session 3 setting priorities for improved environmental management

GEF

Session 3

Setting Priorities for Improved Environmental Management

John A. Dixon ([email protected])

The World Bank Institute

Morteza Rahmatian ([email protected])

California State University, Fullerton

Ashgabad, November, 2005

Caspian EVE 2005/UNDP and WBI John A. Dixon & Morteza Rahmatian, Valuation & Priority Setting

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Questions

• What criteria and approaches can be used in ranking environmental problems?

• What are the advantages and limitations of economic methods for defining priorities? (e.g. BCA, CEA)

• What are the principles of and key lessons in environmental priority-setting?


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Priority Setting with limited information

• In a “first best” world all costs and benefits can be valued and an economic efficiency criterion used to rank actions...

• In a “second best” world all benefits cannot be valued and a cost-effectiveness criterion may be necessary…...

• In a “third best” situation with little information, time or resources, qualitative ranking approaches are the best recourse


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Priority setting and available information –a simple example.

Given this information, what is the priority??

Impacts on growth

Air quality medium

Water quality

high

Waste management

medium

Congestion high

Noise low


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Priority setting and available information –if we add information on distribution of impacts,

what is the priority now??

PROBLEMS:

•How to compare a waste management project with a congestion reduction one?•Weighting of the different criteria depends on political considerations•It is possible to use experts’ opinion (Delphi technique)•The focus on weights to different cualitative criteria is known as “Multi-criteria analysis”

Impacts on growth

Distributional impacts

Air quality medium high

Water quality

high high

Waste management

medium high

Congestion high medium

Noise low high


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Priority setting and available information – with added information on health impacts, do

priorities change now??

PROBLEMS:

•It is necessary to define the spacial and time limits of the analysis: financial analysis vs. economic analysis

•Pollution can have different impacts:-Productivity-Health-Recreation-Ecology

Impacts on growth


Health effects

Air quality medium high high

Water quality

high high high

Waste management

medium high medium

Congestion high medium low

Noise low high low


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An Example of Use of Expert Judgment in Nigeria—what are the priority problems??

Problem Economic Growth Distributional Equity

Resource Integrity

Soil Degradation

High High High

Water contamination

High High High

Deforestation High High High

Gully erosion Moderate Moderate Moderate

Fisheries loss Moderate Moderate High

Coastal erosion Moderate Moderate Moderate

Wildlife & Biodiversity loss

Low Low High

Air pollution Low High Moderate

Water Hyacinth

Moderate Low Low


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Economic methods for defining priority actions:

Cost-effectiveness analysis (CEA)

• Identifies the cheapest means of attaining a given environmental objective, e.g. an emissions reduction target.

• A powerful “second-best’ tool when data on benefits are not available.

• Can only prioritize measures that mitigate the same type of environmental impact, i.e. have the same end-point


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Priority setting and available information – with management cost information –

what is the priority now?Impacts on growth


Health effects

Management costs

Air quality medium high high 1000

Water quality

high high high 800

Waste management

medium high medium 900

Congestion high medium low 1500

Noise low high low 1200


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Cost-effectiveness in controlling air pollution in Mexico City

Interesting features• Identifies measures with negative costs

(benefits) illustrating “easy-win” actions with small budget implications.

• Assumes that the marginal benefits of mitigating air pollutants are constant.

• Analyzing different air pollutants requires a weighting of toxicity impacts on human health (the end-point: combination of multiple criteria and CEA approaches).


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Cost effectiveness in controlling Mexico City air pollution

1.2

-400

100

600

1,100

1,600

2,100

2,600

Retrofitting (natural gas and LPG)

Emission standards

Fuel improvements

Inspection of passenger cars

Taxis (replacement)

Passenger cars

Gasoline trucks

Minibuses

Strengthened inspection

Target reduction

Cumulative emission reductions (millions of weighted tons)

Inspection of high use vehiclesa

Marginal cost of emission reduction (dollars per ton)

Technical controls only

Controls, matched with gasoline tax

Welfare cost when tax is excluded

Note: Calculations are based on -0.8 elasticity of demand for gasoline. a. Including taxis, light-duty trucks, and minibuses. Source: Eskeland 1994b.

0


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The preferred form of analysis: Benefit Cost Analysis (BCA)

• Maximizes the present discounted stream of all future benefits and costs of the action.

• Economic efficiency criteria include:– Net present value (NPV)– Economic rate of return (ERR)– Benefit-cost ratio (B/CR)

• Information requirements for a “social” or “full” BCA are large: data on all marginal benefits and marginal costs

• constraints include poor data, but also poor knowledge and acceptability of non-market valuation methods among decision-makers.


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Evaluation Criteria: all three measures use

the same inputs (benefits, costs, time, discount rate)

• Net Present Value (NPV):

n

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t

r

C

r

BNPV

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ERR/ EIRR

Economic Rate of Return (or Internal Rate of Return): r* is the discount rate that equates the present value of the benefits from the project to the present value of the costs of the project. IRR = r*

n

tt

tn

tt

t

r

C

r

B

1*

1* )1()1(


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Benefit/ Cost Ratio (B/CR): present value of benefits divided by present value of costs

n

tt

t

n

tt

t

r

CC

r

BB

1

1

)1(

)1(

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Measurement and Analysis of Benefits and Costs

• “Benefits” refer to the benefits associated with additional environmental or natural resource preservation, conservation, or restoration.• Likewise “costs” refer to the costs of additional environmental or natural resource preservation, conservation, or restoration.


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Measurement and Analysis of Benefits and Costs (cont’d)

• Costs are usually relatively easy to estimate in dollar terms. Examples:

– The additional cost of producing diesel engines that comply with more stringent particulate matter regulations.

– The additional costs and foregone revenues associated with certified sustainable timber harvest methods.

– The reduced commercial fishing revenues due to more stringent fishing regulations


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• Benefits are more difficult to estimate in dollar terms. Examples include:

– The improvements in human health associated with more stringent particulate matter regulations.

– The watershed benefits associated with certified sustainable timber harvest methods.

– The ecological and future gains to stocks associated with more stringent fishing regulations


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• Benefit/cost analysis usually uses money as a measure of utility, and thus monetizing benefits and costs is an important aspect of such an analysis.


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Limitations of benefit/cost analysis:

Value of Human Lives: Some of the benefits of environmental improvements include the reduced loss of human life. What are the policy implications of placing an infinite value on a life? Of measuring the value of a life based on earnings capacity?

Future vs. Current Generations: What discount rate is appropriate when bringing future impacts into present discounted value? Will future generations value things the same way we do? If not, then how can we bring their values and preferences into policy debates today that will affect them?


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Priority setting and available information

– when both cost and benefit information are available --the full Benefit Cost Analysis

Impacts on growth


Health effects

Management costs

Benefits Net Benefits

Air quality medium high high 1000 1300 300

Water quality

high high high 800 900 100

Waste management

medium high medium 900 1150 250

Congestion high medium low 1500 1300 (200)

Noise low high low 1200 1100 (100)

Benefit Cost Analysis


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Example: Benefit Cost Analysis of air-

pollution control in Santiago, Chile Annualized benefits and costs of air pollution control strategy in

Santiago, Chile (US$ millions)

Program component

Benefits

Costs

Net Benefits

Fixed sources Gasoline vehicles Buses Trucks Control strategy

27 33 37 8 105

11 14 30 4 59

16 19 7 >4 46

Source: WB, 1994


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Determining economic values to include in a BCA: Economic Valuation Methods

(again!)

• Changes in Production– Crops, fisheries,

water– Health– Opportunity cost

• Hedonic Approaches– Property value– Land values– Wage differential

• Survey Techniques– CVM (Contingent

Valuation Method)

• Surrogate Markets– Travel Cost


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Selecting the appropriate valuation technique (again)

Environmental Impact

Measurable change in production

Change in environmental quality

Yes

Nondistorted market prices available?

Use change-in-productivity approach

Use surrogate market approaches, apply shadow prices to changes in production

Yes No

Habitat

Opportunity-cost approach

Replacement cost approach

Land value approaches

Contingent Valuation

Air and water quality

No

Cost-effectiveness of prevention

Preventive expenditure

Replacement/ relocation costs

Health effects

Sickness Death

Medical costs

Loss of earnings

Human capital

CEA of prevention

Recreation

Contingent valuation

Travel cost

Aesthetic, Biodiversity, Cultural, Historical assets

Contingen Valuation


Hedonic wage approach



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Limitations of Economic Policy Analysis

• Incremental impacts of activities• Uncertainty (wrt the future)• Irreversible impacts• Preferences of future generations• Distributional effects across social

sectors

session 3 setting priorities for improved environmental management

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