMB per year, with level positively correlated with income, education and urban residence

14 14 Discount Rate Should normal rate apply? Rise in relative scarcity of environmental assets is equivalent to adjusted lower rate for these Stern Review on Climate Change used a discount rate of close to zero (based on possibility of world extinction) Other Environmental studies suggest rates of 1.0% -3.0 % based on declining utility of income Suggestion of dual social time preference rate

15 15 Environmental Discount Rate Separate lower rate for environmental effects Social time preference rate = ng + p Where g is growth of consumption per head, n is rate of decline of marginal utility, p is pure time preference Argument is environmental effects can be converted into consumption equivalents and are becoming scarcer not growing so ng drops out Implies discount rate for environment of about 1% Can this be made operational?

16 Thank you. 16