RECENT TRENDS IN PROJECT APPRAISAL

Prof. Dr. Phoebe Koundouri

Athens University of Economics & Business, School of Economics

London School of Economics, Grantham Research InstituteICRE8: International Center for Research on the Environments and the Economy

http://www.icre8.eu/founder-scientific-director

David Pearce Workshop, LSE, 10 Sept. 2015

DAVID PEARCE CONTRIBUTED TO ALMOST ALL ASPECTS OF CBA AND DEFINED MANY CURRENT TRENDS.

The Theoretical Foundations of CBA The Stages of a Practical CBA Total Economic Value (TEV) Revealed Preference for Valuing Non-Market Impacts Stated Preference (CVM & CM) for Valuing Non-Market Impacts The Value of Ecosystem Services Valuing Health and Life Risks Benefits Transfer Discounting & Temporal Framing Spatial Framing Equity and CBA Sustainability and CBA Uncertainty and CBA The Political Economy of CBA Multi-Criteria Analysis & Interdisciplinary aspects

TOTAL ECONOMIC VALUE: THE CENTRAL CONCEPT IN CBA

DP major contribution to the definition and use of TEV. Current Research: To refine the theoretical models and empirical methods towards:

A. Better understanding of the concept and determinants of the total economic value of ecosystem goods and services

B. More accurate modelling of this value

C. More robust estimation and forecast of this value

D. More efficient integration of this value in interdisciplinary resource management and policy-making.

IS THERE A DOMINANT DRIVING FORCE SHAPING ECONOMIC VALUES AND ALLOCATION OF RESOURCES?

My research points on Information!

Crucial Questions to be answered: Does relevant information exist? Who owns it? Who understands it? How is it diffused over time/over space? How to handle information uncertainty? Do we face risk or deep uncertainty? How people react to information uncertainty? How we deal with information uncertainty in the LR?

It is important to explicitly incorporate the level, quality & dynamics of information in the theoretical and empirical attempts to measure values.

Required Information is truly Interdisciplinary!

VALUING ECOSYSTEMS AND BIODIVERSITY (TEEB) FOR CBA

“Making nature’s values visible”: mainstream the values of biodiversity and ecosystem services into decision-making at all levels.

Major Challenges:- Interdisciplinary- Valuation is an estimation of a snapshot- Spatial and Temporal Frameworks- Uncertainty about present & future of stocks

and flows of ES

SPATIAL FRAMES IN ES-BASED CBA Knowledge of how and where ecosystem services are

generated, altered and experienced is often insufficiently detailed.

Risk adopting spatial boundaries that do not encompass all the impacts of a planned change.

GIS-based spatial analysis is needed.

TEMPORAL FRAMES IN ES-BASED CBA

What is the relevant time horizon? Preferences for or against an impact may change through time

and this “relative price” effect also has to be accounted for. C/B not known with certainty so that risk (probabilistic outcomes)

and uncertainty (when no probabilities are known) have to be taken into account.

Co-evolution of social-ecological systems is not predictable. Choice of temporal scale of analysis determines to what extent

the interests of future generations are included in the analysis. This choice involves the selection of an appropriate discount rate.

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GLOBAQUAEC-DG Research-FP6

10,000,000 euro

Managing the effects of multiple stressors on biodiversity and functioning of aquatic ecosystems http://www.globaqua-project.eu, Budget: 10,000,000 euro

USE & OPTIONVALUES

Agriculture Production

Analysis

PASSIVEVALUES

Existence

Value Choice Experiment

Warm Glow Lab

Experiment

Bequest Value

Choice Experiment

Altruistic Lap Experiment

Δ Total Economic Value

ES-related Goods & Services

DSS: CBA (GIS + Over time: CC scenarios)

Institutions + Policy Recommendations

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OCEANS OF TOMORROW: EC-DG Research-FP6

Budget: 20,000,000 euro

OCEAN.2011-1: Multi-use offshore platforms3 funded projects

Development of a wind- wave power open-sea platform equipped forhydrogen generation with support for multiple users of energy

http://www.h2ocean-project.eu/

Innovative multi-purpose offshore platforms: planning, design and operation

http://www.mermaidproject.eu/

Modular multi-use deep water offshore platform harnessing andservicing Mediterranean, subtropical and tropical marine resources

http://www.troposplatform.eu/

TEV and Assessment Tool: Marine Resources

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OPEN-ACCESS TO SCIENTIFIC INFORMATIONEC-DG Research-FP6

Budget: 12,000,000

OPEN ACCESS EVOLUTION IN EUROPE HTTP://VIMEO.COM/OPENAIRE/2014

OpenAIRE is the European online network that makes research output openly accessible to all.

It manages diverse research outputs across all disciplines, promotes and shares the results, effortlessly.

It is all about sharing, reusing and linking research information.

COSTS

Stakeholders: 18 NOADsInstrument: Cost

QuestionnaireMeasuring Total Cost

BENEFITS

Stakeholder AnalysisInstrument: Stakeholder

QuestionnaireMeasuring Willingness to Engage

Monetary Valuation of BenefitsInstrument: Choice Experiment

(Full-Preference Ranking)Measuring Willingness to Pay

Methodology for Assessing OpenAIRE’s Sustainability

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Sustainable Project: Total Benefits > Total Costs

Cost Benefit Analysis

Discounted Net Benefits of OpenAIRE (NPV)

Risk Analysis Confirm

Robustness of CBA

Business ScenariosSustainable Financing of OpenAIRE

GOVERNMENT PROJECTS APPRAISAL: ALTERNATIVE APPROACHES TO DEFINE THE DR

Discount Rate

Social Rate of Time Preference

Rate of Return Required by

Consumers in order to Exchange

Current Consumption for

Future Consumption

Social Opportunity Cost

Government DR should not differ

from DR applied by Private Investors. Risk should be

taken into Account

THE VALUE OF DISTANT BENEFITS & UNCERTAINTY[SERIES OF PAPERS WITH PEARCE, GOLLIER, GROOM, KOUNDOURI AND OTHERS]

In an Uncertain Environment:- Persistent shocks on the growth rate of consumption and- Persistent shocks on short-term interest rates- Translate into persistent shocks on growth expectations, translate into persistent shocks on interest rates

Determine the shape of the term structure of the socially efficient discount rate & imply DDR.

Estimate Theory Consistent DDR trajectory• Using Historical Data• Without a Structural Model• Using univariate time series regime switching models:- describe stochastic dynamics of the real IR - future properties of the IR are determined

by its own past behaviour

Information accumulation may transmit patterns of preferences towards risk & influence time preferences & attitudes towards the public goods such education, environment. As they become more important and current generationscare more about the future: DDR for PV of LR effects!

RECOMMENDED SCHEDULE OF DISCOUNT RATES PROVIDED IN UK

DDR in various formsadopted in: UK, USA, France, Norway,Etc.

Now working on Ukraine, Cyprus,Moldova.

RISK: probabilities of random events (RE) are known

Bayesian Paradign & Expected Utility Framework UNCERTAINTY: probabilities of RE are unknown (different data

generating mechanisms possible for the true process)

E.g. Climate Change: Within CC an analysis of uncertainty is especially important

becausedifferent studies use different models, different physical

parameters anddifferent methodologies. These differences generate alternativeprobability distribution for possible outcomes.

- Theoretical Models to investigate dynamic convergence to a probability distribution.

- Lab Experiments to elicit current preferences under uncertainty: controlled variation in the levels of uncertainty and probability distributions. Target populations:- General Public: elicit ambiguity aversion re. effects of climate

change.- Policy Makers: reaction to types of uncertainty presented by

experts.- Scientists: preferences under uncertainty that will result in different

outcomes.

WHEN I TALK TO POLICY-MAKERS I WISH THAT DAVID WAS THERE!WHEN I TALK TO AN INTERDISCIPLINARY AUDIENCE I KNOW

THAT THEY ARE USING DAVID’S WORK!.. SOMETIMES THEY DO NOT KNOW IT!

WHEN I TALK TO ENVIRONMENTAL ECONOMISTS I KNOW THAT DAVID HAS PARTLY DEFINED THEIR WORK.. SOMETIMES THEY DO NOT KNOW IT!

PUBLISHED AND FORTHCOMING BOOKS

Forthcoming: Koundouri, P. (editor) Innovative Multi-Purpose Offshore Platforms: Economic Engineering andEcological Perspectives. Springer Publishing, 2015. Koundouri, P. (editor) The Economics of Marine Energy Production: A framework of analysis andits application in European oceans. Springer Publishing, 2015. Markandya, A., and Koundouri, P. (editors) Fisheries Policy and Management. World Scientific Publishing, 2016. Koundouri, P. (editor) Handbook on Ecosystem Services and Water Resources Management. Cambridge Uni Press.