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PolicyResearch
WORKING PAPERS
WorldDevelopment
Report
Officeof the Vice President
DevelopmentEconomics
The World Bank
October1992
WPS 988
Background
paperfor WorldDevelopment
Report1992
EconomicValuation
and the NaturalWorld
Public Disclosure Authorized
DavidPearce
Economicvaluationcan help improvedecisions aboutprotecting the environment.By imputingvalues to unpricedgoods, it
can make public choices more cost-efficientand thus allow
limitedpublic incometo be optimallyspent.
PolicyResearchWoriong
Papersdisseminatethefindingsofworkin progressandencouragetheexchangeof ideasamongBankstaffand
all others intersed in developmnentissues.T7hesepapers. distributedby the ReseatchAdvisory Staff.,carr thenames ofthe authors, reflect
,ihy theirviews,andshouldboused
andcitedaccordingly.Thefindings,
interpretations,andconorlusionsaretheauthors'own.
Theyshould
not be attributedto theWotddBank,its Boardof Directors,its management,or any of its membercountries.
PolicyResearch
WorldDevelopmentReport
WPS 988
This paper- a product of the Office of the Vice President, Development Economics - is one in a series
of background papers prepared for the World Development Report 1992. The Report, on development and
the environment, discusses the possible effects of the expected dramatic growth in the world's population,
industrial output, use of energy, and demand for food. Copies of this and other WorldDevelopmentReport
background papers are available free from the World Bank, 1818 H Street, NW, Washington, DC 20433.
Please contact the World Development Report office, room T7-101, extension 31393 (October 1992, 63
pages).
Economic valuation is controversial largely
because its purpose has not been clearly conveyed to non-economists, says David Pearce.
The purpose of valuation of the natural world is
to elicit measures of human preferences for, or
against, environmental change. As a procedure,
it thus faces two immediate limitadons, he
argues.
First, economic values are not the same as
"intrinsic" values - values "in" things rather
than values "of' things. Economic valuation
makes no claim to measure intrinsic values,
although through the concept of "existence"
value it may be capable of capturing humar.
perceptions of intrinsic value.
Second, measuring preferences focuses on
efficiency gains and losses from environmental
change. It says little about the distribution of
costs and benefits within a time period or
between time periods.
Within a time period, the use of efficiency
gains and losses as a guide to policy or project
evaluation assumes that the prevail.ng distribution of income is socially acceptable, since it is
that distribution which "weights" the measures
of willingness to pay.
Between time periods, the use of another
efficiency concept - the discount rate - biases
the outcomes of evaluation in favor of the
present, and against future, generations where
future costs and benefits are both distant and
significant.
But economic valuation is useful in several
contexts, says Pearce. Project and program
appraisal cannot be comprehensive or adequate
without it. National environmental policy
priorities will be better informed if economic
values are known with some degree of certainty.
The entire objective of sustainable development
almost certainly cannot be interpreted without
some idea of the value of environmental services
and assets.
Empirical work on valuation remains
limited, even in the developed world. It is fairly
new in the developing world, although many
project evaluations have used some form of
indirect valuation. Its importance for the development process is that revealed economic values
for environmental conservation and environmentally improving projects and policies have often
been found to be large.
Valuation demonstrates that there is an
economic case for protecting the environment,
and can help improve decisionmaking. In so
doing, it could make public choices more costefficient, thus allowing limited public income to
be optimally spent.
The Policy ResearchWorkingPaperSeriesdissemninates
thefindingsof workunderway in theBank.Anobjectiveof the series
is to get these findings out quickly, even if presentationsare less than fully polished. The findings, interpretations,and
conclusions in these papersdo not necessarily representofficial Bank policy.
Producedby the Policy ResearchDisseminationCenter
Economic Valuation and the NaturalWorld
David Pearce
Centre for Social and EconomicResearch
on the GlobalEnvironment
London and Norwich, UK
Prepared as a BackgroundPaper for the
World DevelopmentReport 1992
Not for quotation without permission of the author. Contact: David Pearce, 90 Kimbolton Rd,
Bedford, MK40 2PE, UK. Fax (44) 234 215528 (0234 in UK)
The World Development Report 1992, "Development a.d the Environment," discusses the
possibleeffectsof the expecteddramatic growth in the world's population, industrialoutput, use
of energy, and demand for food. Under current practices, the result could be appalling
environmental conditions in both urban and rural areas. The World Development Report
presents an alternative, albeit more difficult, patl- - one that, if taken, would allow fLture
generations to witness improved environmental conditions accompanied by rapid economic
developmentand the virtual eradicationof widespreadpoverty. Choosing this path will require
that both industrial and developingcountries seize the current momentof opportunityto reform
policies, institutions,and aid programs. A two-fold strategy is required.
* First, take advantageof the positivelinks betweeneconomicefficiency, incomegrowth,
and protection of the environment. This calls for acceleratingprograms for reducing poverty,
removingdistortionsthat encourage the economicallyinefficientand environmentallydamaging
use of naturalresources, clarifyingproperty rights, expandingprograms for education(especially
for girls), familyplanning services, sanitationand clean water, and agricultural extension,credit
and research.
* Second, break the negative links between economic activity and the environment.
Certain targeted measures, described in the Report, can bring dramatic improvements in
environmentalqualityat modest .ost in investmentand economic efficiency. To implementthem
will require overcoming the power of vested interests, building strong institutions, improving
knowledge,encouragingparticipatorydecisionmaking,and buildinga partnership of cooperation
between industrial and developingcountries.
Other World DevelopmentReport background papers in the Policy Research Working Paper
series include:
Dennis Anderson, "EconomicGrowth and the Environment"
DennisAnderson and WilliamCavendish, "Efficiencyand Substitutionin PollutionAbatement:
SimulationStudies in Three Sectors"
WilliamAscher, "Coping with the DisappointingRates of Return of DevelopmentProjectswith
EnvironmentalAspects"
Edward B. Barbier and Joanne C. Burgess, "Agricultural Pricing and Environmental
Degradation"
Robin W. Bates and Edwin A. Moore, "CommercialEnergy Efficiency and the Environment"
Wilfred Beckerman, "Economic Development and
Complementarity?"
the Environment: Conflict or
Richard E. Bilsborrow, "Rural Poverty, Migration, and the Environment in Developing
Countries: Three Case Studies"
Charles R. Blitzer, R.S. Eckaus, Supriya Lahiri, and Alexander Meeraus,
(a) "Growth and Welfare Losses from Carbon Emission Restrictions: A General
EquilibriumAnalysis for Egypt";
(b) "The Effects of Restrictionsof Carbon Dixide and Methane Emissionson the Indian
Economy"
Judith M. Dean, "Trade and the Environment: A Survey of the Literature"
Behrouz Guerami, "Prospects for Coal and Clean Coal Technology"
David 0. Hall, "Biomass"
Ravi Kanbur, "Heterogeneity, Distribution and Cooperation in Common Property Resource
Management"
Arik Levinsonand SudhirShetty, "EfficientEnvironmentRegulation:Case Studiesof Urban Air
Pollution"
Robert E.B. Lucas, David Wheeler, and Hemamala Hettige, "Economic Development,
EnvironmentalRegulationand the InternationalMigration of Toxic Industrial Pollution:
1960-1988"
Robert E.B. Lucas, "Toxic Releases by Manufacturing:World Patterns and Trade Policies"
Ashoka Mody and Robert Evenson, "Innovationand Diffusionof EnvironmentallyResponsive
Technologies"
David Pearce, "Economic Valuationand the Natural World"
Nemat Shafik and Sushenjit Bandyopadhyay,"EconomicGrowth and Environmental Quality:
Time Series and Cross-Country Evidence"
Anwar Shah and Bjorn Larsen,
(a) "Carbon Taxes, the GreenhouseEffect, and DevelopingCountries";
(b) "World Energy Subsidiesand Global Carbon Emissions"
Margaret E. Slade,
(a) "EnvironmentalCosts of Natural Resource Commodities:Magnitudeand
Incidence';
(b) "Do Markets Underprice Natural Resouce Commodities?"
Piritta Sorsa, "The Environment- A New Challengeto GAIT?"
Sheila Webb and Associates, "WaterborneDiseases in Peru"
Background papers in the World Bank's DiscussionPaper series include:
Shelton H. Davis, "IndigenousViews of Land and the Environment"
John B. Homer, "Natural Gas in Developing Countries: Evaluating the Benefits to the
Environment"
Stephen Mink, "Poverty, Populationand the Environment"
Theodore Panayotou, "Policy Options for ControllingUrban and Industrial Pollution"
Other (unpublished)papers in the series are availabledirect from the World DevelopmentReport
Office, room I7-101, extension31393. For a completelist of titles, consult pages 182-3of the
World DevelopmentReport. The World DevelopmentReport was prepared by a team led by
Andrew Steer; the backgroundpapers were edited by Will Wade-Gery.
Table of Contents
I. Introduction .
....................................................
I
1. Scarcity and Choice ...........................................
2. Choice and Value ............................................
3. Projects, Programs, Policies ......................................
4. Whose Values Count? ..........................................
5. Valuation and the DevelopingWorld ................................
1
1
2
3
5
II. Economic Valuation:What Is It? .......................................
6
III. Total EconomicValue .
7
.............................................
IV. Why Derive EconomicValues? .......................................
1. The Importanceof Environmentin NationalDevelopmentStrategies ....
A. Mali: Soil Erosion
B. Burkina Faso: Biomass
2. Modifyingthe National Accounts ..................................
3. Setting National and Sectoral Priorities ..............................
4. Project, Program and PolicyEvaluation .............................
5. Valuationand SustainableDevelopment..............................
12
........
14
17
19
24
V. Valuationand Discounting ..........................................
27
1. SustainabilityCriteria .
.........................................
2. Modifyingthe Discount Rate ....................................
VI. Valuation in Practice .
28
29
.............................................
1. Setting Priorities .
...........................................
2. IdentifyingWillingnessto Pay for ConservingEnvironmentalAssets ....
3. Compara.tiveEconomicsof EnvironmentalConservation ...................
12
32
........
32
34
46
VI. Valuation and Global EnvironmentalProblems .............................
47
VIII. Conclusions .
.................................................
48
Annex I EnvironmentalPolicy as a Constrainton EconomicGrowth .................
Bibliography . ....................................................
50
59
I. Introduction
l. Scarcity and Choice
If the Earth's resources were available in infinitequantities,and deployableat zero cost, there
would be no economicproblem. Everyone could have everything they wanted without compromising
later generations' wants and needs. It would not be necessaryto choose. Choice becomes a necessity
once it is recognizedthat resources are finite in terms of their absolutequantity, and involve costs of
extraction and use.
The oceans, for example, have a finite capacity to assimilate waste before the process of
eutrophicationsets in. Going beyondthat capacitymeansthat the further benefits of disposingof waste
to the ocean have to be weighed against the costs associated withleutrophication- e.g. the loss of fish
stocks. This kind of resource constraint is an instance of Malthusian scarcity - after the Reverend
Thomas Malthus. The limit can be exceeded, but only at a cost.
The other main form of scarcity is Ricardianscarcity - after David Ricardo. Absolutelimits are
not breached, but the cost of harvesting, extractingand using a resource rises. The global atmosphere
might be an instance of a scarce resource in the Ricardian sense. As its capacity to receive and
accommodategaseous wastes from fossil fuel combustion, land conversion and chlorofluorocarbons
(CFCs) is exceeded,so the surface temperatureof the Earth may warm up with (disputed)deleterious
effects to human wellbeing. The "price" of using the atmosphere as a waste sink is effectivelyrising
through time as greater and giteaterdemandsare put on it.
Given that resources are scarce in relationto humandemandsupon them, choicesor "trade-offs"
have to be made. In the market place the individualhas fairly clear informationon which to base any
choice; the product tends to be visible, its characteristicsare generallywell known, and it has a market
price. The individual's choice is then based on a weighingup of the quantity, quality and price on offer,
subject to some uncertainty arising from incompleteinformation. But when envir(qmentalassets and
services are involvedthere is often very limited informationaboutthe nature of the product in question,
and, invariably, there is no price posted in the market place. In the case of global warming, for
example, there is extensiveuncertaintyover its likely impacts;hence there is only limited information
about the environmentalbenefits of controllingglobal warming- the "product" or "good"in this case is
the damage avoided by undertakingcontrol measures. Moreover, the global atmosphereis not bought
or sold in the market place; it has no perceived "price." An additional complicationis that many
environmental goods are "public," rather than "private," goods. Public goods generally have the
characteristicsof joint consumptionand non-exclusion;when the good is consumedby one person this
does not, and cannot, diminish the amount consumedby another person. A's consumptionof clean air
does not diminish B's consumption, nor is there a way in which it could, since A cannot prevent
("exclude") B from consuming the resource. This "publicness" is one reason why markets for
environmentalgoods and services often do not develop naturally.
2. Choice and Value
Making choicesin the contextof environmentalquality, therefore, is more complexthan making
choices in the context of purely privategoods and services. What is beingcompared is one priced good
(the private good) and one unpriced one (the public good) - as when deciding to invest in air pollution
control rather than new output capacity. Alternatively,the comparisonmay be between two or more
unpriced public goods - air quality versus water quality, for example. In this context it is necessaryto
impute a value to the environmentalgood or service. The disciplineof environmentaleconomics has
developedtechniqueswhereby such values can be imputed. In the
1
I
1COWBOYANDSPACESHIP
ECONOMIES
EconM1t Krenneth
Bouldiaoeoined the phases *eowboyeconomy'and 'spaceship e¢onomy't characterize the 20th ceniuty
tansidon in human perception of the natural environmont. The cowboysymbolizesman's viewof the natural envi.onmtentas
a new domain, a roOier, to be conquerod and civilized, The cowboy economy is an opensystem which Is maintained by
resoure and anergy inputs whichthen becomew'aktes,or outputs of the system. This contasts starklywith tho economyas a
closed system,in which inputs ao, as :ar as poasible, transformed into outputs wbichare then returned to the system through
reycling and reuse, As mankindperoelvea the 'Iinits' of economic activity in tertmsits environmmental
effets, so econotuc
activityshoulthbe reorganized
to increase recyclingand reuse of materials,and to substitute unlimited energy flowsbased on
solai enegy for tho embodied solar energy of fossil fuels.
Boukling's visionhasdone much to influencethe nature of environmentalthinking.In its most provokingsenseit canbe taken
to implythat thoe throughput"of the economyIs not somethingto be ntaxinized,but something
to be mninimized.
Whatrustters
is not throughput (the economic analogue of which is GNP) but the stock of wealth, includingthe toek of knowledgeand
hum,a wellbeingand the stock of environmentalassets. The idea that it is this dtockthat needs to be maintained and expanded
underliesa good paittofmoder thinig about 'sustainablc
development". However,the ideaof conceatadng on stocksrather
than fows may be justified for a rather different reon. It is not necersay to accept thO view that stocks s
than .flows
determinewellbeing.Thw ock of wealh determines the canabilitvto generate real income. Ifreal incomeisawbatcreates most
human wellbeing a
and in the poorer woridit is difricultto see it otherwise- then incteasing the oapabilityto secute real income
involvesincreasingthe stockof wealth; This iSconsistentwiththe World Commissionon Environmentand Development's view
of sustainable development (s= the text).
K.Boulding,'Mre Economicsof the ComingSpacehiip Earth', in H.Jarrett (ad),EnviroUnmnts!
Quait in a 3rowtna Econo
Johw Hopkins UniversityPrss, Baltimore, 1966.
market place, individuals exercise choice by comparing their willingness-to-pay with the price of the
product; they purchase the good when their willingness-to-pay exceeds the price, and not otherwise.
Imputing values thus requires finding some measure of willingness-to-pay for environmental quality. This
is the essence of the process of economic valuation: it involves finding a willingness-to-pay measure in
circumstances where markets fail to reveal that information.
This kind of "market failure" affects the allocation of resources within an economy. If the
production of specific crops involves using agricultural technologies which give rise to soil erosion, then
the damage done by the soil erosion may well not be reflected in the choice of crop or technology. This
may be so even where the costs of damage are borne by the farmer growing the crops, since future
damage to crop productivity through soil erosion may be imperfectly reflected in present choices. Market
failure is even more pronounced when the costs are borne by agents other than the farmer - possible
examples include the siltation of rivers, ports and reservoirs. Failure to account for these external costs
gives rise to a misallocation of resources in the economy, in this case through the choice of the wrong
agricultural technology. Avoiding this misallocation of resources involves understanding the value of the
external costs, and then finding a mechanism for integrating those values back into the original selection
of a technology. Valuation may be imperfect but, invariably, some valuation is better than none.
3. Projects, Programs. Policies
The putpose of economic valuation is to reveal the true costs of using up scarce environmental
resources; choosing "instruments" is the mechanism whereby the resulting values are reflected in
decision-making. If the disposal of sewage to inland waters, for example, gives rise to a loss of
wellbeing, then the value of that loss should be reflected in the private costs of disposing of the sewage.
This might be achieved by taxing the sewage discharger, by setting some environmental standard for the
effluent or the receiving waters, or by requiri,ng the discharger to buy permits for the effluent.
2
In general, the choice of instrument- tax, standardor permit - will not be affected by the value
of the damage done. The virtues of economicinstruments- taxes, permits and other incentivesystems
based on altering market signals - remain even if valuationis not carried out. But valuationis essential
if the ca_leof the tax or strength of the regulation is to be determined. In practice, valuation is the
exception anu not the rule. Environ,nentalstandards are often set by criteria that incorporatesome
features of the valuationprocess; health criteria, for example,determinemany enu/ironmentalstandards
in the developedworld. Damage to human liealth should be an integralpart of any valuationprocess,
since peoplewill be willingto pay to avoid health risks from pollution and waste. But as there are often
many other forms of damage 't,esideshealth effects, using health criteria alone could impose its own
distortionson resourceallocation. In manyother cases, environmentalstandardsare set withoutany clear
or detailed rationale. Many regulations, for example, are responsesto environmentalscare stories and
misinformedperceptions of hazard and risk. In such circumstances,economicvaluationis helpful as a
check on the criteria implicitlybeing used.
Valuationis relevant at all levels of public choice:
* in proiect appraisal the environmentalimpacts of any investmentneed to be estimated and
comparedto the other costs and benefits;
* in program appraisal the value of environmentalimpacts similarlyneed to be integrated into
the evaluationprocess;
* in policy appraisalenviromnentalfactors needto be treatedon an equalfootingwith other costs
and benefits so that sectoralpriorities are not distorted.This is as importantin choosingbetween
marginal expenditures on, say, transport as against energy, as it is in choosing between
conservation and development projects. Similarly, as discussed above, the setting of
environmental standards should be informed by valuation analysis. In short, environmental
valuationshould be an integralpart of
- sectoral priorities;
- the balance betweenconservationand development;
- the choice of environmentalstandards.
4. Whose Values Count? Intergenerationaland IntragenerationalIncidenceof Costs and Benefits
Economic values reflect individuals' willingness-to-payfor benefits or their willingness-to-pay
to avoidcosts. Typically,the valuesthat count belongto those actuallyexercisingthe choice:the current
generation. But a particularfeature of environmentalcostsand benefitsis that they oftenaccrue to people
in generationsyet to come. How are their valuesto be counted? Countingonly the current generation's
preferencesbiases the choice againstfuturegenerationsunlessthere is some built-inmechanismto ensure
that current generationschooseon behalf of future generationsand take their interestsintoaccount. This
bias arises because future generationsare not present to have their votes counted;this is the problem of
intergenerationalincidence. Whether they are present or not, future gains and lossestend to be played
down in economicdecision-makingbecauseof the practice of discountingthe future.
An analogousform of bias arises evenwithin a generation:willingness-to-payis weightedby the
incomesof those expressing their willingnessto pay. The economicvotes of the poor countfor less in
the marketplace than the economicvotes of the rich. This is the problemof intragenerationalincidence.
Both inter- and intra-generationalbias are present in the willingness-to-paycriterionfor
3
JqX
ON FVTUR VALUES
COUNTING
On the approach of the World Commnisilon
oa Etwitonmontand Development( 04r Cpmllon utur0, sustainabledevelopmnent
implies soma general rule about not impairingthe capabilityof future gonerationsto achieve the same levelof wellbeingas the
current generation. But this is in faot a particulat ethicalrle for treating future generations.lTere are others. .noosingbetween
mlea Is for from straIghtforward. Yet which rule is chosen will have potentially major resource allocation implications.
Philosophers-and economistshave analyzedthe isues in detail. In broadest outline the alternativeviewsmight be summarized
as follows.
Teleology
Teleoiogy involvesweighing up goods and bad* and aims to maximizewhat is good. Goods and bads are broadlyconsred.
Equality might be good, so that maximizingequality would be a teleologicalapproach. Maximizingthe economist's notion of
'tiulity' (preference satisfacton) would be a particular form of teleology- utUiitargnism.The essence of toelologyis that it
permits a balancing of goods and bads or of one good against another - equality against utility, for axample.1he benefit-cost
approach is teleologicat,being a form of tfilitarianisnibased on preference satisfactionas a 'good thing',
On the teleological approach it would be consistent to adopt a polic' that made futumegenerations worseoff compared to
presont genorationaif the gains to the present are deemed to be greater than the costs to the future. TeleologyIs not therefore
consistent with the broad definition of sustainable developmententertained by the Brundtland Commission.
Theoe amesevetal theoies of justioe. Some have been applied to the issue of how to sccOunt forf the tegeroeational
distnrbutionof goods and badsa
- onteaealism.Contractualis atgue tht people will come together to deteramineMulesof socialbehavior becausa
C
it-is to their mutual advantage to do so. Laws and their implementationexist for this reason.This doctrine mu::tual,,
advaA&e will only arise in socialtcontextswhere the patties to the 'contract are of mughly equal power. Otherwise
the powerfulwould not secuxeany advantage from an agreement and they Would not allowone to eerge> But fure
: generations not yet born have no power at all, so the requirement of roughly equal power is not met. On the.
justce.Eventfthee" were,
conttatatln sppeoach,the, thete appears to be no basisfor a theoryof inteneional
it is inconsient .withtleololg justice wouldtake precedence over the good.
-IWO.
the rights appsrosh, justice Impliesa duty to behave in a curtain way,nd coners a nightonA
hothpo
-whoisathe subject of the duty.to expect that behavior.The. rights approach is also inconsistentwith tldeologyfbcause::
over what is'good. The rights are.like constrats whichmius ae mnetfirst bcfore any
whiatis,right takes preedin
other rule of behavior is applied. The notion of 'maintaining wealth 'see Box.'. 1) fits this approach siice it is
predicated on the 'view that fiiture geneations have a right to at least the same leVel of wellbeing as'cuurrent
generatlons. But there:arepvroblemsof definition since it is not clear,who holds tho righlts.Obeying tbe rule g:-.
would arguably zaltrthe p,attern of resour allocation which, in -turn,would alter the behavior of individualseven
ruIe
to the point 'of alterg their decisions about firntly size or timing.The future'population arsing'fom the "
to..
rule" situation.'Thte Is tinooie in particular
situation'mt differ fromthe populationarising from the "without
whom the rights belong. This is the w-called "nonidentityproblemt.
Resoures. On this approacheach generationshould havethe same levelof resources or productivecapacityaFeach
other. lheir wllbeing mfaythen differ,depending on what each generation makesof this stock of resources.But their
pa2abiliwto genefrae wellbeingwould be the same. Alternatively,since wellbeingdepends on consumptionan itot
productive capaeity, what matters is productive capacitylesssavings-
Strict Egalitarianims.Strict egalitariais insist on equality of somnecharacteristic for each generation. It might be
resoure- endowments(as with resourcismn),or wellbeingitself. Or the rigidity May relite to the wellbeingof a target
groupf say iompoorest group in society.No change would be permitted if the wellbing of this poorest gtoup was
reduced, regardless of gains to other groups (John Rawls's "differenceprinciple"). Clearly, such approaches ame
inconsigsentwith the teleologicalview since none of them allowsgains'and losses to be weighed up indepetfently of
to whom they atome.
Philosophicaldiscussionnmyappear out of place in a discussionrelating to worlddevelopment.But it is fundamentalto the way
4
in which environMnma:isules are treated in economic appraisal. First, the conventionaleconomic appro3ch ia based on a
benefit-costframework.Second,envimutmentalproblems often involvelong-lastingor distant inpacts. Applyingthe benofit-cost
frameworkto environmentalIssuesthetefore poses a potential intergenerationalimpactprblem. Rosource allocation decisions
willdiffer, pediaps markedly,accordingto the rule adoptedfor the treatment of future generations.The benefit-cost approach
would permitgains and losses to be balanced between generations. Rules based on justice will produce different resource
allocatiosmsinco they invariablydo not permit the tradeoff betwoongenerations to take place.
The definitions used here havebecn borrowed from J.8Dome, Tbo _nterenoratlotnl Asnca of Cglimag'9innng, Department
of Economics,Universityof Bristol, UK, June 1991,m.
eliciting economicvalues. Both biases are strongly debated by economists;yet their significancemay
be overstated, for two reasons:
(a) Generationsoverlap. The current populationincludesthree generations:parents, children and
grandchildren. Parents care for their children and grandchildrenand make sacrifices for them.
Currentchildren care for their children and will care for their grandchildren. In formallanguage,
the rate at which current parents discount the future is likely to incorporatea "coefficientof
concern"for the future through the direct effects of childrens' wellbeingon parents' wellbeing.
But whetherthese concernsare consistentwith the kindsof discountrates used in practice (often
10 per cent in real terms, or more) is open to serious question;
(b) Redesigningprojectsand programsto allowfor distributionalfairnesswithin a generationmay
be an inefficientway of serving the goal of fairness. It is often preferable to secure the gain to
overall developmentby concentratingon efficiencygains and losses, and then correcting the
distributionalimpacts in someother way (e.g throughlump sumtransfers). Moreover,integrating
distributionalconcernsintoproject and programappraisalhas beentried (Squireand van der Tak,
1976),but is not widelypracticedbecauseof operationaland informationaldifficulties. Care has
to be taken not to use this argument to ignore distributionin the appraisal process altogether.
More seriously, the samerationalefor ignoringdistributionalconsiderationscannotbe advanced
so firmly in the context of jlicy choice.
There is no consensus on how to integrate inter- and intra-generationalconsiderations into
economicdecision-makingabout the environment. While economistswould typically favor the use of
positive rates for discountingthe future, some argue that there is no particular rationalefor discounting
future wellbeing. Most economistswouldprobably focus on efficiencygains and losses in project and
programappraisal, but others favor the explicitrecognitionof multiplesocial goals or 'multi-criteria' and
seek some form of calculus for trading-offbetweensuch goals when they conflict.
5. Valuationand the DevelopingWorld
Valuationis fi"damental to the notionof sustainabledevelopment,whichhas been looselydefined
by the World Comm.-iJonon Environmentand Developmentas developmentthat "meets the needs of
the present without compromisingthe ability of future generationsto meet their own needs." This is
because, developmentpaths which ignore the environmentalconsequencesof economicchangemaywell
be unsustainable. As environmentsdeteriorate,so humanhealth will sufferfrom environmentally-induced
diseases, and long-term labor productivitymay decline. Degraded environmentsalso impose costs in
terms of: foregone crop output due to soil erosion; additional energy imports, as biomass energy is
5
exhausted; diverted labor time to collect water and fuelwoodfrom more and more distant sources, and
so on. Moreover, when properlyvalued, investmentin natural resource augmentationis often found to
yield rates of economicreturn comparableto that earned on conventionalcapital investments.
Demonstratingthat "conservationpays" in terms of economicdevelopment, is a process only
recently b.3gun. But it is already possible to point to significantfindings. Far from environmentaland
resource conservationbeing inimical to sustained economicdevelopment, it is in a great many cases
integralto the developmentprocess.
11.Economic Valuation: What Is It 9
It is important to understand what is being done when economic valuation is carried out.
Economicvaluesare measuredby the summationof many individuals'willingness-to-payfor a particular
good. In turn, willingness-to-pay(WTP)reflects individuals'preferencesfor the good in question. Thus,
in an environmentalcontext, economicvaluationis about "measuringthe preferences" of people for an
environmentalgood or against an environmentalbad. Valuation is therefore of preferences held by
people. The valuationprocess is anthropomorphic.The resultingvaluationsare in moneyterms because
of the way in which preference revelation is sought - i.e. by asking what people are willing to pay, or
by inferringtheir WTP through other means. Moreover,the use of moneyas a measuringscale permits
comparison that is required of "environmentalvalues" and "developmentvalues." The latter are
expressed in money terms, either as a dollar amountor an economicrate of return. Using other units
to measure enviromnentalvalues would not permit the necessarycomparisonwith developmentvalues.
The language of economic valuation is often misleading; studies speak of "valuing the
environment"or "pricingthe environment." Similarly,becausechangesin the environmentaffect health,
it is necessaryto define valuationsof changes in health status, the ultimate change, of course, being the
cessation of life itself; hence, references to "the value of life." All these terminologiesgenerate an
unfortunateimage of economicvaluation.
But in practice, what is beingvalued is not "the environment"or "life", but people's preferences
for (and against) changesin the state of their environment,and their preferencesfc (and against)changes
in the level of risk to their lives. There is no dispute that people have preferences for and against
environmentalchange. Likewise, there is no dispute that people are willingto pay to prevent or secure
change: donationsto conservationsocieties alone demonstratethis. The problem arises when this WTP
is taken as the value of environmentalchange. Many people believe that environmental assets are
intrinsicallyvaluable:they are of value in themselves,not merelybecause individualhuman beings have
preferences for them. Yet, there is no reason to reject the idea of intrinsic values because the idea of
measuringpreferencesis adopted. What is being assessedare two different things:the value of people's
preferencesfor or againstenvironmentalchange(economicvalue), and the value that intrinsicallyresides
in environmentalassets (intrinsicvalue). Economicvaluationis essentiallyabat discoveringthe demand
curv for environmentalgoods and services.
Once it is acceptedthat both forms of value exist, the issuebecomesone of which values should
inform and guide the process of making public choices. The answer is that, since both values are
"legitimate', both are relevant to decision-making. Making decisionson the basis of economicvalues
alone neither describes real world decision-making,nor would it be appropriategiven that governments
and other agents involved in the developmentprocess have multiplegoals. One difference betweenthe
economicand intrinsic value approaches is that while economicvalues can, in principle, be measured,
intrinsic values cannot. If decision-makersdo not feel the need for quantifiedassessmentsof gains and
losses, then lack of quantificationmay not be an obstacle to decision-making. Otherwise, it will often
prove difficult to make choices between competing projects or alternative policies with differing
6
environmentalimpacts.
The practical problem with economicvaluationis one of deriving credibleestimatesof value in
contexts where there are either no apparentmarkets or very imperfect ones. If it is possible to derive
such values, then it may well be that some measures of individuals' preferences will, in any event,
capture at least part of what might be called intrinsic value. This will be the case, if those people
expressingvaluesfor the environmentalchange in questionthemselvespossess some conceptof intrinsi.
value; they may then be partly valuing "on behalf' of the environmentas an entity in itself. Although
these kinds of issues may seem remote from tMeconcerns of the deyelopmentprocess, they are not.
Many of the environmentalassets that people generally feel are very importantare in the developing
world; notable examples include tropical rain forests, ecologicallyprecious wetlands, and many of the
world's endangeredspecies. Manypeoplefeel these environmentalassetshave intrinsicvalue. nieymay
express that view by speakingof the immoralityof activitieswhich degrade these resources, and of the
"rights" to existenceof trees and animalspecies.
Yet, at a more practical level, the "developmentand environment" debate often centers on the
high relative value of development in a context of malnourishmentand underemployment. The
environment tends to be viewed as a luxury to be afforded later, not now while the struggle for
developmentis under way. In such contexts, it may prove counterproductiveto introduce notions of
rights and intrinsic values into policy dialogue;honouring such notions may be perceivedas a sacrifice
of developmentalbenefits. If, on the other hand, conservationand the sustainableuse of resources can
be shown to be of economicvalue, then the dialogue of developer and conservationistmay change environmentaland developmentbenefitsmay cometo be seen,hot as necessaryopposites,but as potential
complementsof each other.
For this to happen,ways must be found for the developingworldto captur conservationbenefits.
If environmentalistsin rich countries perceivevalue in conservinga rain forest in a poor country, this
is of little consequenceto the poor country unless there is a potential cash flow or technologytransfer
to be obtained. Economicvaluationis therefore a two-partprocess in which it is necessaryto:
and measure the economicvalue of environmentalassets;
* find ways to capture the value.
edemonstrate
III. Total EconomicVaie
The economicvalue of environmentalassets can be broken down into a set of componentparts.
Decision-makingaboat alternative land uses for a tropical forest, can provide a useful illustration.
Accordingto benivfit-costrules, decisionsto "develop"a tropicalforest can be justified by showingthat
the net benefits from developmentexceed the net benefits from "conservation." Development,in this
context, is taken to mean some use of the forest that would be inconsistentwith retentionof the forest
in - at the minimum - some approximationof its natural state. Conservation, here, can have two
dimensions:preservation,formallyequivalentto outrightnon-useof the resource;and conservationwhich
would involvelimited uses of the forest consistentwith its retention. These definitionsare necessarily
imprecise. Some people wouldargue, for example, that "ecotourism"is not consistentwith sustainable
conservation,others that it may be. Acceptingthe lack of preciselines of differentiation,the benefit-cost
rule argues for developmentonly if net developmentbenefits (benefitsminus costs) are greater than net
conservationbenefits. Put another way, developmentbenefits minus both developmentcosts and net
conservationbenefits, must be positive.
Typically, developmentbenefits and costs can be fairly readily calculatedbecauseof attendant
cash flows. Timber production, for example, tends to be for commercialmarkets and thus prices are
7
directly observable. Conservationbenefits, on the other hand, are a mix of associatedcash flows and
"non-market"benefits. This results in two biases. The first is that the componentswith associatedcash
flows are made to appear more "real" than those without such cash flows; decisionsare likely to be
biased in favor of the developmentoption becauseconservationbenefits are not readily calculable. The
second bias follows from the first. Unless incentivescan internalizenon-marketbenefits intothe land use
choice mechanism, conservationbenefits will automaticallybe downgraded. Those who stand to gain
from, for example, timber extractionor agricultural clearancewill not be consumersof non-marketed
benefits, and the resultant "asymmetryof values" imparts a considerablebias in favor of the development
option.
Conservation benefits are measuredby the total economicvalue of the tropical forest. Total
EconomicValue (TEV) comprisesseveral types of value. These are explainedin greater detail in Box
3. Briefly, however, four main types of value should be identified:
Direct use values are conceptuallyfairly straightforward, but are not necessarily easily measured in
economicterms. Thus minor forest products' output (nuts, rattan, latex etc.) shouldbe measurablefrom
market and survey data, but the value of medicinalplants is more difficultto measure.
Indirect use values correspond to the ecologist's concept of "ecological functions." A tropical forest
might help protect watersheds, for example, and removingforest cover could therefore result in water
pollution and siltation. Similarly, tropical forests "store" carbon-dioxide. When they are burned for
clearance much of the stored CO2 is released into the atmosphere,thus contributingto greenhousegas
atmospheric warming. Tropical forests also store many species which in turn may have ecological
functions- one aspect of the value of biologicaldiversity.
Option values relate to the amountthat individualswould be willingto pay to conservea tropical forest
for future use. That is, no use is made of it now but use may be made of it in the future. Option value
is thus like an insurance premium to ensure the supply of somethingthe availabilityof which would
otherwisebe uncertain.While there can be no presumptionthat option value is positive it is likely to be
so in the context where the resource is in demand for its environmentalqualities and its supply is
threatenedby deforestation.
Existence value are those valuations of an environmentalasset that are unrelated to either current or
optionaluse. Its intuitivebasis is easy to understandbecausea great manypeoplereveal tneir willingness
to pay for the existenceof environmentalassets - through donationsto wildlife and other environmental
charities - without taking part in the direct use of wildlife through recreation. To some extent, this
willingnessto pay may represent "vicarious"consumption,i.e. consumptionof wildlife videos and TV
programs, but studies suggest this is only a weak explanationfor existencevalue. Empirical measures
of existencevalue, obtainedthrough questionnaireapproaches(the contingentvaluationmethod),suggest
it can be a substantialcomponentof TEV; this finding is even more pronouncedwherethe asset is unique
(see Box 4), suggestinghigh potentialexistencevalues for tropicalforests, and in particular, for luxuriant
moist forests.
8
TOTALECONOMICVAJ1JEINTHETROPICALFOREST CONTEXT
lotatEconomicValue =
_Use
Value
(2)
(3)
____on-UseValue
(4)
+Indirect
Value
+OptionValue
+Existence
Value
Non-TnmberProducts
NutrientCycling
FutureUses as
per (1) + (2)
Recreation
Watershed Protection
Medicine
Air Poltution
Forestsas objects of
Intrinsic
value,as a
gift to others,as
responsibility
(stewardship)
PlantGenetics
Microclimate
(1) DTrect
Sustainable
Timber
Reduction
Inctudes
cuttural and
heritagevatues
Education
Humuan
Habi tat
Total
economic
value
coimpries
useand existencevalues.Use valuecomprisesdirect uses(e.g. timber production), indirect uses
(e.g. the protective effects of forests on watersheds), and 'option' values - aldn to an insurancepayment to reflect the value of
a future use if the option to use "the resource is exercised.Existencevalues comprise willingness-to-payfor an environmental
asset's oonservationeven though no use value is present.
*onom!c; Valzs and Topical Forest Fun)tions: the Korup National Park
KOMpNtional Park lies in SouthwestProvince,Canrun. It containsAfrica'soldest rainforest,over 60 miltionyears old,WM
highspeciesendemism.There are over 1000speciesof plant, and 1300animal speciesincluding119 mammalsand 15primates.
Out of h toW listed species;60 occur nowhereelse and 170 are currently listed as endangered.Con'tinuedland use chaAges
are putting substantialpressure on the rainforest.The WorldwideFund for Naturc CWWF)inid
a program of conservation,
centered on a managementarea of 126,000hectares plus a ourroundingbuffer wund of 300,000hectares. A similarprogram
was initiated for Oban nationat Park just across the border in igeria (see nap), Econotnic valuation of the rainforest's benefits wascarried out in order to assist with the proceas of raising development aid
finds to consetve
Vhe faea.Benefitgof conscwvatio were then compared to the cost4 of th conaservation
-project plus'the
foregonetimber revenues.While the-frameworkfor analysiswas the total economicvalue concept, oxisence and option values
were not directlyestimated. The procedure involvedestima'tingdirect and indirect use values to the Cameroun and then seeing
whit the existenceand option valuowouldhave to be in order to justify the project. Sinceit was thought that the non-use values
would maiinlyreside with people outside the Cameroun, the focus of attention for non-use values was on seeing what
Internationaltransfers tight be needed. Briefly summarized,the results were as shown in the table below.
Prom tei standpoint of the Cameroun, the project appears not be worthwhilebecause there is a negative net present value of
sooi 18$2miliott CFA at 5%discount rate, although there is a modest positivenet present value if the discount rate is lowered
to 6%. But the analysiscovers only some of the components of total econotnicvalue. What of existence and option values?
These were not estimated directly.Istead, the isuuetherefore beconmesone of asking whether the rest of the world would be
willingto pay 1852millionCFA (in present value terms) to the Cameroun to reflectthese option and existencevalucs,One way
of testing this is to look at existingconservationtransfer through debt-for-nature swaps.Translated into a per hectare badis,
the tequired trensfeilfor the Cameow isjust over 1000ECUs per km2 . Debt-for-nature swapshave implied variousvaluations
ranging from as low as 15ECU per knl (Bolivia)to around 1600ECUs per km2 (Costa Rica), Giventhe high speciesmndemism
and diversityof Korup, valuesof t000 ECUs or rmorewould seemjustified.The conservationof Komipforest becomesjustifted
in economicterma provided this transfer actually occurs.
9
Box3 (cont.)
Senefits and Costs to the Caneoroun
(Present vatues, MilLion CFA, 1989 prices)
(Discount Rate a 8%)
Costs of conservation protect:
Resource cost8:
Foregone forest benefits
tintber:
forest products
- 4475
-
353
223
-5051
Benefits of Conservtion Project:
Direct Use Benefits
Use of forest products
Tourism
354
+ 680
+
.Indirect Use Benefits
Protection of Fisheries
ftood control
*Soil productivity
+ 1770
+ 265
+ 130
+ 3199
Net enef its to Cameroun
- 1852
EconomicRate of Return
6.2X
Ilet Benefits to-Camerounif
the discount rate is 6%
+ 319
The resourcecos are basedon budgetsandplans in the Korup Nat;onalPark Master Plow,net of compensation
payments
(Wichage internaltratnsfrs)andother costbregardedasbeingnot auributableto theconsetvationproject.The florgoneforest
benefits .cludestimberfrom potentialcomMfrciallo8ging(the #%# nmillion
CPA) andsone foregonetraditionalusesofthe
foreat, namnlhunfing,thatwouldbefojiidden witin adesignated
nationalpark,andwhichcannotbeoffsetby,divertingidtivity
elsewhere(the 223 million CFA). This proscrtiptionof traditionalusesaffeotssome800 villagerswithin the nationalpark
boundaries. In thelongrun, however,other residenta,mainlysome 12,000people on the peiphery willbe able to continue their
tradWional
useof the ftrest, whichtheywouldPot be ableto do if deforestationcontinued.Thus,while one grwp losesbenefts
anther, larger, group gaius (the 354 million CFA). The tourism figure is conjecturaland is baed on aneventual 1000 visitors
p.a by the year 2000indtheir expected expenditure
adjusted for the shadowwage rate. 'Te fisheries item is impotlant. Rainfall
ia the fotest feeds several rivers which feed into large mangrove areas tich ia fish.The mangroVes
ptosper on the basis of
frehwater inundation in high water periods and saltwater in low water periods. If the forest wasto disappear,peak flowsfiom
the forest would increase and thete would be added sediment and less salinity.Basically,the tangrove swampswould no longer
finction as the habitat for the rich fish species that nake up both the on and offasore fWuetiee.Since the link between tho
rainforest and the offisore fishery is less establishod
than the link to the inshore fishery,ondydamage to the onshore fishery
was estimated. WIhiswas valuedat the market value of fish and, as a check, at the income derived frort the fishery.
The flood alleviationbenefits were calculated by looking at the expectedvalue of the income losses that would accrue if there
wasa flood, The soil fekrilty benefits werebased on a broad brush assessmentthat, if the forest disappeared, cashcrop yields
would decline by 10%.
Tleimplicitminiimumrequirement for aninternationaltransfer (the so-called"rainforestsupplyprice') was estimatedbytaking
thepresent
value
ofnet costs (the 1852millionCFA) and dividingby tha present value ofthe hectarage that could be identified
as being protected by theconservationproject - some500,000 'hectare years'.T1is produces the value of 3600 CFA pet hectare
per year, or some 1060ecus/kmn.
10
Box 3 (cent.) Notable omissionsfrom the study arn twofold:no attempt was madeto assess the value of thd forest to local
people over and aboveits use value; and no attempt was made to estimate the net contribution to C02 emissions ftom
dafostatoio Both oiss;ionsare likelyto reduce the net present valte deficitshown in the table. But onlythe former will lower
the rainforest supplyprice because COZ benefitsare likely to attract a negligibleIf not zero willingness
to pay on the part of
Canmtrowzcize,
The C02 benefits will, however, make it more likely that the rest of the world will pay for rainfotest
conservation (i.e. it affects the rainforest demand price).
Shurces: J.4RitenbZeek,MTeRainibrest SupplyPric:- a Step Towards Estimatinga Coat Cve for Rainfores ConsetvatIon',
SuntoryToyota Internationl Centr for Economicsand Related Disciplines,Paper 29, LondonSchoolof Economnics,
September
190: L.Ruitenbeekl
EvaluatingEconomnic
Policiesfor Pronmoting
RainforestConservationin Dewtoinst Countries,Ph.D theila,
Lonon School of Economics, 1990; J.Ruitenbeek, Economic Analysis of Tropical Forcst CoQtsrvation,litiatives: xM&le
from West Afric,. World Wide Fund for Nature, Godalming,1990.
Total economicvalue can be expressed as:
TEV = Direct Use Value + Indirect Use Value + Option Value + ExistenceValue
While the componentsof TEV are additive, in practice care must be taken not to add competingvalues.
There are trade-offs between different types of use value, and between direct and indirect use values.
For example,the value of timber from clear felling cannotbe addedto the valueof minorforest products,
but timber from selectivecutting will generallybe additiveto forest products.
BOX 4 - VALUINGPREFERENCESFOR UNIQlE ASSETS:VISIIBILITYANDTHE GRANDCANYON
Calculatingexistence valuo is likelyto be important in contextswhere (a) manypeople are faniiar with toe attributes of the
sse to be valued,and @f)the aset i unique. Some evidenceto support this view can-befound in an analysisof valiationsftor
improved visibility in the Grand Canyon region. By using surveysto assess both users and non-users' willingnessto pay for
improvedvisibility,one studyfound that user valueswere some 7 US cents per monts, whilst existence valueswere $4.43 per
month(I98) prices),over 60 ties higher, Signtficantly,distance from thesitedid not affect presetvatio values,a -ict that the
researchers
put down to:the unique natureof the Grand Canyon, a 'wonder of the world'. Since distance was not rlevant to
thepreservationbids, it is legitinate to extrapolate the nean preservation bids to the nation as a whole.The ratio of 60+ Is
n-tichhigherthan othet studieshave found between total valuesand use values.But i arises partly fom the uniquenessof the
asset and pastly because two different questionsare beingasked.The user value question asked how muchusers wouldbe willing
to' ay th,ro entrace eharge increases. whereas the total value question relatedto monthlyelectricity bill increase.
Respondents were shown photographsofthe Grand Canyonregionwitheach photograph revealing
different degreesof visibility.
Pereeol9los of visibilitycould of coursediffer fom some scientificmcasure, so tests were carried out whichsuggesteda linea
relationshp between perceived visibility (on a scale of I to 10) and apparent target contrastmeasured by a niultiwave
telradiometer.Respondents
were asked one of two questions: how muchwould you be willing-to-payfor improved viibtlity,with
the 'vehicle'of paymentbeing hypothetical'additions to the existingentrance fee. Other respondentswere asked how much they
would be willingto pay to presetve visibilityif the vehiclewas increases in the monthlyelectricitybill. The first group should
thereforeptovide uset values. The second group would provide a 'total preservation bid', i.e. user plus existence values. If
existence values 'exissthenthe latter vahlions should be greater than the former.Thiswas the finding.By showinghowbids
were related to Income,age,and distance from the Grand Canyon. the WTP estimates could be extended to the nation as a
wholeand comparedto the costs of controing air pollution.The annualizedpreservation benefits for the nation as a whoe
cameto $7.4 bilfion (1980 dollars) and the costsof control cameto S2.8-3.1billion in annualized form. Hence the costsof
controlwere outweighed by the benefits of controlby a factor of about 3.
W.Schulzeetal.,'The Economic Benefitsof PreservingVisibility in the NationalParklands',Natural ReOUrCes
Joumal,Vol.23.
January13; andD.Bmokshire, W,Schulzeand M.Thayer, 'Some Unusual Aspect of Valuing a Unique Natural Resource",
Department of Economies,Universityof Wyoming,Februasy 1985,mimi.eo.
11
IV. Why Derive EconomicValues?
There are at least fivemajor reasonswhyeconomicvaluationof environmentalgoodsand services
is important.
1. The Importanceof Environmentin NationalDevelopmentStrategies
Environmentaldamage shows up in two ways as a eost to nations. First, it impacts on GNP;
GNP is less than it wouldbe if at least some environmentaldamage were avoided. Second, it generates
costs which are not currently recorded as part of GNP, but which would be if GNP accounts were
modifiedto reflect comprehensivemeasuresof aggregatewell-beingrather than economicactivity.
With regardto the former cost, some evidencenow showsthat environmentaldegradationresults
in appreciablelosses of GNP (see Box 5). The kinds of impactsthat give rise to such costs include:
* foregone crop output due to soil erosion and air pollution;
* foregoneforestry output due to air pollution damage, soil contaminationand soil erosion;
* impairmentof human health with consequentlost labor productivity
* diversion of resources from high productivityuses to uses such as maintenanceof buildings
damagedby pollution.
The empirical investigationof theselosses at a nationallevel is in its infancy. In the case of crop
losses, for example, what is required is some measure of change in the overall level of economic
surpluses (consumers'plus producers' surplus), rather than a more straightforwardestimateof crop loss
valued at market prices. Two examplesfollow.
A. Mali: Soil Erosion
Soil Erosion is endemic to many developingcountries. Soil erodes "naturally" but lack of investment
in conservation,poor extensionservices, inabilityto raise credit and insecureland tenure all contribute
to poor managementof soils. A standardapproach to estimatingthe costs of soil erosion is to estimate
soil loss through the Universal Soil Loss Equation (USLE). The USLE estimates soil loss by relating
it to rainfall erosivity, R; the "erodibility"of soils, K; the slope of land, SL; a "crop factor", C, which
measuresthe ratio of soil loss under a given crop to that from bare soil, and conservationpractice, P,
(so that "no conservation"is measured as unity). The USLE is then:
Soil Loss = R.K.SL.C.P
The next step is to link soil loss to crop productivity. In a study of soil loss effects in southern Mali,
researchersapplied the followingequationto estimatethe impact.
Yield = C"bx
where C is the yield on newly clearedand hence unerodedland, b is a coefficientvaryingwith crop and
slope and x is cumulativesoil loss. Finally, the resultingyield reductionsneed to be valued. A crude
approach is simply to multiplythe estimatedcrop loss by its market price if it is a cash crop. But the
impactof yield changeson farm incomeswill generally be more complexthan this. For example, yield
reductions would reduce the requirementfor weedingand harvesting.The Mali study
allowedfor these effectsby lookingat the total impacton farm budgets with and withouterosion(see Box
6).
12
VW,
VALItJNGOFTHE EFFECTSOF DOUBLINGCARBONDIOXIDE LEVELSON WORLD AGRICULTURE
Eonomic Modelsare-being developedwhichattempt to measure the likelyimpcts of global warmingon thewodd economy.
oni: studyshows th effeots of doublingC02 concentrationson worldagricultur, using a patial equilibtium worldfood model
shicb ~snsee ehas1gee
in consiommrse
and protucera'suplus.Provisionalresults are shown below.
ounttyf/Reeioi :XSA
(COfldt
-
CI.Europie
Japat .
Australita
Clsilne
USSR
oraz'i
btorld TotE
.nWelfare
Charge (Om1986)
+194
-167
-673
As a X of GDP
0.005
0.047
0.022
51
0.010
.*-1209
-47
0.062
0.038
0.141
0.292
0.017
+1509
0.010
+66
x2882
+658
Two cees am of iere
htt
Fist, tho impacts are genetalty very sanfl when exproesedas a pecentage of national income.
Seodnd,some atoas:ain from global warmingdue to the effects of the warmer climate on crop growth and suitabilityof land.
'The differenes aris bcause of diffemet climatic Irnpaetin different regions:global warmnogwill not regult in the same
emperlttc increases
throughout
Ibeworlnd pteeipitation
willalso change.The notable gainers are China and the USSRM
The ov'erallimpacton the world is very small.at around 0.01%of world G1DP.
Aayses i.sft,. kindassistin identifyingthe intrests taat each country would havein a global wanrinagreemrenmL ose who
g- ain -are o lik'ly t show muchinierest in signingan agreement,whereasthose who tlo' might. On the odher hand, the study
i.siw.:iidi8¢c
s
'
!inity' in the elaIotshlp' between warming and damage done. Sudden oatastrophesand other ecological
Adocksand siis
arAnot allowedfor. These might not be correlated with the losinS'nations shown above. i.e. some of the
expectel gins mtay be.offetby 'to 'aejohet Uevents,
while some of the losse might be even bi;gger.
.So*ur-. Resources and TechnlogyyDivision, Econoaic Research Service, US Department of Agriculture, Climate Change:
. c.no, ic Imlleatloos br World Ariculture,Washngon DC, November1990 (_rafl).
The procedure described above is an example of a "dose-response,"or "productionfunction"
approachto valuation. The "dose" is soil erosion, the "response"is crop loss. Anotherapproachwould
be to look at the costs of replacingthe nutrients that are lost with soil erosion. Nutrient losses can be
replaced with chemical fertilizers which have explicitmarket values.
B. BurkinaFaso: Biomass
Where it is not possible to engage in detailed assessmentof the costs of resource degradationit is still
useful to obtain "best guess" calculations. In BurkinaFaso estimateswere made of the total amount of
biomasslost each year in the form of fuelwoodand vegetation. The resultinglossesshow up as foregone
household energy (fuelwood) which can be valued at fuelwood market prices; foregone millet and
sorghum crops which can be valued at market prices; and reduced livestock yield due to fodder losses.
Fuelwoodlossesamountto some 47 CFAF billion, livestocka further 10 CFAF billion, and cereal losses
a further 15 CFAF billion. The grand total amountsto some 9% of BurkinaFaso's GNP.
It cannot be deduced from this that BurkinaFaso's GNP is 9% less than it otherwisewould be.
This is because resources wouldhave to be expendedin order to rehabilitateerodedareas and to prevent
further damage. But if the resourcesrequired are small, then the 9% figure is a ballpark estimateof the
direct loss to Burkina Faso.
Provided they are credible, nationalenvironmentaldamage cost estimatescan play a useful role
13
N.A
THIECOSIS OF SOILEROSIONIN MALI
The oUosof soil crosion in Mali ameshown using both the dose-responseapproach and the nutrient replacement approach.
Because sil loss in any one year has effeots in subsequent years the data show both an annual loss and a present value lose
expressed as a loss In a single year. Several conclusionsemerge:
(a) economiclosses from soilerosion are high enough to warrant conservationinvestmentsin some areas in the south
Ofthe countty;
(b) investingin additional agricultural output may be less profitable than a sinple financialappraisal would suggest.
It is necessaryto build in to the analysissome estinate of expected soil erosion, and this will loworrates of return;
(e) most importantly,it is necessaryto ask whv soil erosion occurs. Restrictions on access to informal redit and
insecure find tnure are imnportantfactors. High risks also contribute to high fanner discount rates: measures can
be taken to reduce risks.
The nutrient replacement approach. which valuesthe soil loss at the cost of replacingthe natriets, showshigher valuesthan
the crop.retponae estimate ($7.4 million p.a conpared to $4.6 millionp.a.).
Farm Inome LossesinNati Due to Soil Erosion. 1988
Based an USLEand FarmBdgets:
Vationwide Annualt hcome Losses
US$4.6 mitlion
Wscounted Present Valtue-of Income Loss
USS31.0 mitlion
Nettionwidi Arnwat-toss BOsid on
Nutrient 6Reptaceent
USS7.4million
=
0.2X
~ 1.5%
= 0.4%
GDP 0.6% Agrieulturat
CDP
GDP- 4.0% AgricuLturet-GDP
GOP
1.OX Agriculturat
e
-Site Costs of Soil Erosion in Mali, Envitonment Deattmen
Sotre:. IJishop ad J.Allen, lOn
November 1989,Wod dBa, Wahi
DC.
&DP
Workiog P"nr No.21
in assessingdevelopmentpriorities. Becauseenvironmentaldamage costs do not show up explicitly in
measuresof nationalproduct, planners have no obvious incentiveto treat environmentaldamage as a
priority in development plans. Increasingly, however, environmental concerns are entering into
developmentplans as the GNP costs of degradation are shown to be significantand sometimes very
substantial (see Box 7). Arguments of this kind are particularly appropriate at the level of
macroeconomicmanagement;it may be more importantthat the Ministryof Financeappreciatesthe costs
of environmentaldegradationthan that the Ministry of the Environmentdoes.
2. Modifyingthe NationalAccounts
Macroeconomicmanagementmakesextensiveuse of the nationaleconomicaccountswhichrecord
monetary flows and transactions within the economy. Their primary purpose is to record economic
activity, not to measureaggregatewellbeing in the nation. None the less, national accountsare widely
used to indicatewellbeing,and rates of changein nationalaggregatessuch as GNP are widelyconstrued
as measures of "development." Whether the accounts are designed to record economic activity or
measurewellbeing,or both, they are deficientin respectof their treatmentof the environment. Economic
activity involvesthe use of materialsand energy, and, once transformed
14
21!SUMMARYNATONALENVIRONMENTALDAMAGEEIMATES
Countrv
Eorm of Enviorwmentat Damase
Year
Burkina Faso
Crop, livestock and fueltood losses
due to land degradation
1988
8.8
Ethiopia
Effects of deforestation on fuetwood
sUppty and crop output
1983
6.0- 9.0
Madagascar
Land burning and erosiOn
1988
S.0-15.0
MalawTi
Soll erosion
1988
0.5- 3.1
Mati
On site solt erosiontosses
1988
0.4
Nigeria
deforestation
Soil degradation,
othererosion
waterpotLution,
1989
17.4
Irdonesia
Sofl erosfonand deforestation
1984
4.0
Hungary
damage(mainlyair pollution)
PolLution
lateSOs
5.0
Potand
damage(mainlyair poltution)
Pollution
1987
4.4- 7.7'
goermany*
PotLution damage
1990
1.7-4.2
Netheiftands
Somepollution
1986
0.s- 0.8
USA**'
Air pottution controlt191
control
Waterpollution
1985
0.8- 2.1
0.4
damage
*e-pili6cati°n
use diftrnt
poly, I.e.ovoided deamas rather than actual damage osts. Whilet1# eates
*0 benpfits of envirnettal
tachnlqes, ielh*. to difomnt yesas and vaty in the qualityof'the underlyingres"th they sugge some broad ierctatio
In e devloped world total gis environmunt damage maybe around 24% ofONP; in the East Eur n unties pes
does not nean it is.wordi avoidingall this
5.10%-of ONP, d ini the poot deveiojg nations poaps 10% and above.'rThi
of cononicdistotions
dame. Consrvatiion costsetiftes as w6ll.But since manyeonservtion measuresinvolvete wmoYal
(such iaspric control6,subuidiesf,undefined esource dghts the cods of consrvration will,in many wses, be ow.
Justificetonibt Rutal Affore.sttio. th C.ase
oursces:BurkbutPasi: WorldBankdata Ethiopa:K.Newcombe,*AnEcononic
-jnt,
1n fHauiveutIty
&onon bevewon
e
m imtad
and .Wsribid,Enbmen
Folflpthip-G.-clirnmi
ar - EWOmnvtal Ac*t-n Plan July 1988Malawh Word Dank
Mad
1f89;Ms'a soar Wod B
rees, Ralote,
Worin
data- Mali: J.Dishop nd I.Allen, 1he On-Site Cost of Soii Erosion ia MJlI. World Ba-En nronnnt Depare
a
i
Action Pl
rl
t
et of an
fige.wa. World EankgTowards the Deve
Paper No.21,Noven9berg98q;
..
Wodd Bank, eca.18,199
WorldResore Instuute,
A cOunta,
in the Nationallwgmiein
Natural esourcess
Asse HWsting
htdonesia:R.Rpettoi
Aec i jW;
and P.Armns.ie Cots of SoilEr1sionon Iv a .iuaI 1Rce
W.McOratIt
19W9,ansd
Washaington
ft pungryWodd-ank data; Polnd:
WorldBank,EnaviromentDepartmentWorkingPaper IS, Washington,August1989;
Wold
ln the DevePioting
Natura Resources
Mana2lna
and 1coanmicDevelonment:
D.W.PeatseandJ.Werford,E0nv1irnent
Advantasesof EnvisonmentaProtection. t
fo4coming 1992; OenmenyrFederalMinisg of the Envitonnwernt
Estimates'OfBeefitaof
J.Opsohoor,AReview.ofMonetary
Pbllution.Bonn.September1991;Ndethedands:
Elonntil
'OD, Paris, October1986;USA,P.Potey,, 'AlI'Pollutdon lcy,,iis
bnprovent in the Netherlands',
EafVitnmeital
P.Por¶ney(cd).Pub5cPolci forl4iYiton~aLEmli2g. Resourcesforthe Future,WashigtonDC, 1990j.ndA.FPeemuaa,
-
-
NWaterPoxlltion Policyt.ia Porny. On.ct.3
into products, those same resourcesbecome, sooneror later, waste products. Any measureof economic
activitywhich ignoresthese materialsand energyflows willfail to record importantactivitieswhich affect
the sustainabilityof economicactivity. In the same way, any measureof wellbeingwhich ignores these
sameflows will fail to measuresustainablewellbeing. For these reasons,there is a widespreadconsensus
15
that the national accountsneed to be modified - at least with respect to the way in which environmental
"stocks"and "flows" are recorded.
Materialand energyflowsbegin at the point of naturalresourceextraction,harvest, or use, They
end as waste products: emissionsto ambientenvironments,dischargesto water, and solid waste to land
or sea. Logically, then, GNP needs to be modifiedto account for:
* any depreciationof naturalcapitalstocks, in the sameway that net nationalincomeequalsgross
nationalincomels estimateddepreciationon man-madecapital. This is a measureof the 'draw
down" of natural capital;
* any damage losses accruing to human wellbeingfrom the extraction,processing and disposal
of materials and energy to receivingenvironments.
Both adjustmentsinvolveeconomicvaluation. The first involvesvaluationof the natural capital
stock, and the second,valuationof such things as health impairment,pollutiondamage to buildings,crops
and trees, aesthetic and recreational losswsand other forms of "psychological" damage. National
accountantsare not agreed on how best to make the appropriateadjustments. At the very least, gross
measuresof nationalincome should be adjustedso that:
Modified GNP = ConventionalGNP + Value of EnvironmentalServices - Value of Environmental
Damage.
In this way, additions to national parks, for example, or improvementsin pollution levels, would be
included as positive entries for modified GNP, and damage done would enter negatively. The way in
which damage should be measured is disputed. Some experts measure it in terms of expenditure
necessaryto offset the damage in - so-calleddefensiveexpenditure. Others propose using the kinds of
valuation techniques which attempt to elicit willingness-to-payto avoid damage or to improve
environmentalquality. Under certain circumstancesit happens that defensive expendituresar perfect
measures of WTP, but the general use of defensive expendituresis strongly disputed in the national
accountingliterature. Moreover,defensiveexpendituresincludeboth final and intermediateexpenditures,
breaking the equivalencebetween factor incomes and expendituresthat is fundamentalto conventional
nationalaccounting. Defensiveexpendituresby firms tend to be intermediateexpenditures;those by
households, final expenditures. It is significantthat the literature showing how expenditurescan be
perfect measuresof WTP relates only to a householdcontext.
Depreciationon stocks of iiatural capital must also be valued in order to measure sustainable
income- the incomea nation can receivewithoutrunningdown its capitalbase. In conventionalnational
accountingthis is partly accountedfor by estimatingnet nationalproduct (NNP), defined as:
NNP = GNP- Dk
where Dk is the depreciation on man-made capital (machines, roads, buildings etc.). The further
adjustmentthat is required is:
NNP = GNP - Dk - D.
where D. is the depreciationof environmentalassets.
Box 8 illustrates both types of adjustment: deducting environmental costs from GNP, and
estimating the depreciation on natural capital stocks. However the debate about modified national
accounts develops,there is a clear role for economicvaluation.
16
DQ.. MODtFIED
NATIONALACCOUNTS:
AGRICULTURE
ANDFORETRVIN THEUNITEDKINGDOM
rvlaiotal
butnoftfcial adjustaetahavebetetmadotoonesector
of theUK'snational
accounts,
agriculture
andfo(hly,
linewith-the
requirefient
thatpositiwv
environmental
effects(bonefits)
beaddedto GNPfor thissectorandOhat
negstive
ffectsarededucted,
thofiliowingadjustments
canbemade
Ea
UKs'gtgrCa., Mitlions (1988)
Pinat marketedoutput
.11,161
5,663
-Input
mGoss
5,498
product
Depreciation
1,470
Net Product
t nvironnentat services
biodiversity
amentty-sreen bett
-amenity;national parks
94
642
152
G
Oovt.
-expenditure to maintaintandscapeend comservedareas,
-d ean-up pol tut 7on-
58
1Householddefensiveexpenditures
n.a.
expenditures
-
Depreciation- {D,,>--carbn-fixig
mater
*
---
: -.-
sustainable Not Product
-
- -
:
: -
(+)146
:
-
11--
. - -
-- :-i
-
-
-
To
fmake the -adjuatents to netp.roduct, Wbinatesaw.ete
madeof the per hectare recreatioma
Ind'iAenity valuesobtained &-'
-samplealuatuiiion
sdies. These were edin
appliedto tie wholearea under consevaiadondesig-ations of o-neform.or .nother.
,Wsilingness-so-ayto avoid daiimge wast
estim directly:rather, the defWv expenditurt -approach weatis, iing
imiates 1weea!vilable or household
including government anti;pollution expenditures:..:No.est
-comaniesJ'oepvaditure and
expenditures.
Natualia
capivta
depreciationinvol,ved
estimates
for the netaceretionor releas osfabondiomdeanid-h vauaio
of waetrpollution.-Beiase -thisctoi
hasa net lixeton
tate of C02 thisitemappears
positive
ia the 4l. st,
ftousebold
-e.penditurescanbeignoreW
then
-theisetor'a accoutss how an upwards revaluationby 24% 'a signficantadjustnt'
oM0es:
N.Adger andMl.Witby,
RNatiooI
Accountingfor theExternalitiesof Aidculttiweand Fe eatr, cOtiti
- Unit,-Universityof Newcsle-up*nTyne, Working Paper 16. April 1991.
0de
ChUange
3. Setting National and Sectoral Priorities
Information on the economicvalue of policy changes can greatly assist governmentsin setting
policy and sectoral priorities. Estimatingdamage or benefit figuresalone will not be sufficientfor this
process; it is necessaryto compare the benefitsand costs of policy. The presence of net benefits is
sufficientto establish that existing or planned policy is potentiallyworthwhile,though not sufficientto
establish that resources devoted to that end would not be better used elsewhere (net benefits may be
greater still if the resources were put to alternativeuses). But if benefits are less than costs then it can
at least be inferred that resources should not be devoted on such a scale to that particular goal. This
general requirementto review sectoral priorities in terms of benefits and costs, has perhaps even greater
17
force in the developingworld where governmentincomeis at a premium. Indeed, this has always been
one of the motives underlyingthe developmentof cost and benefit valuationtechniquesfor developing
countries. Despite this, sectoral benefit-costtechniqueshave been used in fairly limited ways in the
developedworld, and hardly at all in the developingworld. Althoughthere are a great manybenefit-cost
studies of specific policies in both developedand developingcountries,there are only a limitednumber
that analyzeoverall sectoral expenditures. These few attempts,however, have been revealing.
UnitedStates air pollution regulationsprobablycost some$13-14 billion in the single year 1981.
Beyond that date, annual costs probably rose fairly fast as standards were better and more extensively
enforced, and regulations grew in number. Benefits in 1978 were probably around $37 billion, and a
little abovethis in 1981. Thus, for 1981, the overall air pollutioncontrol policy almostcertainlyyielded
net social benefits. With a benefit-cost ratio of nearly 3, the regulations would seem to have been
eminentlyworthwhile,and it is unlikelythat the resources involved would have yielded higher returns
elsewhere. That conclusionneeds to be qualifiedin several ways.
First, what was probablytrue of 1981may not be true of years after that, especiallyas regulatory
costs probablyrose faster than benefits. Second, the conclusionassumesthat all the improvementsin US
air quality in 1978 were due to prior legislation. In practice, as evidencefrom a number of countries
shows, underlying structural changes in the economy have also contributedto improved air quality:
switchesfrom polluting fuels to less pollutingones due to ordinary market forces; reductions in heavy
industry in favor of lighter, less polluting industry; changedconsumer habits, and so on. Third, the
picture changessomewhatif the regulatorypolicy is lookedat in parts. It seems likely, for example,that
1970sUS policy on air pollutionfrom stationarysourcesdid achievenet benefits, whilepolicy on mobile
sources (vehicles)probably generatednet costs. A similar result emerges for federal water pollution
policy. Costs of around $20-30billion for 1985compareto a best estimateof benefits of only some $14
billion.
Not too much can be derived from such comparisons,but the results for mobile air pollution
sources and for water pollution suggest the need to look carefully at the costs of policy. It has to be
borne in mind, for example,that the costs quotedare estimatesof the actualcosts involved,not the costs
that could have been involvedif the most efficientpolicies had been pursued. One of the attractionsof
market-basedapproaches(taxes, charges, tradeablequotas and permits) is that they have the potentialto
keep compliancecosts down. Savingsmay well be large, perhaps by a factor of two or more, compared
to the costs of traditional "command-and-control"costs (Portney, 1990).
In the real world of political decision-making,priorities are rarely set by reference to measures
of costs and benefits. In part this reflects a lack of understandingof the techniquesinvolved, but it also
reflects the fact that decision-makershave multiple criteria for deciding on policies (not all of them
rational from the social standpoint,of course: chance, favoritism, patronage, whim and corruptionare
just as important). Benefit and damage estimationare therefore likely to be V= of a wider package of
criteria includingdistributionalconcerns,humanhealth, and concernsover the quality of environmental
impact and the sustainabilityof resource use. Box 9 illustratesone possible ranking of environmental
issues in Nigeria according to various criteria.
18
IN NIGERIA
SErlVING 1MVRONMENTALPRIORITIES
tho
in otrdeto obtainguidancefor developmentaid to Nigeria,th WorldBankadopted
To nk envinntental ptioritiOes
following
oriteda.
* ihpact of environmental
degradationon GNP
issue
*.sizeofpopulation
affectedbythe environmentat
Iincidencebyincomegroupof thedegadation
assimilative
M a aure
of tesourco
integritybased on tho retationshipbetwoenwaste(W) andetwironmnenal
capacity(A)
*a inilar measureof rsourc Integritybasedon a comparisonof harvestand uge rates (H) comparedto
*rgoneration rates R) for renewableresources.
dataate clearlyimper&ct,theappoach
Itc retultsafeshownbelow(figuresin squarebrclketsare indicativeonly).While elio
soildogrdation,deforestationand waterpollutioaali rankhighon each of the
yieldssonmcohmre priorities.For exanmple,
distnbutionalincidenceandresourceintegrity.Suchrankingscanassistnationalptioritysetting.
gena) criteriaof GNPimpact,
ilslul
GP
So/yr
Incidence
Ponutttone rdk
(miltions)
Wf
(higher scores worae)
3-4.-
Soil degradation
3000+
s0
2-3
3
Waterpollution
10W+
40+
3-4
3-4
Oeforestation
750+
50
2-3
(2]
4
Coastat erosion
c. 150
<3
3
2-3
2
Gultyerosion
c. 100
10
2-3
2
2
Fish Loss
c. 50
5
3
n.a
i
Wildlife
C. 10
ci
2
n.a
4
-A-irpotlUtion
n.8
35
4
2.3
E13
-Water hyacinth
c.50
5
23
2-3
n: .
Source: WorldiBank, Towardsthe Develonmertof an EnvirornentalAction"Pianfor I4itia
1990.
Departmn*t Deeember
WesternAfrica
4. Project. Program and Policy Evaluation
The traditional role for environmental damage and benefit estimation is in project appraisal.
The main manualsthat have influencedtheoretical and practical work in economicproject assessment
have not, however, addressed environmental issues. Issues relating to the treatment of environmental
factors are not, for example, discussed at all in the main project appraisal technical manuals (Little
and Mirrlees, 1974; Squire and van der Tak, 1975; UNIDO, 1972). They receive very sketchy
treatment in Gittinger's agricultural appraisal manual (Gittinger [1982J). In contrast, assessing
envirommental impacts has been the subject of a wholly separate set of procadures known as
Environmental Impact Assessment (ETA). EIA is important in drawing decision-makers' attention
to the many forms of environmental impact. To some extent EIA also permits an assessment of the
importance of impacts. The main problem, however, is that EIA tends to be pursued either as an
adjunct to conventional economic appraisal, or as a precursor; in neither case is EIA integrated into
19
economicappraisal.
Extendingproject appraisl to account for environmentalimpacts,or to the assessmentof
pure conservationprojects,presentsno conceptualproblemfor benefit-costapproaches.The typical
benefit-costassessment(BCA) calculatesmeasuredbenefits and costs and convertsthem into an
economicrate of return (ERR). In this process,market prices are adjusted for distortions,using
shadowprices. Environmentalimpactsare simplyadditionalcostsor benefits;economicvaluationof
environmentalimpactsis essentiallya matter of shadowpricingalso. The traditionalBCArule for
the potential acceptanceof a project can thereforebe re-expressedas:
Et(B,-Ct-EJ).(I +r)" > 0
whereB, is non-environmentalbenefit at time t, C is non-environmentalcost, r is the discountrate,
and E is environmentalcost. Economicvaluationis concernedwith the monetarymeasurementof
E in this inequality.Environmentalissuesdo, however,raise a further problem,namelythe selection
of r, the discountrate, in the aboveinequality.
Projects
Box 10 showshow project economicrates of return car. be transformedwhen due account
istaken of the detailedenvironmentalconsequencesof plantingtrees. The analysismakesextensive
use of data on the variousphysicalinterlinkagesin environmentaland agriculturalsystems. Trees
have manyfunctions,from producingtimberfor poles,to fuelwoodsupply,leavesfor animalfodder,
crop wind protectionand, in some cases,the fixingof ambientnitrogen. The principlesof BCA
requirethat all impactsbe accountedfor.
Programs
Just as project appraisalrequirescomprehensiveenvironmentalvaluationso, logically,does
programappraisal.Programstend to be amalgamsof often interrelatedprojects,policymeasuresand
developmentplans. As withsingleprojects,the environmentalimplicationsof a programshouldbe
evaluated,and the overallreturn to the programshouldbe assessedwithreference to the inclusion
of environmentalenhancementcomponents- tree planting,soilconservation,water supplyetc. In
programanalysis,ERRs shouldstill be estimatedwhereverpossible,especiallywherethe intermixing
of policy changesand projects is liable to make ERRs higher than if projects alone were being
evaluated. Box 3 illustratessome of the kinds of benefitsfrom environmentalconservationin a
tropicalforest context.
Choiceof Technology
Within a program the issue of choice of technologyusuallyarises. A given development
objectivemay be met by selectingamonga range of technologicaloptions. The programobjective
of meetinga givenincrementin electricitydemand,for example,involvesselectionof incremental
electric power sourceswhichcontributeto the overall objectiveof meetingdemand at least cost.
Whereasleast cost power systemplanninghas typicallybeen couchedin terms of the private costs
of generationand distribution,environmentalconsiderationsrequirethat the criterionbe modified
to becomeleast socialcost,and therefore inclusiveof the environmentalimpactsof differentenergy
20
-RATESOF RETUN TO AFFORESTATIONIN NORTHERNNIGERIA
;CareM e,ix;ntiion and' teaswetlt
of the eviVonmentalbenefits of afforestationcan greatlyincrease the ERR to foestry
invesameni-.Oni study in northom Nigeia assessed the benefits of afforostationin norhemnNigeria as:
* batting the fotwte declineof .oilIrtility
-*rising currentlevelsof soilfertity;
(since trees typicallyreduce soil etosioo);
* produoing tree products -Iheiwood, pole, fruits;
* pteiuclng- oddewboth ftom ratied produedvity of soils and from forest fodder.
rates of return (ERs) that resulted for Shettetbeits (planting treS mainly for
The net prsent values (NPVs) and econoWic
and farm forestry (nenniJng tres and crops) woee:
.winddprawetion)
Shette-betts
ease
-c
*tow' field, Hfi h cost
Nigh yietd
.ao erosfon
.
-tore r:apid erosion .
rQIsto
$red
+` yeld
benfits
-*
JuIP
Ony(*
farm Forestr
170
14.9
129
19.1
110
13.1
70
14.5
221
16.2
100
13.5
75
16.6
109
13.6
.60
15.5
263
16.9
203
21.8
-95
4.7
-14
7.4
wa' andftuit for farm forestry)
andbenefits
inh Kano aea havetended to showJates of return of around 5%.whichhastobe
.:alXiculation
of i;~~ costs
other
does not pay. &K onmsthe
us=ualy hge tttfet 0%.In otherwo,afforeston
: pae it
on be secured.
.bbnbfts
oreiAadled1 dratif
icnreaies"lin-res
of eitun
.Tbe nalysis
os t cowtin-woodbeteft'" olyptudces negative net prmt value.and ootrespondigly low eConomic.
.a-es
of realtut. But if allowane
.is made'for th efctsof trees on crop yields;and for exqpectedrates of soll erosiona the
t
te
transfonred
Is
fol othfarm forestry and sheltobelts.
ahbsence
of aflotatlon,
in- a Cse Study in Africa. Johns Hopkins Universty Press, 1987 andi
Sources:Adown Te Eomics, of Aff We
iental
and oi ConservationPrqjectsb,lnG.Sehimind lWadEviron
Airduao',Qconomic
Asectsof Affo
Press, Balt(imor, 1980,
172184
M*at
Jobsm
h opkinsUniversty
technologies. In some developed economies this redefinition has resulted in the estimation of
"externality adders." These are the surcharges or credits to be attached to specific energy
technologies accordingto their relative environmental impacts. Expressed in this way,the credits and
debits have to be measured in money terms, so that the monetary value of environmental impacts is
used to calculateprice adjustments. Box 11 illustrates the kinds of calculationthat are involved. The
"adders" are then added to, or subtracted from, the private costs of generation. As an illustration,
nuclear power might be credited with avoiding carbon dioxide and acid rain emissions, but it would
be debited with a surcharge for any routine or accidental radiation risks. Several countries are
experimenting with estimation of externality adders. If applied in practice, the choice of energy
technologies in a least-cost planning system could change markedly.
21
.XI
EXTERNALITYADDERSFOR ELECTRICITYGENERATIONSYSTEMSIN THE USA
Suthaegea
aro ealculatW
accoing to the tometary value of impacts relating to sutphurdioxide, nitrogen dioxide, carbon
dioxideand paticulate emitsions. Nuclear power costs are based on thevalue of damage done by romtineemissions,accidents
and the coatsof decouinissioning.
Slectricity
TeAhnotogy
Surcharge
(USc/Kwhgen.)
ao"
Convbntional
Fluidised
Bed Combustion
Integrated
Gas Combined
Cycle
0.058
0.028
0.025
Ltowsutphur
:Highsulphur
0.027
0.067
N;tural
Gas
Steamplant
Combinedcycte
*00:;;~~M
0.010
0.010
t:::cear
Power'Routine
emissfons
Accidents
-0
..
Deconmisafoning
-:
0-
0.110
2.300
.0.500
.
Fof this p
a
tdy,
uilarthe rng
would be (from most to least dantaging nuclear power, oi, coal and gas.This
iacc
ItipuliW p
t
tedeveloped world. The-very1high
penlty io nuclear powerIa een tib e
: Aeialy .afinct
ofitht
e esdi*
mma
ed t teni
costs In
in
f
plantchoica,:ctore, the tretevai;e of this' penaltywould
de - oi nodilations to safety designswhichwould affect risk factors.
It i
bly
-S:trge R.Ouins et al,Envioi eta
an. New York.September 1990.
C
of
Etecgi-ty, PACE UniversityCenter for MEvironmental
LegalStudies,Whitiu
The Polluter Pays Principle
The externality addition approach extends beyond choice of technology. Existing sources of
supply and service can be priced to reflect environmental damage, as the general principles of optimal
resource allocation would require. Adding surcharges in this way is consistent with the Polluter Pays
Principle, to which OECD member countries subscribe.' The 'PPP' requires that those emitting
damaging wastes to the environment should bear the costs of avoiding that damage or of containing
the damage to within acceptable limits according to national environmental standards. As stated by
the OECD, the PPP does not require that environmental damage be valued in monetary terms,
although it could be. Whatever the cost of achievingthe national standard, that cost should, in the
tirst instance, be borne by the emitter of waste. That the emitter's increased costs may then be
I For a full statement of the PPP see, "The Polluter Pays Principle; Definition, Analysis,
Implementation"Paris: OECD, 1975.
22
passed on partly to the consumer is not inconsistent with the PPP. The costs borne by the emitter
and the consumer can be thought of as a form of valuation. Regulatory agencies set standards on
behalf of the voting population, and the cost of meeting those standards becomes, in effect, a
minimumestimate of what the regulator regards the damage to be. Nor is it essential for the general
PPP to be implemented via taxation or some other form of economic instrument (tradeable permit,
product charge, tax-subsidy etc.). The PPP is consistent with traditional standard setting via
"command and control" policies.
However, economic instruments do have many attractions relative to command and control
policies. If this approach is used, then it is essential that any charge or tax should be at least
proportional to the damage done. Valuation therefore becomes important in givingguidance to the
setting of such environmental prices. Box 12 shows how a tax on greenhouse gases might be
computed using the economic valuation of globai warmingdamage as a base. The analysissuggests
that, if global warming produces an impact on global national product of around 1% , then a very
modest "carbon tax" of about $7 per ton of C0 2-equivalent would secure an optimal reduction of
greenhouse gas emissions of about 10%. But if damage rises to 2% of GWP, then the tax is above
$60 per ton. Taxes computed so that they secure the level of pollution reduction that yields the
greatest net benefits are "optimalpollution taxes" and are special examples of the PPP.
IMQX1 lDERIUVING
A CARBONTAXFROM GLOBALWARMINGDAMAGEESTIMATES
S-ver s4oe. have atteted to caloulatethe tnonetauyvalue of damage from globe*waaming.Estimates arc bighlyuacenain
but can be-expetd i- improveai the underiying'physicaldata and global circuation models improve.Nordhaus ostimates-that
damage- ight am-ont to some I pe cent-of groas word prduct (GWP) expresed in present val.uetems Comparing hi to
-the robabla costsof reducing grO004s gis emissions,he eslimatesthat th reductionin gaes tht Wouldbong the greatest
:netbenefit to the wrid would bc some10per ent off a baseline trend of pryected emissions.
- -greenbhoise-. total -ost of - total benefit
gas eimtiss-ion reduction
of reduction
-redut
-- MSb)Y
tSb)
-
:-1
---
.---
---
. ::- : 2. --- -- .3
-0
4
5
10-11
15 --25
-
-:
4.b0.04.-0.-56-
:0.12
1.20
.Z4 --1.80
0.40
- 230
2.90
:0.61-2.20 -5,90.
-2.9:-6.8030.70% -
-
6.40
8.80
14.70
net totat
benefits($b)
1-.08
1.56
1.90
2.-39
3.70
-:
3.50
2.00
-16.00
Ihe stimates-suggeistthat gree'Aous gases -.aggregated and measured in tes of COeuivalent - should-bereduccd in to calculate the
mi
agegait by litile over 10%.To find tho surchargcnewessayto achieve this optimal reduction-t it neasaay
daage d*otwby eaos
4tr6t
-of
jfrakalttT is is $7.30 per ton C0)2-equivaata X the datrage-cwg sb*n. Butit
would.sueto $6per ton if damages were twice the estimated level- correspondingto 2% of GWP..These istimates are en
to manyreservation. If it is conmpaativelyeasy to control emissions,then th Catsof contol miaybe less than owq, dictat.ng
a hihe optimal e*delof greenbouse gVsreduction. If tere are, as many scientistsbeleve, certai thresholds byond wich
damage would become-vy svere, tfihenthe benefit estimates would nsee also justifyng sticter conols. Cendainly,those
countrie -,
commtotd to grenbouse gas oonitms, over and abovo those for 0hlotofluotoeatboe ae talkingaou f
more e*tenswoelevestof control.
Source fordata: W.Nordhaus, "ASketch of the Eonomics of the Greenhoue Effect', Ameican Economic Review01o.51,
No.2,199, 1464250.
23
Policies
Policy changes can also be evaluated using the benefit-cost framework with special reference
to environmental implications. Box 13 showsthe computations used to determine whether or not the
Environmental Protection Agency (EPA) would recommend reducing lead in gasoline in the USA.
5. Valuation and Sustainable Development
The need for economic valuation of environmental impacts and assets arises quite
independently of the definition of sustainable development. Simplypursuing efficient policies and
investing in efficient projects and programs requires valuation to be pursued, in order to be credible.
At the most general level of intergenerational concern, valuation is still required. If transfers of
resources are to be made between generations - with the current generation sacrificingfor the future,
or future benefits being lost for the sake of present gain - then it is essential to now MIMIis being
sacrificed and how much it is that is being surrendered. It is not necessary, therefore, to invokethe
philosophy of sustainable development, however it is defined, to justify a focus on economic valuation
in a development context.
However, if one or more definitions of sustainable development are to be espoused, the role
of economic valuation needs to be investigated. An efficient use of resources need not be a
sustainable one. The optimal rate at which an exhaustibleresource should be depleted, for example,
still requires the rate of use to be positive; and in the absence of repeated discoveries of further
identical resources, the resource must be exhausted eventually. Every unit used today is at the cost
of a foregone unit tomorrow. Global warming is another example of an activity that impairs the
welfare of future generations. "Sustainability"therefore implies something about maintaining the
level of human wellbeing so that it might improve, but at least never declines (or not more than
temporarily, anyway). Interpreted this way, sustainable development becomes equivalent to some
requirement that wellbeing does not decline through time. The implication for valuation is now
somewhat different to what is impliedby considerationof efficiencyalone. It now becomes necessary
to measure human wellbeing in order to establish that it does not decline through time, and, since
environmental assets contribute to wellbeing, it is necessary to measure preferences for and against
environmental change. The problem from the point of viewof development planning and aid is that
a simple "trends continued" cannot be assumed. This is particularlytrue if the environmental changes
in question risk harming future wellbeing in any significantway. In terms of Box 14, a development
path such as A appears to be sustainable; B is non-sustainable (but could be "efficient");whilst C is
both unsustainable and non-survivable because average wellbeing levels fall below some minimum
level (e.g. a poverty line). But from the vantage point of 0 in the diagram, it may not be possible
to tell whick development path a country is on. Hence, defining sustainable development as sustained
wellbeing is of only limited help in real world development planning. The declining rate of growth
of wellbeing (path C) might provide an early indicator, but would not detect the unsustainabilityof
path B. Moreover, A and B look very similar to begin with; what matters is knowing whether the
conditions for sustainable development are fulfilled or not.
If the focus is on identifyingthe conditions for achievingsustainable development, then it may
be that wholly non-economic indicators will suffice. For example, computations of the carrying
capacity of natural environments could act as early warningsof non-survivability(path C). Carrying
capacity measures the number of people whose livelihoods can be sustained by a given stock of
resources if each of them consumes the minimum level of those resources necessary to survive. If
the numbers resulting are less than the actual population, then the situation appears to be nonsurvivable and therefore certainly non-sustainable. Carrying capacity indicators would need to be
24
COST ANALYSISINDECISION-MAKING,LEAD IN GASOLINE
THE USE OF BENEFIT C
iSC:
wRegulatory Impact Analysis (RIA) and
UnderExeoutiveOrdetr 1291 of 1951 US govemment asgencieswere required to use
t adopt egulatorypoceas6sethat would maximnizenet benefits to society'.The Order wasthe first to eabish the net benefit
objectivoas the.oriteironfor adoptng regulatoryprocesses,although its adoption has been circumscribedbyexlistnglawgltedng
. ,.,.'
-t* oather-objectives.,
Benefit cost afalysisplayed-a important role In the adoption of retgulaon con
-
coenztrtion
Envrnmntal
g lead m gasoline. Ambient lead
weoe thott to b lnked to serious health effects, includingretardation, kidney disease and even death. The
Proection Ageacy conducted a benefit-cost study with the reults own below,
'The regulation involvedreducing lead in'gasoline from 1.1 grams per gallon (jpg) to0.1 gpg.The costs of the rule ar shown
AS'total refiiag coasbt.Rlfinery osts increase becawe leadhis traditionallybeen used t6 boost octane levels in fael, and other
-manis woud have to be found to achieve tiis. ITe benefits included:
(e) iflDptOVnchildreti'ahealth
-(b) impreved blood pressure in adults
(c) reduced damges fom misfuelledvehicles,arising from hydrocatbon, ltOx and CO emissions
(d) impacts on maintenance and fioeleconomy.
EPA study found tht blood kad levelscloselytracked trnds in gasolinelend.Medical coatsfor the care
ChildrenesH .'The
of obldren would be redued by' roducinglead concentrations,and themrwould be lass need for compensatory eduction for
IQ-imaiired children.These 'savings afe shownas 'children's health effects' in the able.
Adult ~od
B lesauro. Blood lead levels ware thought to be associatedwith blood presure and hypertendon. Medica coats
would'be
savdIfthese illnessescould be' reduced. Moreover, some heart attacks nad okes would be avoided.A value of a
*stastifof
$S 4mllion
was used br the at. The tesultingvaluesshow up in the 'adult blood ptares' row of Table'X.
T1ey are seen to be high because of the involvementof'mortality-avoidancein this benfit.
,eC, p,oliqpWk.Reducing lead' in gasoline ao reduces other pollutants. Tis is becaus -makingunleaded ficl the 'noert'
reduces the risk of 'ml4iselling - l.e. uing leaded fuels in vehicics designed for unleaded fueis. The mechanismwhereby
sniselllng is rdced is throuaghthe hi8her cost of leaded fuels at the new low
b- kad concentration. This deers dtiver* fiom
purchsing the leaded fuel. As misfuellingis reduced, so emissions of HC, Nox and CO are rduced. Damage don by thes
weo
but estdmates
polltags was esWmtedby studis of ozonepollutioo damage (ozone arises from He and CO emisionlo),
as madeof the valueof tm equipment destroyed by mnisfuelling.
The figutes appean in the tow 'conventionalpollutants'
in the table are in fict averages of the two methods.
M-ia&weance
costs for yehles were expectedto fl due to the reduced corosive effects of lead and its saveVngeson eagines
and oxhaust systems.Fewer engine tonw-upsand oDchangeswould be needed,exhaust systemswouldlast longer. Fuel economy
was expeted to 'liS as the new technologies,to ralse octane levels to what they were previously, also 'increased the energy
Gontsat offitels., here would also be rieuced foulingofoxygensensors.Maintenancebenefits outweighedftel economybenefitS
by around 6 to I. Tne totals are shown in the table.
The net bnefits from reducing lead in gasolineare seen to be substantial,evenif the blood preswre benefits (whichdominate
the aggregate benefits) are excluded.Indeed. it can be seen that the regulation is worthwhileeven if all health beneMitsare
g4ode in the event.the blood prestue benefts were excluded from the final decisionbecau tIhetesearch establishingthis
Linkwasjudged too rec to permit adequate review.The lead regulation wasalso of interest because of the introduction of
a 'lead permits system' to reducethe finanwialburden on the refiningindustry. Eseritially,this alowed 'kad qotas' to be tmded
between refiners. Refies who found it easy to get belowthe lImit were allowedto sell theit 'surplus'lead rights to refiners'who
foundit expenve to get backto desirable octane levelswithout lead. The particular featur of the lead-in-gasolinebenefit-cost
study that miadeit a powerful aid to decision-makingwasthe clear-cut nature of the net benefits even when unertainties abou
benefits wore allowed for, But it waoalso executed carefullyand in comprehensivedetail,
Soce; US Eavironmental
ProtectiooAgency,EPA's Use of Benefit-CostAnalysis1981-1986,EPA-230-0-87-028,Washington
DC,'August, 1987:and US EPA 119851,Costs and benefits of Reducine Lead ig Gasolineg EinalRegulaton InnacT AnalysiX
EPA-230-05845006,Washington DC, Febuary.
25
POX3t4
=I=
;S'
DEVELOP14ENTPATHS'00;
.
..
.
-
.
..
A
'
'
O''
0
-
'
.
'';~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~.
WeUbefin'
Minimum Sustainable L
-
-
-
calculated on a regular basis for the measure to be useful in this context. Typically, carrying capacity
measures are produced on an adbo basis and for a single year only. None the less, they offer one
anticipatory measure of sustainability. Other physicalmeasures could include assessments of the rate
of resource use relative to the rate of resource regeneration, and the rate of waste emissions relative
to the assimilativecapacity of the environment. It may be, therefore, that some light will be shed on
sustainabilityindicators by non-economic approaches, especially if they can be developed to include
other measures of stress and shock to underlying natural resource systems.
The literature on environmental economics tends to suggest that the clues to sustainability
lie in the quantity and quality of a nation's capital stock. Part of the intuition here is that nations
are like corporations. No corporation would regard itself as sustainable if it used up its capital
resources to fund sales' and profits' expansion. As long as capital assets are at least intact, and
preferably growing, any profit or income earned can be regarded as "~sustainable".Analogously,
nations are no different. Sustainable growth and development cannot be achieved if capital assets
are declining. Indeed, some economic growth models suggest strongly that, if capital assets are kept
intact, one concept of intergenerational equity - that of equalizing real consumption per capita - can
be achieved providing population growth does not outstrip the rate of technological change.
If a condition for achievingsustainable development is that capital stocks be kept intact, then
the problem of howto tell whether a nation ison a sustainable development path is partially resolved.
It is not necessary to observe real levels of wellbeing as such, but instead to look at the underlying
condition and amount of the capital stock. Unfortunately, while this approach solves one problem,
it raises many others. First, it is necessary to know what counts as capital. Second, this must be
measurable, otherwise "constancy"cannot be tested (constancy, throughout, should be read as
"constant or increasing").
Mte national accounting issue arises again in this context of defining and measuring capital.
Capital assets in the national accounts are typically confined to "man-made" capital - machines, roads,
26
factories. Some accounitsinclude mineral wealth as part of capital. The depreciation on man-made
capital is then deducted from GNP to give NNP. A more comprehensive definition of capital and
income would include human capital (knowledge, skills etc.) and natural capital (environmental
assets). The primary condition for sustainable development would then be that this aggreg stock
of capital should not decline. Put another way,depreciation on this capital stock should not exceed
the rate of new investment in capital assets.
But how is the capital stock to be measured? For some economies, heavilydependent on one
or two natural resources, it maybe possible to use a physicalindicator of reserves or available stocks.
But in the vast majority of cases it will be necessary to find another measuring rod for capital.
Typically,that means monetary units; it becomes necessaryto value capital, includingenvironmental
capital. Valuation and sustainable development are - again - intricatelylinked. How much this link
matters depends in large part on how likely unsustainable development paths are, and, of course, on
the value judgement that sustainability "matters". Opinions differ. Past development suggests that
technological change and the expansionof human knowledgewillmake resource use more and more
efficient with consequent benefits to subsequent generations. Some technologies have, of course,
brought their own damage costs (chlorofluorocarbons, for example): technology is not a free good.
How far future development will be sustainable perhaps revolves around the issue of irreversibility.
The more irreversible the damage done by the current generation, the fewer degrees of freedom
future generations willhave to expand their own wellbeing. Sustainable development certainlylooks
as if it should be partially guided by the need to avoid significantirreversible damage.
If securing sustainable development has something to do with monitoring and measuring
aggregate capital stocks and not allowingthem to decline, then there need be no particular role for
environmental protection in sustainable development. Environmental assets coulddecline in quantity
as long as depreciation in these assets was offset by investment in other man-made assets or human
capital. But even if this view of sustainabilityis accepted, then valuation is stil central to the process.
For it is not then possible to know whether offsetting investmenthas taken place unless there is some
measure of the rate of depreciation on natural assets and their foregone economicrate of return. Still
others will want to make a special case for the environment. The acceptability of "running down"
environmental assets provided other assets are built up will depend on relative valuations and on
judgments about other measures of sustainability,as well as the moral view about destroying the
environment.
Discussing sustainable development in broad terms risks giving the impression that
philosophers and economists fiddle while the Rome of under-development burns. But there is
nothing in the idea of sustainable development that lessens the emphasis on development now, or
on targeting the most vulnerable. If it is used to justify large sacrifices of real income and wellbeing
now for very long term gains that are highly uncertain, this emphasis becomes lost. Eliciting
economic values can help guard against the latter risk by showing,as far as possible, where and when
environmental protection yields the highest returns.
V. Valuation ane Discounting
Many envirommental problems - nuclear waste storage, nuclear power station
decommissioning,the release of long-livedmicropollutants, ozone layer depletion, global warmingare likely to have their major impacts well into the future. Their costs are therefore likely to be
borne by people alive 50 years, and longer, from now. Conventional benefit-cost approaches would
regard $1 of future damage as being less important that $1 of damage now because of the
phenomenon of discounting. The underlying value judgments of benefit-cost analysis are that
27
"people'spreferences count" and that preferences are justifiablyweighted accordingto existingincome
distribution. If the sovereignty of preferences is to be applied consistently, then the bias of the
current generation's preferences towards present as opposed to future benefits, and against present
as opposed to future costs, needs to be reflected in decision-making. This is the essential rationale
for discounting. Typically,any benefit (or cost) accruing in T years time is recorded as having a
present value of:
PV(B) = BT/(I + r)T
where r is the rate at which future benefits are discounted.
The problem that arises with discounting is that it discriminates against future generations.
In one sense this discrimination is not a problem - the discount rate is meant to discriminate in this
way: this is its purpose. But this discrimination presupposes that meeting the current generation's
wants is more important that meeting future generations' wants. Discounting is consistent with
imposing a major cost on the future for the sake of a relatively small gain now. The usual
justification for this is that future generations willbe better off anyway- their incomes willbe higher
because of economic growth. They willtherefore attach less value to an extra $1 of income than the
current generation (the "diminishingmarginal utilityof income"argument) and willperhaps be better
placed to counteract any ill effects of the current generation's activities that spill over to them.
Yet a cost accruing in 100 years time and amounting to $100 billion would, at a 10 per cent
discount rate, have a present value of
$100billion / (1.1)1"
which comes to $7.25 million. That is, any benefit-cost study of a project that imposed this future
cost would record the damage done at only $7.25 million, even though the actual damage done is
nearly 14,000times greater than this. If intergenerational equity is to be a genuine concern, then
discount rates of the order of 10 per cent - which are typically applied to investments in the
developing world - would be inconsistent with that concern.
Intergenerational considerations would seem therefore to call for some fairly fundamental
revision in the way project and policy appraisal is carried out. Two broad categories of modification
have been suggested, although it is as well to note that all the arguments are the subject of extended
controversy. The first set of modifications requires what a two tier approach. Allocations of
resources over time are treated differently to allocations within a period of time. Some kind of
"sustainabilityrule" is applied to the inter-generational allocation, and fairly conventional rules, such
as maximizingnet present value of benefits, are applied within the time-frame. The second set of
modifications are made directly to the discount rate itself; the framework of maximizingnet present
values is left intact, but the actual rate of discountingis changed to reflect intergenerational concerns.
1. SustainabilityCriteria
Some authors argue that simply changing the discount rate - usually by lowering it - is a
mistaken procedure. Sustainability argues for a major redefinition of the underlying objective namely intergenerational fairnss - and it is therefore inadequate merely to modifya procedure based
on efficiencygains and losses; an issue of fairness cannot be handled by modifyingefficiencycriteria.
Furthermore, an appraisal procedure that evolved from concerns mainly with localized and certainly
marginal changes to the state of the economy, cannot be applied to issues that are global in a nonmarginal sense, where significantchanges in wellbeingare involved. A tool for fine-tuning decisions
28
should not be applied to contexts where fine tuning is not the issue. More fundamentally,transfers
between generations should not be treated in the same wayas decisionsabout how to use resources
available to the current generation. Equity issues within a generation can be treated by making
resource transfers between individuals. Equity issues between generations need to be treated the
same way: pursuing efficiencywithin a generation does not guarantee a fair distribution of resources
through time.
One way to avoid some of the concerns about discounting is to impose a sustainability
constraint. Essentially, this amounts to formulating some rule which would maximize gains to
wellbeing now, provided this does not reduce the wellbeing of future generations below that of the
current generation (a rule very much in line with the Brundtland Commission's definition of
sustainable development). This is a departure from benefit-cost analysis because it requires that
wellbeingbe constant or increasingover time. Benefit-costanalysiswould be consistent with reducing
current wellbeing if it yields a greater benefit for future generations, and vice versa. Rules of this
kind have been formulated in terms of maintaining overall stocks of capital of all kinds - man-made,
human and natural. The basic idea is not to ensure equal (or rising) wellbeing through time, but
equal or rising capabilities for generating wellbeingthrough time. The stock of capital is the means
of raising wellbeing, and hence it is this stock that has to be maintained or improved.
In practical terms, such rules would require monitoring and measurement of capital stocks,
and an investment policy that sought at all times to ensure that net investment offset depreciation
("compensating investments"). The main difficulties would lie in the issue of measuring capital;
physicalunits would not be adequate, due to the heterogeneity of capital (the "addingup" problem).
Hence a valuation procedure would be needed. Then either the total value of the capital stock
would be monitored and adjusted so that it is constant or rising, or perhaps the price of the capital
stock would be used as an indicator - resource prices, for example, would be monitored and demand
and supply adjusted so as to secure constant real prices through time.
As yet, little advance in this area has been made beyond attempts to recompute GNP to
reveal net investment levels that allow for depreciation on some natural capital assets. Such
procedures are promising, but to be all-embracingthey would have to be extended to all forms of
non-marketed, and especiallyenvironmental, capital. At the global level, substantial problems arise some forms of capital will depreciate because of pM action (the ozone layer, earth's surface
temperature). How, therefore, is the "stock"of such assets to be measured? Valuation can assistbut
the prospect is fairly daunting; it becomes necessary to know not just the "price"of global warming
(the marginal damage done), but also how that price willchange over time. The same holds true for
tropical forests, wetlands, and so on.
Economists, philosophers and ecologists are only just beginning to tackle the ways in which
sustainabilitymight be measured. Fairly clearly, many of the implicationsof sustainability- however
the latter is defined - will be the same. Non-marketed assets must not be treated as if they have a
zero price. Environmental impacts must be fullyaccounted for. The national income accounts must
be modified. But whether all this is enough to raise significantly the probability of securing
sustainable development is not clear.
2. Modifyingthe Discount Rate
Environmentalists have traditionally been more concerned to see actua discount rates
lowered. Four approaches to modifyingdiscount rates may be considered. These are:
* setting the discount rate equal to zero
* computing a consumer discount rate
29
* computing a producer discount rate
* computing some weighted average of consumer and producer rates.
Zero Discount Rates
The argument for zero discount rates is essentiallyas follows. The point in time at which an
individualexistsshould not determine that individual'swellbeing;there must be an "impartiality"about
time. Wellbeing at one point in time cannot count for more than wellbeing at another. This
argument has a long tradition in utilitarianism,being clearlystated by Sidgwick,for example. Another
defence of impartiality with respect to time is given by Rawls in terms of his "original position"
argument. An imaginarygroup of people coming together to determine an allocation of individuals
to social groups and particular time periods would not choose to favor one group or one time period
over another, since they would not know to which group or time period they themselves would be
allocated. Thus there must be no discrimination between time periods if there is to be a "just"
allocation.
There are two components of discounting. The first relates to the discounting of consumption
streams and is usually justified by assumptions about diminishing marginal utility of income. The
second relates to the discounting of utility itself. This latter is perhaps what is meant by true "time
preference", the former being due not to time but to differences in levelsof consumption. It can be
shown that if time preference is zero and interest rates are positive (for the first reason noted above),
then any individualwould rationally reduce current consumption levels to zero in order to make the
marginal utility of such consumption infinite. Everything would be transferred to the future.
Adopting a zero rate of discount for utility - which is what pure equality of treatment for generations
would imply - would imply a policy of total current sacrifice. It would appear that zero rates may
have implications contrary to the purpose advocated by their supporters.
Consumer Discount Rates
The standard formula for discounting future consumption is:
d-de- a + A.g
where dc is the consumer discount rate, a is the "rate of pure time preference" (i.e utility discounting),
it is the elasticity of the marginal utility of consumption function, and g is the growth rate of per
capita consumption. If the function linking utility to consumption is logarithmic, then y = 1. If,
further, pure time preference is rejected on ethical grounds, then a = 0 and we have
d =
g
The discount rate becomes equal to the (expected) rate of growth of per capita consumption. Taking
past growth rates as a guide to expected rates, Table 0.1 shows estimates of d; for selected countries.
30
Table 1 Estimates of Consumer Discount Rates (% p.a.)
Country
Growthof Real
PrivateConsumption
(1)
Growthof
Population
DiscountRate
(1) - (2)
(2)
3.3
2.8
5.0
1.0
0.2
1.0
+
+
2.4
1.7
0.8
2.8
2.6
1.7
- 0.4
Ghana
Chile
Thailand
5.8
2.5
USA
UK
Japan
Ethiopia
Notes:assumesa
OUP, Oxford.
0,
2.3
2.6
+ 4.0
-0.9
- 0.9
+ 3.3
= 1 ; growthratescomputed1965-1988
fromWorLdBank,WorLdDevetounent
Rewort1990,
One result of this approach is that discount rates for the poorest countries become negative.
Yet behavior towards natural resource endowments in those countries is clearlyinconsistent with this
outcome; resources are depleted as if personal discount rates were very high. Moreover, market
lending rates are positive and high. The application of the income utility approach in these contexts
may be questioned. It implies, for example, that as incomes double households enjoy only one-half
the utility from the extra units of income.
Table 1 suggests that rates for industrialized and industrializingcountries are in the range 24%. Estimates will, however, be conditioned by the past period used to make the calculation.
Moreover, whilethe value of unity for p is convenient, some empirical work suggestsvalues of around
1.5 as more accurate. The effect of p = 1.5 in Table I is to raise effective discount rates to 4% for
the UK and USA and above 6% for Thailand and Japan. The exclusion of a from the estimates has
also to be questioned. Little evidence exists about pure time preference rates in the industrialized
world: a rate of 1.3% for the UK has been suggested, for example. Added to the rates in Table 1
this would suggest a consumer discount rate in the UK inclusiveof pure time preference of about
4% for u = 1 and 5.3% for p = 1.5.
Producer Discount Rates
If capital markets were perfect, rates of return on capital would be equal to the rate d. above.
In practice, a number of distortions in the market place give rise to divergences between d0 and the
producer rate of discount dp. Corporation taxes, for example, mean that a company must earn r%
if it is to pay its shareholders s%, where:
r = s/(1-t)
and t is the corporation tax rate. Company taxation necessarily makes producer borrowing rates
higher than the rate at which consumers discount the future.
Many economists argue that r% is the "correct" rate of discount because it measures the
opportunity cost of using up $1 in public expenditure: it is the foregone rate of return on marginal
investment in the private sector. To find r, one might take the weighted rate of return on equity and
debt. The resulting long run, weighted, average cost of capital to the private sector in the
industrialized world would be perhaps 7% in real terms.
Clearly, if a discount rate of 7% is used, damages from distant environmental impacts such
as global warming would appear insignificantin any benefit-cost comparison.
31
Synthetic Discount Rates
Any public expenditure on environmental controls would not occur simplyat the expense of
private investment; it is more reasonable to suppose that it would be at the cost of some private
investment and some consumption. If so, a "synthetic"rate of the form:
s = wp.dp+ w,.d,
would be appropriate. If it could be assumed that the weights for marginal investments are the same
as those for existingexpenditures, then the shares of consumption and investment in national income
could be used. If a long term consumption growth rate of 1.5% is used, together with a = 0 and IA
= 1, and dp = 7%, then a typical synthetic rate for an industrialized country, with 85% investment
share in national income, would be around 2.3%. It is difficult to argue that it could be any lower
than this.
Conclusions on Discounting
There are two broad options for accommodatingthe distant nature of the effects of global
warming and other environmental costs. The first requires that some intergenerational criterion of
sustainabilitybe imposed, leavingthe conventional discount rate unmodified as a means of allocating
resources within a generation. The second involvesseeking some quantitative adjustment to the
conventional discount rate. The problem with the first approach is that, as yet, few specific rules for
practical operation have emerged. Indeed, it may be that there is no requirement for special rules:
each concerned individual simply argues for a "fairer"allocation of resources to the future. The
problem with the second approach is that it takes fairly heroic assumptions to make a guantitative
adjustment that "isother than arbitrary. In terms of real-world conclusions,the "discountingproblem"
is not resolved either way.If discount rates above 1-2% are used, an issue such as global warming is
very unlikely to be seen as significant. Future generations would simply have to bear the costs it
would impose. Rates of perhaps 2% M be justified if utility discounting is rejected as unethical
(which seems validgiven that the whole idea isto account for intergenerational equity), if opportunity
cost discounting is ignored, and if specific restrictions are placed on the nature of the income-utility
function. Use of the opportunity cost rate alone does not appear justified, so that the appropriate
range of estimates appears to be perhaps 2-5%.
VI. Valuation in Practice
1. Setting Priorities
The economic valuation cf environmental change and natural resources is a comparatively
new activity for the developing world. Much valuation relies for its credibility on the existence of
well-functioning property, goods and labor markets. In so far as these markets operate given the
extensive government intervention in the developing world, the scope for valuation is more limited
than in the developed world. This fact has not inhibited valuation studies in Eastern Europe where,
perhaps surprisingly,valuations of the economicdamage from pollution, especiallyair pollution, have
been carried out reasonably regularly. But the problems of credibilityare substantial;damage by acid
rain to buildings, for example, has been estimated to be as high as $1.8 billion in Poland, or around
2.7% of GNP. Such massivelosses,if true, wouldjustifysignificantexpenditures on pollution control,
regardless of any impact of air pollution on human health, crops and forests. But the methodologies
32
used to arrive at such figures are primitive. Moreover, the prices used to value increased repair and
rebuilding due to foreshortened building life, are administered prices. The theory of valuation,
however, requires the use of domestic market-clearingor border prices. As a result it is difficult to
assess the reliabilityof such estimates, making their policy relevance very doubtful.
Nor are valuation exercisesin the developed world sufficientlyadvanced to give many insights
into the setting of overall environmental priorities for the developing world. Few studies have
compared benefits and costs for a single environmental medium (air, water etc) and fewer still have
compared different media. As a result, it is difficult to say, for example, whether $1 in Europe is
better spent on controlling air or water pollution. Even if this information were available, its
implications for the developing world would not be readily transferable.
From the limited information available,the followingspeculativeconclusionsmay be derived.
First, it seems reasonable to focus environmental policy on two broad targets: increasing net gains
to GNP, and improvinghuman health. Methods of raisingGNP through environmental conservation
and improvement need to be developed. Wildlifeconservation maypay handsomely if associated with
tourist revenues. Conserving tropical forests may involve some "development"sacrifices, but could
be rewarded if international resource transfers were to compensate for losses incurred: investment
by the Global Environmental Facility would be an example. The focus on GNP ought to be
contingent upon avoiding significantirreversabilities. That is, a GNP gain should not be sought at
the cost of major environmental damage that is irreversible and unrecorded in conventional GNP.
Second, and focusingon GNP gains,investment in soil conservation and forms of afforestation
would appear to have potentially high rates of return. Broad-brush calculations on soil conservation
by the FAO suggest that unchecked erosion could cost some 19% or Asian, African and
Central/South American crop output between 1975 and 2000. Some individual country studies of
damage done produce very high estimates of damage. In Zimbabwe, for example, valuing nutrient
lossesfrom soil erosion in terms of the artificialfertilizers to replace them produced a staggering $1.5
billion estimate for 1985,one third of Zimbabwe's GNP. Clearly,the policy implicationto be derived
from this is not that GNP would rise by one-third in the absence of soil erosion. An anti-erosion
policy would clearly costs significantresources itself. But the magritudes are indicativeof the kinds
of gains to be had. Economic rates of return to soil conservation are also often high, although final
judgement requires a far more substantial body of literature relating to the developing world rather
than the well-buffered soils of some developed economies, and careful accounting for all costs and
benefits.
In cases of soil conservation or afforestation much of the return is likely to be in the form
of damage avoided rather than visible net gains in the form of increased production. This presents
a problem of perception for farmers and others: investment designed to maintain economic activity
will tend to appear relatively unattractive until the dramatic consequences of failing to prevent
damage actually arise.
To some extent, the expectation that the damage resulting from soil erosion and biomass loss
will be high may reflect the fact that, in a limited literature, these areas have actually been studied.
By comparison, the economic rate of return to improved water quality in the developing world is
much under-researched. The number of work-dayslost from water-borne diseases in Africa,Asia and
Latin America, for example, may have totalled some 250 billion in the late 1970s. At just 50 cents
per day this would amount to a staggering $125 billion lost output, around 10% of gross product for
the relevant regions. In the developing world, high rates of return to water quality investment would
almost certainly exceed rates of return to air pollution control. In the developed world, where
drinking water quality largely precludes the presence of waterborne diseases,the balance might switch
back towards air pollution control. In truth, however, valuation studies have not progressed far
enough to underscore these conclusions.
33
2. IdentifyingWIllingnessto Pay for ConservingEnvi onmentalAssets
The notion of economicvaluationrests on the concept of willingnessto pay. The range of
techniquesavailablefor elicitingwillingnessto pay is fairlywide(see the attached Ainex), although
their applicationin the developingworld is veryrecent.
(i) Yaluing ProtedAreas
Protectingwildernessareastends to be a low nationalpriorityin manydevelopingcountries.
This is especiallytrue wherethe demandfor land for agriculturalextensification
threatens protected
lands, and where domesticvalues for land are low relative to the "global"value afforded it by
residentsof other countries. Notableexamplesof the formerincludemanyof the nationalparks in
Africa and of the latter, tropicalforests,unique wetlands,coral reefs and mangroveswampswhich
tend to be rich in biologicaldiversity.
Somesense of economicvaluecan be obtainedbylookingat the impliedvaluationsin existing
internationalconservationschemes. This is particularlyrelevantto debt-for-natureswapswhere
secondarydebt is boughtby a conservationistconcernand then traded withthe host governmentfor
a domesticcurrencyliabilityand a conservationpackage. Box 15showsthe resultsof translatingthe
sumspaid in four debt-for-natureswapsinto per hectare values. The other projectsshowninvolve
joint ventures in conservationwithoutdebt-for-natureswaps.
!0L0
IMPlCiT WJL1:JNGNE&*PAY
TO iFR
-ro1e~t
-
:
1e
RAINMI}REST
ASSETSIN
Pretud
A
NPVActual Trenofero
JJ
: -e84i1
R,eaeNe lot lvfa :-:-0' .
:::0 '
-St;Pauit'sPark, -PhflU;ne
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279
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9
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PV Area
9t)¢6,
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oa Pm1k,Costa
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-15420-
Amazonla~-Pa'e1 Eu d3'
7N-NALTRANS
'.
10.00
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430.69.a
:
;-
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.:
t1173
50
~~~~~~~~~~~~~~~~~~~~~~~~~~~~
W. 2
U-
.
,w...Yj1s--X:
-bioljiculdiveriJ is se.n to h: vesi imallfIb ies irsitwo proJects,withth or
ying in:th range:400.t80Deqare::
Itout.ter.Th owv
X the: e tw proe
e
may havearsen beause dy We -te
8
.
swp
iifences mayalso affet the
ty' of-th assets: tu Monte vede
V
areafor eaple>i scoudforest. And-te :y- as
.ellectjudcenta by to s to howsuec'asf*ithe ventureis likelyt:beI
Source:
JARuitenbeek
EvaluatigEconomicPoliciesfor PromotineRiinforet
Thess, Uliverity ofhLndon 199
:
mation
n Develo
ontines. P,D
More explicitvaluationsof protectedareasare comparativelyfewin developingcountries.An
exercisein Khao Yainationalpark near Bangkokin Thailandsuggestedrecreationalbenefitsof some
10-25millionbaht per year,and possible"existence"
benefitsof morethan 120millionbaht/yr. These
might be comparedto the sum of managementcosts and foregonefarm income- about 30 million
34
baht. Provided existence values can be "captured",for example through raising entrance charges to
the park, the analysissuggests a high return to conservation. Similar analysisof a wildlife sanctuary
in Khao Sol Dao, Thailand, where tourism is not encouraged, produced a series of 'indeterminate"
values which, in prin"-iple,could be estimated with further data and resources.
(ii) Valuing the Ecological Functions of Wetlands
The world's wetlands are under threat from agricultural, residential and industrial
development, and from pollution. Wetlands comprise areas of marsh, fens, mangroves,and other wet
areas, usually, but not always, at the interface between aquatic and terrestrial environments. They
account for some 6% of global land area. Wetlands are especiallyfragile ecosysten-sbecause they
are "open" and fed by river systemswhich are themselves subject to pollution and man-made changes
in flow. Because their economic functions have been so poorly understood, they also tend to be
regarded as relatively unimportant. But there is now a wider appreciation that wetlands are
multifunctional and that many of their unpriced functions are economicallyimportant (Box 16).
Table 2 shows some estimates of the economic values of wetland,. In themselves, they are
of little interest, although they do show that wetlands have economic value and that that value is not
negligible. Of more relevance is the relationship between these economic values and the values of
alternative uses for wetlands. It is often assumed that water feeding a wetland is not serving a useful
function; yet, as Table 2 indicates,natural wetlandsserve a number of direct economicfunctions such
as supporting agriculture and fisheries. The draining of wetlands, therefore, although enabling both
the diversion of water resources to the irrigation of adjacent areas and the reclamation of wetland
soils, should be debited with the foregone benefits of the natural system. In the case of the HadejaJama'are floodplains of Northern Nigeria, for example, it has been possible to show that even a
partial valuation of natural functions reveals that it is better to employthe wetland as an agricultural,
fishery and fuelwood supply system than to dam its feeder rivers for other purposes. A useful way
of presenting such findings is in terms of the net economic value per cubic meter of water supplied
to the wetland system. In the Hadeja-Jama'are case the resulting comparison showed net benefits
of $45 per 1000 m3 of water flow for the natural system,but only 4 cnts per 1000 m3 for an existing
diversion of water through the building of a dam. A similar analysis of Ichkeul National park in
Tunisia, which is also threatened by dams, showed fishery and grazing benefits of $134 per 1000m3
of water compared to negativ returns for the diversionaryuse (see Thomas et al, 1990). It cannot
always be assumed that there is profit in nature, nor that, when there is, it wIll exceed man-made
alternatives, but the evidence is sufficient to show that the alternative mistake of assuming natural
systems to have low economic value, is a serious one.
35
.
U JITOGICALPNCTIONSO
-4~1 a
F
.WETLANDS
and" * 'fYitkCttoev4t
emp
tistow
inpo~l
Wetland Twea
otw'egew fourtho
W)ct0ly0
nd
oyf*ing
water fliThysiiprovemenz:
atwape and iechar 1bncon
Wioviioaof a 4eXynm
neiam
to thc .0IeaF
-Alleteet po.ibjy(> fflo w:t.
ot
toa
toiiB
Q
tidals*irgesand winds
Shoie$ine gmnobdn
-ue
prv4i1*
(oatatand :rtvede)
-
.
a;b.Z
-.
ai-
:
:
:;::
-- F
a.na t eeodw -:.t -:- - : --.
(carbohsinks,et6
Food We.9bX
support
C0P;f,
Mot!
.a~y~
'
-0' .,W
Oilier(n14es wlhil.
+ habitts.la
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im
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.
.
;' '
I...............
,.,,,
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yin degrae
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Swamp
''''"'..""
:
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(b)Inland
salkiemardi..~~~~~~~~~~~~~~~~~~~~~~~
(), e.ru,
-
t'
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' ;'sE''
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.(b) NWooe wm
"~) Wet., mea
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-Soue
vais
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*i
.0) Mang.roe wzp
Tmidales,iw,ater''Miarses'
.
likely t
,RX.Tut Mauket
- veb y s
oter
hab'ats'
.:
fio tmlw
"ad In_vifionFa-ibWu
riparian
high-mking
in th
Universityof ast Angla, Norwici,UX; 1990,mlmn.-:
36
Maemt
,
-
-
o*rdevwt.andk.
of Wland
,
cof
ow
-
-
Tablb 2
EconomicValues for Wetlands Functions
Area
Source of Value
Louisiana"
CommerciaLFishery
Fur Trapping
Recreation
Storm Protection
Valuation Per acre (1990 $ prices.
400
190
57
2,400
3,047
Total
Louisiana(2
Recreation
103
Charles River, Mass.'3
Recreation
Water supply
3,400
80,000
Total
83,400
Hadejia-Jama'are 41
Floodplain, Nigeria'
Mangrove:
Trinidad
Fiji
Puerto Rico
8% discount rates)
Agriculture
Fishing
Fuelwood
41
15
7
Total
63
Tt6
Mainly fisheries
15,000
11,000
13,000
of Wetland Ecosystems", Ecotogical Economics,
(1)R.Costanza, S.Farber and J.Maxwell, "Valuatlon and Management
Vol.1, No.4, December1989, 335-362;
(2) J.Bergstrom, J.Stoll,
J.Titre,
V.Wright, "Economic Value of Wetlands-Based Recreation", Ecological
Economics, Vol.2, No.2, June 1990, 129-148.
(3)F.Thibodeau and B.Ostro, "AnEconomicAnalysis of Wetland Protection", Journal of Environmental Management,
12 (1), January 1981;
(4) E.Barbier, W.Adams,K.Kimnage, Economic valuation of Wetland Benefits: the Hadeia-Jama'are Floodolain.
Nigeria, LondonEnvirorunental EconomicsCentre, Paper 91-02, London, 1991;
(5) Handbookfor MangroveArea Management,Section IV.
(iii) Valuing Preferences for Peace and Ouiet
Noise nuisance afflicts all societies both in the workplace and in the open, where the main
causes are traffic and, in the richer world, aircraft noise. Attempts to value people's preferences for
peace and quiet have centered on the use of the hedonic price approach (see Annex), in which the
determinants of house prices are analyzed. A residential property price will vary with the
characteristics of the property - its location, size, neighborhood, nearness to business districts and
shopping, and so on. In this way the house is seen more as a "bundle of attributes" than as bricks
and mortar. By statisticallyanalyzingthe prices of different properties according to their attributes,
it is possible to separate out the factors that influence prices, factors that will include the local noise
level.
Table 3 showsthe results of various studies of the relationshirubetween noise levels and house
prices. They are presented in terms of a price elasticity - i.e. for each unit change in the noise level,
measured in standard noise units, the percentage change in property price is shown. For aircraft
noise the estimates suggest that for every unit change in NEF (noise exposure forecast), property
prices might change by around 1%, and for every unit change in NNI (noise and number index),the
change is around 0.5%. For traffic noise, measured in Leq, a one unit change again produces
property price depreciation of 0.5-1.0%. Clearly, using property price changes to measure
preferences for reducing noise nuisance does not encompass all the benefits of noise reduction. High
and continuous levels of noise are probably associated with health impairment (through stress, for
37
t~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
example). It is unlikelythat individualswillbe sufficientlyaware of health risks to capture their value
in the form of house location choice. Never the less, the hedonic property price approach offers a
reasonable approach to the valuation of the dominant benefit of noise reduction - reduced irritation
and nuisance.
TablI 3 The Value of Reducina Noise Nuisance
Imoact of 1 Unit Chanaein
Studv;
NNI
NEF
AiroraftNoise:
USA
Los Angeles
Englewood
NewYork
Nimeapolis
San Francisco
Boston
Washington DC
Dallas
Rochester
Canada
Toronto
Ednonton
0.8
0.8
1.6-2.0
0.6
0.5
0.8
1.0
0.6-0.8
0.6-0.7
0.2-0.6
0.1-1.6*
UK
Heathrow
Manchester
0.2-0.3
0.0
Le9
Traffic Noise:
USA
N.Virginia
Tidewater
N.Springfield
Towson
Washington DC
Kingsgate
North King County
Spokane
Chicago
0.1
0.1
0.2-0.5
0.5
0.9
0.5
0.3
0.1
0.7
Canada
Toronto
1.0
Switzerland
BaseL
1.3
Norway
Oslo
0.8*
Average
0.5
Australia
Sydney
0.0-0.4
Switzerland
Basel
0.2
Netherlands
Amsterdam
0.3-0.5
Norway
Bode
Average:
1.0 (per Db)
0.6-1.3
0.2-0.5
Sources: OECD,Envirorvuental Polict Benefits: Monetary Valuation, OECD,Paris, 1989; J.Nelson, "Airports and
Property Values: a Survey of Recent Evidence", Journal of Transport Economicsand Policy, XIV, 1980, 37-52;
J.Nelson, "Highway Noise and Property Values: a Survey of Recent Evidence", Journal of Transport Economicsand
Policy, XVI, 1982, 117-130; S.Navrud, "Norway", Ch.5 of J.Ph Barde and D.U.Pearce, Valuing the Environent,
Earthscan, 1991.
(iv) VaYuingPreferences for Unique Habitat
The "existence"value component of total economic value can be important, particularly where the
object of valuation is unique (as with the Grand Canyon - see Box 4) or, if not unique, the subject
of extensive familiarityto people some distance from the asset. The Kakadu Conservation Zone in
northern Australia is a 50km square area surrounded by the 20,000square kilometer Kakadu National
Park. The Park is visited by over 200,000 people every year and has outstanding scenery, wildlife,
wetlands and Aboriginal archaeological sites. When mining operations threatened to disrupt the
Conservation Zone, Australia's Resource Assessment Commission determined to elicit economic
values for the Zone in order to compare them to the benefits of miningdevelopment. The approach
38
used was contingent valuation (see Annex), whereby questionnaire respondents reveal their
willingnessto pay to conserve the area. The resulting "market" is hypothetical and the consequent
problem with CVM is to test for "hypothetical bias" - i.e. the extent to which answers given to
hypothetical questions would be borne out if there were a "real"market in conservation. Part of this
bias-minimizationprocess involves asking "discrete choice" questions in which respondents answer
yes/no to specific questions about willingnessto pay, rather than answering questions about what their
willingnessto pay is.
The Kakadu CVM produced the followingresults:
Type of Mining
Impact
Valuation: $A p.yr for 10 years
Northern Territory sample
National sampie
Major
$A 124-143
$A 7-35
Minor
$A 53-80
$A 14-33
with the analystsshowinga preference for the lower end of the range, so that valuations are between
$A 50-120 per year for the national sample, according to whether the mining development would
have a minor or major impact, and between $7-14 for the Northern Territory sample. Extrapolated
to the whole Australian population, the total willingnessto pay to conserve the area against mining
ranges from $650 million to $1750 million, greatly in excess of the net benefits from mining (see
Imber et al, 1991).
CVM is controversial partly because of its use of hypothetical questions, but also because it
is the only valuation technique capable of capturing the option and existence value components of
total economic value. No attempt was made in the Kakadu study to separate out the component
parts of value, but it is clear that much of the stated willingnessto pay wasmade on behalf of people
who were very unlikely to visitthe area. How far the valuations recorded would be validated if there
were a real market in the conservation of the Kakadu Conservation zone is unknown. There are
some reasons for supposing that so-called "framingbias"arises in highlytargeted valuation studies of
this kind: individualsstate a willingnessto pay for a single purpose without reference to the many
alternative uses of that money they indicate a willingnessto pay. Some commentators feel that
framing bias is particularly relevant when it comes to valuing endangered species.
(v) Valuing Preferences for the Conservation of Endangered Species
Contingent valuationtechniques currently provide the only availabletechnique for elicitingpreference
valuations for environmental assets that have no related market. Endangered species provide one
such example. The problem with CVM is that because the market is created experimentally- through
the use of interviews and questionnaires - there is no obvious way to valida the estimated
willingness to pay (WTP) for conservation. A great deal of the CVM literature is therefore
concerned with procedures for validation (see Annex 2). Broadly speaking, validation tests include
(a) checking the CVM results against other valuationtechniques (usuallythe travel cost method - see
Annex 2), (b) checking fir biases in responses to the questionnaire, and (c) checking, where possible,
against actual market-revealed willingnessto pay.
A unique virtue o the CVM approach is that it can capture existence and option values; all
other valuation techniques focus on use values. Table 4 shows the results of CVM studies for
39
endangered or rare species, and for highly valued ecosystems. The various estimates have been
converted to per person WTP in 1990 prices. The data are interesting because of their broad
Table 4
Per Cafita
Preference
Valuations
Species
for Endangered Species and Prized Habitats
Valuation
Habitat
Valuation
59.0-107.0
Norway:
brown bear, wolf
and wolverine
15.0
conservation of rivers against
hydroelectricdevelopment
USA:
bald eagle
emerald shiner
grizzly bear
bighorn sheep
whooping crane
blue whaLe
bottlenosedolphin
california sea otter
Northern elephant seal
humpback whales'
12.4
4.5
18.5
8.6
1.2
9.3
7.0
8.1
Grand Canyon (visibility)
CoLorado wilderness
27.0
9.3-21.2
8.1
40-48 (49-64)
Australia:
Nadgee Nature Reserve, NSW
Kakadu ConservationZone, NT
3
nature reserves
UK:
2
28.1
40.0 (93.0)
40.0
Notes: (1) respondentsdivided into two groups one of which was given video information;this group indicated
higher valuations;(2) two scenariosof mining developmentdamage were given to respondents;the major damage
scenario produced higher valuations for the habitat then the minor damage scenario; (3) survey of informed
individualsonly.
Sources: Norway - L.Dahle et al., "AttitudesTowards and Willingnessto pay For Brown Bear, Wolverine and Wolf
in Norway", Departmentof Forest Economics,Agriculturaluniversityof Norway, Report 5/1987, (in Norwegian);
A.Hervik et al., "ImplicitCosts and Willingnessto pay for Developmentof Water Resources",in A.Carlsen (ed),
Proceedingsof UNESCO S mosium on DecisionMaking in Water ResourcesPlannina,May 1986, Oslo; USA: K.Boyle
and R.Bishop, "The Total value of Wildlife Resources:Conceptual and Empirical Issues", Paper presented to
Associationof Envirornmental
and ResourceEconomists,Boulder,May 1985;D.Brookshireet al., "EstimatingOption
Prices and ExistenceValues for Wildlife Resources",Land Economics,59, 1983; R.Stoll and L.Johnson,"Concepts
of Value, Non-marketValuation,and the Case of the WhoopingCrane",Departmentof AgriculturalEconomics,Texas
A&M University, 1984; R.Hageman, "Valuing Marine Mammal Populations:Benefit Valuations in a Multi-Species
Ecosystem", National Marine Fisheries Service, Southwest Fisheries Center, Report LJ-85-22, La Jolla,
California,1985; K.Sampleset al., "InformationDisclosureand EndangeredSpecies Valuation",Land Economics,
62, No.3, 1986; W.Schulzeet al., "Economicbenefits of PreservingVisibilityin the NationalParklands of the
Southwest",NaturalResourcesJournal,23 (1983);R.Walsh et al., "ValuingOption, Existenceand BequestDemands
for Wilderness",Land Economics,Vol.60, No.1, 1984; Australia- D.Imber et al., A ContinsentValuationSurvey
of the Kakadu ConservationZone, Resource AssessmentComfission, Research Paper No.3, Canberra, February 1991;
J.Bennett,"UsingDirect Questioningto Value ExistenceBenefitsof PreservedNatural Areas", Schoolof Business
Studies, Darling Downs Institute of Education, Toowoomba, 1982; United Kingdom - K.Willis and J.Benson,
"Valuationof Wildlife: A Case Study on the upper Teeside Site of Special ScientificInterest and Comparison
of Methods in Enviromental Economics", in R.K.Turner (ed), SustainableEnvironmentalManagement, Belhaven
Press, London, 1988.
consistency. Valuations of preferences for species conservation, for example,cluster around $9 if the
relatively high value for humpback whales is excluded, and $13 if included. The range is $1-18
excludinghumpback whales and $1-48 including humpback whales (see note to Table 4). For prized
habitat, the range is $9-107per person per year. While a great deal more work is needed in this area,
the results are suggestivein that (a) they do not represent large proportions of respondents' income,
and (b) habitat appears more highly valued than species which, given the role that habitat
conservation would play in species conservation, is a difference one would expect: a wider array of
benefits is secured through conservation of habitat than through targeting species.
Clearly,
framing bias presents some problem. The sum of the species valuations in the USA, for example, is
40
much higher than average personal contributions to conservation societies, although this may reflect
the "free rider" phenomenon (many who value the environment do not pay because they know others
will). The international comparison of per capita values is also problematic. There are no particular
reasons to suppose that "unit values" of this kind would be the same across countries or even across
different regions of the same country. But where there are reasons to suppose that environmental
awareness exists on approximatelythe same scale, which is testable by opinion polling, then, allowing
for variations in income, one might expect similarvaluations. As yet little work has been done to test
this "transferability"of values.
(vi) Willingnessto Pay for Rural Water Supplies
Valuation techniques have also been applied to the more immediate human environment notably water supply and sanitation. Traditionally,water supply investments have been evaluated by
rules of thumb related to an assumed willingness- to - pay for basic services. Since the service is
usuallysupplied to the poor, the assumptionhas been that only the most basic provision - public taps
and hand pumps - is warranted; no-one is willingto pay for better, more elaborate services. This
"basicneeds" philosophy would be satisfactory if resulting public supplies were reliable. Yet at any
given point in time, perhaps one in four public supply systems are not working, while use rates of
those that do work are low - only one-third of people connected to public supply systems in Cote
d'Ivoire and Kenya actually use them. Since the benefits of such systems,in terms of public health
and time-saving,are clearly substantial, it is worth estimating households' true willingnessto pay.
In the absence of real markets, the challenge is to find the underlyingdemand for the service.
In terms of time saving, one approach is to observe how people choose between alternative sources
of supply. In Ukundu, Kenya, villagers can choose between water supplied by vendors who visittheir
house, water sold at "kiosks"in the village, and water from the well (Mu, 1989). In terms of
collection time , and relative to use of the well, house delivery saves the most collection time and
collecting from kiosks the least amount of time. In terms of expenditure, household vending costs
the most, then kiosk water, with well water being the cheapest. By looking at actual choices, the
trade-off between money and time can be determined. Time-savingis one of the benefits of water
supply improvement; in this case, if water quality is invariant between sources, time-savings will
generally define total benefits. The Ukundu study found that users of vendors and kiosks were
revealing high WTP for time-savings,of the order of 8% of their incomes.
Another study in Brazil, using the contingent valuation approach (see Annex), asked those
surveyed: "If you are required to pay X, would you connect to the new supply or use an alternative
supply?" Three different areas were surveyed, some with improved services available, to which
households might or might not be connected, and some without. Some of these latter areas had
servicesplanned (with an announced tarift), others expected a service but did not know of what kind
or what the tariff would be. From the survey the probabilities of being connected were estimated
and found to behave as predicted. The higher the price and the greater the distance to the source,
the less likely a household was to be connected. WTP estimates were also obtained from the
questionnaires. The results provided not just an estimate of the average WTP, but also indicated how
households would respond to higher prices, an important consideration if revenue-raising is a concern.
Maximum WTP for a yard tap was around 2.5 times the prevailing tariff and some 2.3% of family
income. Some "strategic bias" - deliberate under-reporting of WTP - was probably present (see
Annex); true WTP was probably higher than this. Equity considerations could be taken care of by
providingrelatively high-priced servicesto the better-off, and by using revenues to cross-subsidizethe
poor's need for free public taps.
41
(vii) The Benefits of Improved Sanitation
As urban populations continue to grow rapidly,sanitation needs in developing countries will
become a greater and greater burden on public revenues. In 1950,less than 300 million people lived
in developing country urban areas. Today the figure is over 1,300 million. By 2000 it will be 1.9
billion; by then there willbe 200 cities with populations over 1 millionpeople, of which 150 willbe
in developing countries. The cost of the necessary infrastructure for this urban development is
enormous. As with water supplygenerally, sanitation systemstend to be primitivefor the poor, while
middle and upper income classes benefit from systems that are both subsidized and less primitive.
Willingness-to-payis generallyassumed rather than estimated; charges above 3 per cent of household
incomes are thought not to be affordable.
In Kumasi,Ghana, WTP wasestimated through a contingent valuation approach. The options
were water closets with a piped sewerage system and ventilated pit latrines ("KVIPs"). The latter
represent a far cheaper option for sanitation than connecting sewers and installing water closets.
Some households already had water connections and could therefore be asked their WTP for a water
closet and a KVIP. Households with water closets could be asked how much they would be WTP
for a connection to the sewer, and so on. KVIPs can operate without water connections. The results
showed that households without water closets were WTP roughly the same sum for a WC or a KVIP.
In terms of WTP for KVIPs, households with bucket latrines bid the lowest price; those using public
latrines bid significantlyhigher prices (around 30-35% more), reflecting the inconvenience and lack
of privacy of the public system. Overall mean bids of around $1.5 per month compare to average
existingexpenditures of about $0.5 per month. ComparingWTP with the costs of provision of KVIPs
and WCs, WTP was found to be -Is than costs of supply. Given that sanitation systems yield
extensive external benefits in the form of public health )although these benefits were not measured
in the study), a subsidy would presumably be justified. The study showed that the required subsidy
for a WC system for Kumasi would amount to some $60 million. The required overall subsidyfor
the KVIP system would amount to some $4 million (Whittington et al ,1991).
(viii) Valuing the Benefits of Fuelwood Planting
In the developing world, wood still accounts for the major part of energy consumption.
Planting trees for fuelwood is thus an inherently valuable activity,but how valuable exactly? Since
such a large quantity of fuelwood is collected, rather than purchased in the marketplace, there are
no market prices at which to value the commodity. Moreover, growing trees yield benefits besides
fuelwood; trees provide poles for building, leaves for fodder, protection for crops, and so on.
Economic valuation techniques are therefore essential if the benefits of investingin tree growing are
to be demonstrated.
Typical approaches to valuing fuelwood benefits involve estimating what other source of
energy would be used if increased fuelwood were to be unavailable. This might involve supplies of
kerosene, coal if available, and cow dung. For kerosene or coal, market prices are available. Cow
dung may also be marketed, but this willtypicallybe the case where fuelwood is also marketed (i.e.
in conditions of considerable scarcity),so that fuelwood market prices are then available. The value
of non-marketed cow dung can be estimated by looking at the responsivenessof crops to cow dung
as a fertilizer and soil conditioner. The market value of the crops then provides the relevant link to
market values. Care has to be taken that the predicted substitution is credible. In Korea some
fuelwood investments have been justified on the grounds that the alternative fuel would be coal. In
the event, the fuelwood did not displace coal; rather, coal displacedfuelwood in rural areas. As with
42
all project appraisal, predicting tastes and preferences can be hazardous.
Estimating fuelwood's value relative to cow dung involvesthe followingprocedure. First, find
the energy content of fuelwood and dung. Second, estimate the weightof fuelwood in a cubic meter.
Third, compute the "dung equivalent"of I cubic meter of fuelwood by multiplyingthe weight by the
ratio of the energy values of fuelwood and dung. Fourth, estimate the amount of manure that a
given amount of dung produces, so that the cubic meter of fuelwood can be expressed in "manure
equivalent". Fifth, estimate the crop yieldresponse to this amount of manure and the monetary value
of this yield increase. Sixth, normalize the value of the yield increase per cubic meter of fuelwood:
this is then the economic value, or shadow price, of the fuelwood.
The validityof the final result is cruciallydependent upon the crop yield response estimates.
As with so much economic valuation, it is not the economic stages in the process that give rise to the
problem, but the underlying "production function" - i.e. the links between the environmental and
economic variables. Approaches similarto the "dung-equivalent"method have been used in a number
of economic appraisals and in estimating soil erosion damage. Sometimes costs and benefits are
estimated in terms of chemical equivalents. For example, instead of the "manure"equivalent, it is
possible to estimate how much commercial fertilizer would be required to compensate for that
quantity of cow dung diverted from manure to fuel use because of fuelwood scarcity. This was the
approach used in a World Bank study of afforestation in Ethiopia (Newconibe, 1989). Such
approaches do not capture all the benefits of fuelwood since the chemical nutrient status of dung is
only part of its value as a manure. However, the procedure does reveal that environmental costs and
benefits invariablyhave an analogue somewhere in the private market system. The challenge for
valuation is to make that link and translate available market values back to the environmental asset.
Fuelwood investment yields other benefits. The proximity of the wood to the point of use
means that valuable labor time is saved. Past studies have typicallyvalued the saved time at the
ruling wage rate if there is no surplus labor, and at the minimum wage where there is. Strictly,
neither approach is correct in terms of the criterion of willingness-to-pay;what is required is some
valuation based on actual choices, as with the Ukundu study above.
Trees also provide leaf fodder for animals and this is often included in project evaluations.
Again, if fodder is not actually marketed, a "production function" link can be made to marketed
outputs by estimatingthe effects of increased fodder on livestock weight,and hence the market value
of livestock. Care has to be taken to incorporate full costs; if trees are grown especiallyfor fodder,
then the loss of output from the existinguse of the land has to be deducted. Grass yieldsforegone,
for example, would be deducted from tree fodder yields.
Trees may also be important as inhibitors of "desertification"(which should be understood as
general land degradation rather than as the more popular and unwarranted concept of "spreading
deserts"). All tree planting tends to reduce pressure on naturally forested land. One method of
valuing the resultant gains is to estimate the fuelwood yield from plantations (X) and compare it to
yields from natural forest areas (Y). Each hectare of plantation can then be said to "save"X/Y
hectares of natural forest land. The "avoideddamage" can then be accorded a monetary value; by
projecting the rate of soil erosion on cleared natural forest land, the latter's productivitydecline can
also be projected. (After some threshold year, all crop and livestockproduction would be lost.) By
calcuiating the present value of lost output, a surrogate value for the benefits of planting trees is
obtained.
The fuelwood valuation issue reveals several important points. First, valuation ji possible.
Second, the underlying ecological interlinkages are the vital element in the valuation process; the
highest rewards are likely to be obtained from expanding our knowledgeof these interdependencies.
Third, it is essential to look at all potential benefits. In the event some may turn out not to be
important, but the fodder and anti-desertificationexamplesshow that some of the "incidental"benefits
43
could be substantial.
(ix) Valuing the Benefits of Biological Diversity
Probably the greatest challenge for economic valuation is to derive values for people's
preferences regarding biological diversity. "Biodiversity"is frequently used as a shorthand for both
the guantity and range of species, and equally frequently as a catch-allphrase for wildlifeand habitat.
The African Elephant
Kenya is visited by about 250,000foreign adult tourists every year. Safaris are the main focus
of this tourism, accounting for an expenditure of some $200 millionp.a. in Kenya (and for perhaps
twice that for the visits overall, since much of the generated income accrues to the industry in the
tourists' countries of origin). Until a recent ban on the ivory trade, the Kenyan elephant was
disappearing very rapidly. From 65,000 elephants in 1981,numbers were probably down to 16,000
by the end of the decade. An analysis of expenditures by tourists (the travel cost apgroach - see
Annex) and a contingent valuation assessment together suggested that tourists would be willing to
pay an extra $25 million p.a to ensure they saw elephants during their stay. Points of comparison are
that (a) this represents at least a 10% increase in actual expenditures, and (b) it is substantiallyhigher
than even the peak value of (largely illegal) ivoryexports in 1979 at $3 million, and higher still than
the estimated 1988 value of only $17,000 (Brown and Hall, 1990). In policy terms it suggests that
countries with significantwildliferesources and a demand by tourists to see them, could extract some
of the "rent" tourists obtain.
Rirds
Few studies exist of the economic significance of birds. One Canadian study looked at the
direct benefits from recreational and other activities associated with birds (Jacquemot and Filion,
1987). Over 100,000people were surveyed in order to determine their actual participation in birdrelated activitiesand their willingnessto pay for participation. Expenditures by participants amounted
to $C 1.9billion (1986 C$) and incremental benefits (the excessof WTP over actual costs) wassome
$C 350 million. For all wildlife(birds and mammals)the total net benefit was $780 millionp.a. Birds
thus accounted for around 45% of all net benefits derived from wildlife-related activities.
Expenditure on bird-related activities, which results in direct income and employment to others,
accounted for some $2.4 billion of Canadian GDP, half of which was accounted for by nonconsumptive activities(i.e. birdwatching),and for $C 870millionof government revenues. Protection
of a single species often results in significantgains from recreational viewing. Canada's "capistrano"
(the Pembroke swallow)wasprotected in 1983. The mass flockingof these birds produces a spectacle
much appreciated byrecreationists. Estimated net benefits, based on the travel cost approach (Annex
2) were some $C 0.5 million p.a.(Clark, 1987).
Ecotourism
The travel cost method (see Annex) has been applied to the valuation that visitors place on
the Monteverde Cloud Forest BiologicalReserve in Costa Rica (Tobiasand Mendelsohn, 1991). The
reserve is ma.nly virgin rain forest with, despite difficultaccess, a growingtourist demand. Domestic
visitors were sampled to find their area of origin,and the distancesthey had travelled were calculated.
Distance was converted to currency using an average cost per kilometer of $US 0.15. A demand
44
function was then estimated l-k4ig visits to cost of travel, population density and a measure of
literacy in each of the areas of .igin. The expected links were: (a) the higher the cost, the lower
the visit rate; (b) the higher the pupulation density,the higher the visitrate (low density populations
would being more likely to have their own forest areas to visit); and (c) the higher the literacy rate
(and hence the higher permanent income), the higher will be the visitrate. This is indeed what was
found; estimated visits were found to correspond to actual visits. From the demand function it was
possible to estimate consumer surplus, the excess of willingness-to-payover the actual cost of travel.
Expressed as a present value, the sum of these valuations was $US 2.4-2.9 million for this one site,
or around $35 per visit. Value per year was some $100,000. Further, this figure exgludesforeign
visitors who outnumbered domestic visitors by 4:1 in 1988. Assuminga similar per capita valuation,
this imply a mean present value of $2.5-10 million, or some $1250 per hectare. New land can be
bought for $30-100 per hectare, suggesting that expanding the reserve to allow for more recreation
would be a worthwhile investment.
The Economic Value of Plant-Based Pharmaceuticals
No-one is sure just how many species there are. A probable number for higher'plant species,
which are widely used as bases for pharmaceutical drugs, is some 500,000,counting both known and
unknown species. Rates of extinction are positive but also unknown. Perhaps 10% or more of these
species will be extinct by the end of the century. Between 65% and 75% of all the higher plant
species are indigenous to tropical moist forests. Hence loss of rainforest means losing potential
sources of future pharmaceuticals; existingsources are likelyto be protected through replication and
synthesizingof materials.
What is the economic value of these plants? To date, valuation has been fairly speculative
but iliustrative of the orders of magnitude involved. There are several ways in which to approach
valuation:
- by looking at the actual market value of the plants when traded;
* by looking at the market value of the drugs for which they are the source material;
* by looking at the value of *he drugs in terms of their life-savingproperties, and using a
value of a "statisticallife".
Table 5 summarizes estimates. The method of valuation is important because it affects the
size of the estimate significantly. Valuation based on life-saving properties gives the highest
estimates, assuming the value of a statistical life to be $1 million - a figure representative of actual
values used in life-savinginvestments in a number of countries. Market values of plant-based drugs
give lower values, and actual traded prices for plant material give the lowest value of all. Of course
the price of drugs reflects many factors other than the cost of the plant source material. In that
respect, the drug price grosslyoverstates the value of the plant. Equally, market prices understate
true willingness to pay for drugs: there will be individuals who are willing to pay more than the
market price for a given drug. Indeed, since the evidence suggeststhat such drugs tend to be price
inelastic, consumer surplus could be substantial. While there is no empirical basis for supposingthat
consumer surplus exactlyoffsets the overstatement in the price estimate, the two factors do work in
opposite directions. The price of plant-based drugs is therefore a relevant indicator of the general
scale of the benefits of medicinal plants.
In the 1980sonly about 40 plant species accounted for all plant-based prescribed drugs sold
in the USA. Each species was therefore responsible on average for an expenditure of some $200
45
million. Clearly,some species were far more valuablethan others, but, taking the average,it is
possibleto get some idea of pharmaceuticalvalue lostthrough specieseradication. Extinctionrates
suggest that, by the end of the century, as many as 50,000additional species are likelyto be
unavailablefor medicalresearch. The probabilitythat any givenplant willproduce a marketable
prescription drug has been estimated at between 1O-3and 104. This would imply that, by 2000, 25
plant-baseddrugs will be lost from species reduction. The annual loss to the USA alone would
therefore be 25 x $200 million,or $5 billion,and to all OECD countriescombined,perhaps $15
billion. As a benchmark,it is worth noting that the GNP prou- ed in the whole of Brazilian
Amazoniais some $18 billionper annum.
The results are speculativeand a great deal more research is needed. But clearly the
potential valueof pharmaceuticalsin the developingworldis verylarge. Thus far, nothinghas been
saidaboutsubstitutes:if plant sourcematerialdidnot exist,then other substituteswouldbe available.
Yet if pharmaceuticalcompaniesregard plant source materialas so importantwhy have they not
purchasedlarge tracts of virginforest? Option value considerations,however,argue in favor of
conservingbiologicaldiversityon at least this ground.
Table
6 TheValueof Plant-Based
Druas
$ billion1985
USA
OECDCountries
MarketValueof TradeinMedicinal
Plants
0.55(1980)
Marketor FixedValueof Plant-Based
Drugson Prescription
-8.0(1981)
11.0(1985)
19.0(1981)
26.2(1985)
Plant-Based
Drugs
18.0(1985)
43.0(1985)
Valueof Plant-Based
DrugsBasedon AvoidedDeaths
-anti-cancer
only
-plusnon-cancer
also
30.0 (1985)
60.0 (1985)
3.91(1981)
Market
Valueof Prescrip.;on
andOver-the-Counter
90.0 (1985)
120.0(1985)
notes:Ratioof OECD to USA for prescribed
drugstakento be 2.38basedon marketsurveysin 1980.'Valueof
a statistical
life'takento be S1 million.
Source:adaptedwithmodifications
fromP.Principe,
'TheEconomicSignificance
of Plantsand theirConstituents
as Drugs',in H.Wagner,H.Hikinoand N.Farnsworth,
Economicand MedicinalPlant Research,Vol.3,London:
Academic Press, 1989, pp.1-17.
3. ComparativeEconomicsof EnvironmentalConservation
Demonstratingthe benefits of conservationis an essentialpart of the overall purpose of
economicvaluation. Biologicaldiversityis unlikelyto be successfullyconservedunless its economic
value can be shownto be greater than alternativeland uses. Someevidenceis availableto suggest
that conservation,in the sense of sustainableuse of natural resources,is in many circumstancesto
be preferredover conventionalland uses (see Box 18). This evidencenotwithstanding,the reasons
why evidentlysuperior market benefits for conservationuses are not realized in practice, remain
complex.
46
gi2
2^, Qp,
^,^MRU^T
USEAU§XRagus
Thatabltehowaestimatesof th tconozti vatueof alternativo
landuses for developing
countries.Althoughtheevidenceis limited,
it contradicts
theptwanWionthat "doveloputent'
I -alwaysbatterthan"consenrvton.If ntural tesourcessm nanaged
wiely and
pea Be anlowedti ¢extise fMd Cho4es,eo tvation ftquently pays in tarm of otveaUotaslt namnialanalysis,
gkgt
''YaUse
of Habitat
Zlnbabe4
-
altaysia
PerU:
- iue (oer h^
Alternative
Use
VOlVO
Wildtife
production
z$ 4.2
cattte ranchin
Forestproduction
$ 2455
Intensive
asriculture $ 217
Forest production
$ 6820
Ctear-feltlng
timber
2$ 3.6
$ .1000
Sou*rces
T.S= Onso,"The Economicsof KaturalHabitatUtitIsation:
a Suvey of-the Literature
and
issues", London Enviromentat EconomicsCentre, London, 1991,-inga.
-II.Valuation
and Global
Environmental
Problems
Valuing damage
from global warming extends economic
techniques
into controversial
and
uncertain
areas.
In the first place, the sheer scale of global environmental
issues is likely to make
the credibility of damage estimates suspect.
Second, some global problems
- such as global warming may produce
"non-marginal"
changes in wellbeing;
valuation
techniques,
in contrast,
have been
developed
for comparatively
small or "marginal"effects.
However, there have been several attempts
to value global warming damage; these were intended to assist in setting global warming "targets" for
reduced emissions of greenhouse
gases.
Global warming damage is likely to show up as foregone
GNP and as "non-GNP'
costs.
Existing studies have focused exclusively
on the USA only: extending
these to a wider domain
obviously requires some assumptions
about the transferability
of US results to other economies.
The
results of one study is shown in Table 6. Estimated
damage amounts to 1.1 % of GNP: expressed
as
a "price" of a tonne of CO 2 , damage amounts to some $9 per tonne.
The estimates
shown relate to the damage done by a doubling of the concentration
of CC?
in the atmosphere,
an outcome that, on current trends, might occur around 2030-2050.
The table also
shows guesstimates
for 2250; these are substantially
above those for 2050. This assumed doubling is
merely a benchmark;
if nothing is done by way of prevention,
warming will continue.
The 2250
estimates
in fact correspond
to a warming of 10°C.
The estimates
in Table 6 are part of ongoing work on the valuation of climate change effects.
They are therefore provisional.
But if the damage done from a doubling of CO 2 concentrations
amounts
to around 1% of gross world product, then it is not as dramatic as some forecasters
suggest; global
warming
then becomes
an appropriate
area for the application
of economic
valuation
techniques.
However,
the estimates make no allowance for dramatic change in the form of climatic catastrophes.
Finally, the estimates shown in table 6 are present values: they have already been discounted,
using a
discount rate of 1 %. As noted previously, justifying such low discount rates on conventional
efficiency
grounds is probably not possible.
Using 1% as a discount rate that reflects intergenerational
equity is
arbitrary,
but reflects the state of play. At rates of discount above 1 %, the 2250 damage estimate would
be considerably
reduced.
47
Table
SectoralAssessments
of Damge fromGlobalWarmins
(Presentvalue,in bltlionU; 1990 $ p.a.)
2050
2250
17.5
95.0
Forestloss
3.3
7.0
Sea LevelRise
7.0
35.0
Electricity
requirements
11.7
67.0
Non-electric
spaceheating
-1.3
-4.0
HNuman
life
5.8
33.0
Hurricanes
0.8
6.4
Watersupply
7.0
56.0
Urban infrastructure
0.1
0.6
Air pollution
3.5
19.8
Migration
0.5
2.8
Leisureactivities
1.7
4.0
Speciesloss
4.0
16.0
Totals
lb6
38.6
Agriculture
Source:W.Cline,Estimating
the Benefitsof Greenhouse
WarminaAbatement,
OECD,Paris,1991.
VII. Concluions
Economicvaluationis controversialin large part because its purpose has not been clearly
conveyedto non-economists.The purpose of valuationis to elicitmeasuresof human preferences
for, or against, environmentalchange. As a procedure, it consequentlyfaces two immediate
limitations:
First, economicvaluesare not the sameas "intrinsic"values- values"in'things rather than
values"of"things.Economicvaluationmakesno claimto measureintrinsicvalues,althoughthrough
the conceptof "existence"valueit maybe capableof capturinghumanperceptionsof intrinsicvalue.
Second, measuringpreferencesfocuseson efficiencygains and losses from environmental
change.It sayslittle aboutthe distributionof costsand benefitswithina time periodor betweentime
periods. Withina time period, the use of efficiencygains and lossesas a guideto policyor project
evaluationassumesthat the prevailingdistributionof incomeis sociallyacceptable,since it is that
distributionwhich"weights"the measuresof willingnessto pay. Betweentime periods,the use of a
further efficiencyconcept- the discountrate - biasesthe outcomesof evaluationin favor of present,
and againstfuture,generationswherecostsand benefitsinthe future are both distantand significant.
But economicvaluationis usefulin severalcontexts. Projectand programappraisalcannot
be comprehensiveor adequate withoutit. Nationalenvironmentalpolicyprioritieswill be better
informedif economicvalues are known with some degree of certainty. The entire objectiveof
sustainabledevelopmentalmostcertainlycannot be interpretedwithoutsome idea of the value 4
environmentalservicesand assets.
Empiricalworkon valuationremainslimited,even in the developedworld. It is fairlynew
48
in the developing world, although many project evaluations have used some form of indirect
valuation. Its importance for the development process is that revealed economic values for
environmental conservation and environmentallyimprovingprojects and policies have frequently been
found to be large. Valuation demonstrates that there is an economic case for protecting the
environment, in addition to any ethical case, and can assist the process of better decision-making.
In so doing it offers the potential of more cost-efficient public choices, thus allowinglimited public
income to be optimally spent.
49
Annex 1
ENVIRONMENTAL
POLICYAS A CONSTRAINTON ECONOMICGROWTH
The focus of this paper has been on the valuation of environmental impacts;one justification
for this is that environmental degradation frequently involveslosses in conventionallymeasured GNP.
But policy-makersoften have the opposite concern, namelythat a stronger environmental stance will
be at the expense of jobs, trade and inflation. Environmental policy is seen as a drag on economic
growth.
1. CurrentSpending on the Environment
Figure Al shows OECD data o.adeveloped economyspending on environmental protection.
Despite the very imperfect database, it suggests that OECD nations spend around 1-1.5% of their
GNP on environmental protection. Future costs are likelyto be higher as the pressure to strengthen
environmental policy grows and as international agreements expand (ozone layer protection, global
warming,global biodiversity,tropical forest protection, toxic waste trade etc.) To gain some idea of
future costs, it is worth noting that the Netherlands National Environmental Protection Plan, one of
the strictest in Europe, envisagesspending of up to 34% of GNP.
2. The MacroeconomicImpactof EnvironmentalProtection
A number of studies have been carried out on the costs of environmental protection in
macroeconomic terms.
United Kingdom
Barker and Lewney have simulated the macroeconomic impacts of three hypothetical
environmental policies:a carbon tax designed to achieve the UK's conditional target of reducing CO2
emissions to 1990 levels by 2005; a fourfold rise in industrial pollution abatement expenditures by
2000; and an intensified water clean-up policy'. Various scenarios are run through the Cambridge
Multisectoral Dynamic model.
Figure A2 shows the results of combining all three policies. The carbon tax has virtuallyno
negative macroeconomic effects because it is offset by the use of VAT reductions. This fiscal
neutrality assumption is important; the pervasiveness of carbon fuels means that any tax has the
potential to raise substantial government revenues. For a carbon tax regime to be fiscally neutral,
revenues would have to be partly or whollyreturned to the economy both to offset deadweight losses
from existing tax regimes and to compensate lower income groups who would be affected adversely
by energy taxes.
The overall result of this UK study is highlyreassuringfor the environmentalist. GDP in 2010
is reduced from base levels by less than 1%, which translates to a reduction in annual growth rates
of only 0.05%. GDP actually increases before 2010. Unemployment falls by 2005 due to rapid
I T.Barker and R.Lewney, "A Green Scenario for the UK Economy", in T.Barker (ed),
Green futures for Economic Growth: Britain in 2010, Cambridge Econometrics, Cambridge,
1991.
50
expansion of the pollution abatement industry; however, this result is critically dependent on
assumptions about full employment in the economy - a continuing debate among macroeconomists.
In the Cambridge model, full employment is not achieved before 2005.
A separate simulation of a carbon tax using the Cambridge model has been run by
2 . This supposes a hypothetical tax of some 30 pounds sterling per tonne of carbon,
Sondheimer
rising at the rate of inflation and offset by changes in direct and indirect taxes to secure approximate
fiscalneutrality. Like the Barker-Lewneystudy, Sondheimer finds very little impacton GDP - a 0.5%
reduction in baseline GDP - and a reduction in unemployment of some 70,000.
Ingham and Ulph have estimated the size of the carbon tax needed to secure 20% reductions
on 1990 CO2 emission levels by 2005 (stricter than the UK's stated target) and its macroeconomic
effects3 . While the future tax is large (120-280%on coal,in 2005, 60-130% on oil, and 16-71% on
gas), they note that:
the effects could be rather different from what is often supposed; in particular, any
loss of competitiveness will be short-lived in terms of lost output, with a longer term
boost to output due to enhanced productivity effects through scrapping of old
equipment.
As a result, manufacturing investment and employment increase rather dramatically. Assumingthe
economy grows at 2% p.a.,the carbon tax increases employment in 2005 by some 30% over base, and
by 21% for a lower growth rate of 1% p.a. Some runs of the model actually raise employment by
over 100% compared to the base case. It needs to be noted that this result, while similarto the other
studies, arises without tax revenues being recycled back to the economy in the form of other
compensatory tax changes.
While they vary in sophistication,these UK studies all suggest that environmental policy has
a strong potential for increasing employment,or at least making it no worse.
Norway
Norwayhas a strong tradition of using general equilibriummodelsto simulatepolicymeasures.
The Central Bureau of Statisticshas since 1986regularlysimulatedthe effects of environmental taxes.
Glomsrod and colleagues impose a hypothetical carbon tax designed to stabilize Norwegian
emissions at their 2000 level4 . The tax rises over time, and in 2010 is approximately 100%
higher than the price of fuel oil on a reference "businessas usual" scenario. GDP growth is reduced
from 2.7% p.a. to 2.3% p.a.; imports and exports show modest declines (down by 4-7% from what
they would otherwise have been), while investment falls slightly (by around 1%). The investment
CO2
2
J.Sondheimer, "Macroeconomic Effects of a Carbon Tax", in Barker op.cit.
I A.Ingham and A.Ulph, "Carbon Taxes and the UK Manufacturing Sector", Department
of Economics, University of Southampton, mimeo, 1990.
S.Glomsrod, H.Vennemo and T.Johnson, "Stabilization of Emissions of C02: A
Computable General Equilibrium Assessment", Central Bureau of Statistics, Discussion Paper
No.48, April 1990, Oslo.
4
51
result is in completecontrastto the Ingham-Ulphresult,and is causedbya changein the capitalmix
- from shorter-lifemachineryto longer-livedassets such as houses. Employmenteffects are not
computedin aggregate,but man-hoursin the pulp and paper sector and petroleumrefiningboth fall
significantlyby 12-15%;in housing,construction,andtextiles,they rise by similaramounts. Overall,
the effectson employmentappear negligible.
This study is additionallynotablefor its attempt to estimatethe benefitsof sucha policy. It
suggeststhat the cost of some 27 billionkrone (at 1986prices) is largelyrecoupedby some 19.1
billionkrone in health benefitsand reducedcongestion,noise,accidentsand road damage.
Netherlands
The Netherlandshas producedone of the mostdetailed environmentalpolicystatementsof
any country - the National EnvironmentalPolicy Plans. The policy involvesa doubling of
environmentalprotection expendituresas a proportionof GDP, substantialincreasesin energy
conservation,investmentin publictransport,constraintson the use of privatevehicles,wasterecycling
and reduced fertilizeruse. Figure A3 showsthe resultsof the NEPP in terms of macroeconomic
impacts. GNP risesby 95% comparedto 98% by 2010comparedto 1985(?), a slowdownof under
0.1% p.a., but may actually increase if other countries pursue similarpolicies. Employmentis
unaffected,and couldeven rise if other countriesrespondwith similarpolicies.
The European Community
OECD'sINTERLINKcountryforecastingmodelhas been usedto simulatethe effectsof the
EuropeanCommunity'sLarge CombustionPlants Directivewhichrequiressignificantreductionsin
6 . The investmentsin
sulphurand nitrogen oxidesfrom power stationsand large industrialboilers
pollutioncontrolequipmentand plant modificationnecessaryto achievethe targetshave the effect
of increasingGDP and employmentin the five years followingimplementationof the Directive.
Longer term adjustmentinvc!vessome slightreductionin GDP and employment. The resultsare
shownin FigureA4. Again,the overwhelmingimpressionis that restrictionson air pollutantshave
very little impacton inc)me and employment.The investmentin pollutionabatement equipment
tends to expandthe economy.As higherpollutioncontrolcostsworktheir waythroughthe economy,
so pricesdo riseto someextentand deflatethe economyslightly,an effect reinforcedbythe cessation
of the extra investmentonce abatementmeasuresare complete.
5 Netherlands Ministry of Housing, Physical Planning and the Environment, National
EnvironmentalPolicy Plan of the Netherlands,Amsterdam, 1989. This policy was updated by
"NEPP+" in 1990 which committed further funding for energy conservation and some other
measures.
G.Klaassen, P.Kee, A.Nentjes, W.Hafkamp, A.Olsthoorn, The MacroeconomicEffects
of the Large CombustionPlants Directive Proposal:EconomicAspectsof ControllingAcid Rain
in Europe, Institute for Environmental Studies, Free University of Amsterdam, Amsterdam,
1987.
6
52
The USA
US studiesof the effectsof environmentalregulationare more plentiful. Hahn and Hird
assembleestimatesof the costsof regulation,both economic(e.g. regulationof trade) and social(e.g.
regulationof environmentaldamage)'. Economicregulationstend to have very limitedeconomic
benefits. Hahn and Hird estimatethat such measurescost the US economysome $46 billioneach
year. Socialregulationcostsbetween$78billionand $107billion,but yieldsbenefitsof some$42-181
billion. Environmentalregulationdominatessocialregulation,accountingfor some 70%of the cost
and some 40-75%of benefits. Hahn and Hirdsuggestthat environmentalcontrolcostsare probably
slightlyin excessof benefits.
Reference to the benefits of environmentalpolicy serves as a caution to "straight"
macroeconomicimpact studies. For example,environmentalpolicy benefits health, and hence
(probably)contributesto productivity.These effectsneed to be seen as offsettingthe direct "GDP
costs"of environmentalregulation.
Probablythe most detailed studyof environmentalregulationcosts in the USA is that by
8 . Througha
Jorgensen and Wilcoxen,whichsignificantlymakes no allowancefor health benefits
long-termgrowthmodel,the studysimulatesthe past effectsof USenvironmentalpolicyon economic
growthbetween 1973and 1985. The annualGDP growthrate for the period is foundto have fallen
by 0.19 percentage points because of the "drag"effectsof environmentalregulation. This figure
amountsto a reductionapproximatelytwicethose suggestedby non-USAstudies. The difference
could reflect either the nature of US environmentalregulation,or the differencein the modelling
procedure. Convertedto a long-runprojection,the Jorgensen-Wilcoxen
model suggeststhat GDP
mightbe some 2.6% lower as a result of regulation. The model results do not indicatethe effects
on employment,but clearlythey wouldtend to be negative.
9.
Nordhaushas lookedat the broad impactsof "resourcescarcity"on worldeconomicgrowth
He estimatesthat risingenergy prices probablyconstitute a "drag"of about 0.15% p.a. and that
greenhousewarmingwilladd a further 0.03%to this. Allowingfor other environmentaland mineral
scarcitycosts,the total drag is tentativelyput at 0.31% p.a. But on Nordhaus'sestimates,the costs
of environmentalpolicy are not a major part of this cost. If the Jorgensen-Wilcoxen
estimate is
applied to the world as a whole (a clear exaggerationgiven the relative strictness of US
environmentalpolicy),the 0.31% estimatemightrise to 0.45%,whichbeginsto look significant.
OECD
The OECD has produceda six-countrysurveyof environmentalpolicycosts". Coveringthe
7 R.Hahn and J.Hird, "The Costs and benefitsof Regulation:Review and Synthesis", Yale
Journal of Regulation, Vol.8, No.1, Winter 1991.
8 See D.Jorgensenand P.Wilcoxen, "EnvironmentalRegulationand US EconomicGrowth",
RAND Joumal of Economics, Vol.21, No.2, Summer 1990.
9 W.Nordhaus, "EconomicGrowth: Limitsand Perils", Paper presentedto the International
Congress on Environment, Ethics. Economicsand Institutions, Milan, March, 1991.
10 OECD, The MacroeconomicImpact of EnvironmentalExpenditure,OECD, Paris, 1985.
53
USA, Norway, Netherlands, France, Finland and Austria, the study concluded that the effects of
policy on GDP were indeterminate, with long run rises of 1% over baseline in some cases, and falls
of 1% in others; that inflation might generally be worsened by as much as 0.3-0.5% p.a; that
employment is stimulated by the growth of the pollution abatement sector and a slight depressing
effect on productivity; and that the beneficial effects of increased regulatory expenditures occur in
the short-term, with negative effects occurring in the longer-run. The OECD concludes that:
While these various results are of interest in their own right, the main conclusion which
emerges from them is that the macroeconomiceffects of environmental policies is relatively
small. Most of the figures reported - with the exception of some of the results for consumer
price inflation - are in the range of a few tenths of a percentage point per year. Furthermore,
it is important to recall that these small effects were registered during a period (the 1970s)
of peak pollution control activity.when efforts were directed not only at limiting on-going
pollution, but also at cleaning-up the ba^klog caused by neglect of the environment during
the 1950sand 1960s.
3. Conclusions
The available economic studies do not bear out the worst fears about employment, price and
income effects of environmental policy. They tend to suggest that environmental policy can actually
increase employment and income, or at least make them no worse than would otherwise be the case.
But there are several caveats.
First, the detailed study by Jorgensen and Wilcoxen for the IJSA suggests annual GDP
sacrifices that would probably be regarded as politicallysignificant. How far this result reflects
specific US regulatory measures, and how far it reflects the sophistication of the niacroeconomic
model, is impossible to say. Second, these sacrifices have to be compared to the benefits of
environmental policy, on which there is even less empirical evidence.
Third, the relevant studies are still limited in number. The fact that regulatory impacts take
some time to work through the economy also mean that the methodologies involvedrequire longer
run economic growth models than those typicallyused for short-term forecasting. But we can be sure
that the evidence available does nMtsupport the politically-receivedwisdomthat more environmental
regulation will be harmful to economic growth - at least in Europe.
Finally, whatever the cost of environmental policy,there ought to be more emphasison policy
efficiency; and that tends to point towards a bolder policy of embracing green taxes and
supplementing traditional regulatory policies with tradeable permit systems.
54
Flbure Al Pubic and Private Expenditures on Pollution Control In OECDCountries 1972 - 1986
ControlExpenditure
PublicandPrivatePollution
rates
-1I8(tprices'andexchange
Biltlonof USS
ltIIIan
of US
Wo
- ,
S14F
S12
UNlEDSTAJEL.-8T->-$40
-eEGRMANY
S10
-
~~---~~.~z-
~
-'
'
$1
.
RETHERLMW--..
2
-10
So(-
FINLAND
.
72 73 74
.
.I.*
78
7778
$31)
$w'
20
!
FRIWCE
St _-__6~
S4
--
-
NORVAY
I1$0
70 80 81 82 e
~br
14688 6e
Privateh usehtildexpndilture excluded
U.S. fiyurerefcr it, nght-ha.tndscale
1.Deflatedwith GDP pnce index
PollutionContmlExpenditure
PublicandPrivate
of GDP
Percentage
17.
A
JIT3STRTA
6
NETHERLANDS8
FRA!CNORY
72 73 74 76 76 77 76 70 60 81 82 68 64 6 866
6wr
OA
expemfiturcexcludcxl
Privatehouusehold
55
Fbaur.A2 MacroeconomicImpactsof VariousEnvironmental
Polcesfor the UK(CambrdgeEconometrics)
A G3REENSCENARIO:THE MACROECONOMIC
EFF:EC'TS
(differencesfrom base)
1995 2000 2005 2010
ODP and Components of (DP
(% difference from base)
Consumers'expenditure
Fixedinvestment
Exportsof goods mid services
Imports of goods andservices
ODP at factor cost
(.5
1.4
-0.1
0.4
0.4
1.8
2.1
--0.6
0.5
0.9
0.1
0.3
0.3
4.2
2.7
-1.7
-1.3
1.2
-1.7
1.1
2.2
-3.2
-0.9
0.1
0.7
.0-2
-.1.1
191 427 682
--92 --207 --365
0
0
Inflation
(pp differencefrom base)
Consumers' prices
Averageearnings
0.6
Employment
(differencefrom basc iln'000)
Employment
Unemployment
Source:CambridgeEconometrics
56
FloursA3 Macroeconomic
Impact of A Strong EnvironmenteI
PoUcy:
the Notherands
VolumeGNP (%)
Realwages(%)
Consumption(%)
Employment(%)
Budgetdcefcit
(%pointof NI)
Resultsin 20(10(comparedto 1985)
Unchauigcd
Policy
SustainableGrowth
without'
with'
+98
+95
+100
+61
+59
+61
-119
+118
+121
+26
+26
+28
-2.4
+ 1.0
-3.4
Interestrate (%point)
-1.1
+0.2
-0.7
C02emissions(%)
CFCsemissions(1)
+35
-I(H)
-20
100
to
-30
S02 emissions(MY)
-50
8()
NOxemissions(%M
--10
Hydrocarbons(%)
- -20
Dischargesinto
Rhine& North Sea (%) *-50
Wastedumping(%)
0
to
-9(
-70
-70
to
to
-80
..75
-. 70
to
-80
Environmental
expenditure
(%NI)
2%
4%
1(0
350
Total investmnentin
petiod 1985-2010
I)withoutequivalent policy ip foieig,ncountries
2)withequivalent policy inf
tdrcigii coutitries
3)compared
to 1980
Source:NEPI'. 1989.
57
-80
Flour. A4 Inoomeand Employment Impacts of Acid Rain Pollution Control In the Europen Communkty
Annual X deviation
frombaselineLeveLs
NOxControl
SO, Control
1988-93
1994-97
1988-93
1994-97
n.e.
n.s.
n.a.
n.a.
Country:
France
Y
N
0.04
0.02
0.03
0.02
Germany
Y
N
0.13
0.13
-0.06
-0.11
0.06
0.05
0.00
-0.03
Italy
Y
N
0.08
0.02
0.03
0.01
0.03
0.01
0.02
0.01
UK
Y
N
0.06
0.03
-0.05
-0.05
0.01
0.01
-0.01
-0.01
Y = GDP, N = employment.
58
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