Professional Documents
Culture Documents
Environmental Valuation Methods in Economic Analysis: July 1993
Environmental Valuation Methods in Economic Analysis: July 1993
Environmental Valuation Methods in Economic Analysis: July 1993
net/publication/291056399
CITATIONS READS
0 2,630
1 author:
Olivier Serrat
Chicago School of Professional Psychology
595 PUBLICATIONS 1,226 CITATIONS
SEE PROFILE
Some of the authors of this publication are also working on these related projects:
All content following this page was uploaded by Olivier Serrat on 19 January 2016.
Olivier Serrat
31/07/1993
1
Introduction
1. Economic development relies on natural resources and the productivity of natural systems.
It implies sustained improvements in human welfare derived from conventional goods and
services, the production of which often requires natural resources and productive natural systems.
At the same time, economic growth is often accompanied by increasing stress on natural systems
and adverse effects on environmental quality that may result in real losses in long-term
development potential.
2. Traditional project appraisal, based on cost–benefit analysis, largely failed to take adverse
environmental effects into account.1 The objective of maximizing net output or income encouraged
investment in projects regardless of environmental costs to the detriment of projects with
environmental benefits. Much present economic growth has environmental costs that are omitted
from national income accounts. These costs are real and increasingly tangible.
A. Market-Based Methods
5. The methods considered in this section are based directly on market prices or productivity.
They are applicable where a change in environmental quality affects actual production or
production capability.
1. Change-in-Productivity
6. This method estimates the impact of a change in the environment on output, e.g., the
damage from air pollution to crop yield, or the impact of soil erosion on farm output.
1
The Bank's Guidelines for Economic Analysis of Projects deal with environmental effects only briefly under the
category of externalities and in connection with the depletion of non-renewable natural resources.
2
In 1986, the Bank published an Economic Staff Paper, Economic Analysis of the Environmental Impacts of
Development Projects, which contributed to establishing the framework for quantification of environmental costs and
benefits. The forthcoming ADB Workbook of Economic Assessment of Environmental Impacts will combine case
studies with methodological summaries and provide operational guidance in the use of valuation methods.
3
Economic values consist of: (i) direct use values, derived from output that can be consumed directly; (ii) indirect use
values, derived from functional benefits; and (iii) non-use or preservation values.
2
2. Loss of Earnings
7. This method measures the effects on health from environmental hazards such as air and
pollution or the use of pesticides based on the loss of earnings and the cost of medical care.
8. This method infers the true value of protecting the environment from what people spend to
prevent the damage or to restore the environment afterwards, e.g., the cost of building terraces
and protecting bunds to prevent soil erosion.
9. The methods considered in this section use market information indirectly. Each has its
particular advantages and disadvantages, as well as specific requirements for data and
resources.
1. Property Value
10. This method determines the implicit price of specific characteristics of properties to place a
value on improvements or deterioration in environmental quality, e.g., the effects of air pollution in
certain areas.
2. Wage Differential
11. This method is based on the theory that, in a competitive market, the demand for labor
equals the value of the marginal product and that the supply of labor varies with working and living
conditions in an area. A higher wage is therefore necessary to attract workers to a polluted area or
to entice them to perform risky work.
3. Travel Cost
12. This method infers people's valuation of an unpriced amenity, e.g., a beauty spot or a
public beach, from the time and cost they are observed to incur while travelling to the site.
13. This method approximates the value of environmental goods that have close market
substitutes, e.g., the value of a non-marketed fish species can be valued at the price of the most
similar fish being sold in local markets.
14. The benefits from environmental quality protection or improvements do not always lend
themselves to valuation. In some of these cases, it may be possible to estimate benefits by
calculating the costs of replacing the environmental services that have been or might be
destroyed by a project, or by estimating what people might be willing to pay to protect an
environmental asset. Care should be exercised to avoid improper evaluation.
3
1. Replacement Cost
15. Under this method, the costs of replacing a damaged asset are estimated, e.g., the cost of
the fertilizer that would be needed to replace the nutrients lost through soil erosion.
2. Shadow Project
16. This method involves the design and costing of one or more shadow projects that would
provide substitute environmental services to compensate for the loss of the original assets.
3. Contingent Valuation
17. This method is a form of market research on what people would be willing to pay or willing
to accept for a change in environmental quality.
Discounting
18. The rate at which the cost and benefit streams are to be discounted is a general issue in
cost–benefit analysis but is particularly important with regard to environmental costs and benefits
since some of them will accrue in the long term. The opportunity cost, i.e., the benefit foregone by
using a scarce resource for one purpose instead of for its next best alternative use, increases the
longer the gestation period of a project.
19. For discounting to fulfill its purpose efficiently, it is recommended that: (i) the standard
opportunity cost of capital be used for environmental cost–benefit analyses; (ii) short-term and
long-term costs and benefits be estimated carefully; and (iii) a rigorous analysis be made on non-
monetary consequences to supplement standard cost–benefit analysis.
20. Environmental valuation can satisfactorily cover only part of the field and has several
important limitations. The scientific and physical data supplied by the environmental sciences
relate to processes that are complex and not fully understood. In addition, notions of
environmental costs and benefits rest on concepts of sustainable development that need to be
tested in operational conditions. Accordingly, considerations relevant to the selection of valuation
methods include data requirements and availability, intelligibility and plausibility. Plausibility is
frequently overlooked. Environmental valuation methods should be credible as well as accurate.
Examples of valuation method application, outlining in each case the main data requirements and
limitations of the method concerned, are presented in the Appendix.
21. The Asian Development Bank recognizes the need for sound management of the
environment and natural resources and incorporates, where relevant, considerations of
environmental impact into lending, technical assistance and policy activities. To ensure that
economic development is essentially sustainable, environmental valuation needs to be
institutionalized and integrated into project appraisal methodologies.
Environmental Impacts, would formulate guidelines for environmental valuation for incorporation
into the Bank's Guidelines for Economic Analysis of Projects to ensure uniformity of analysis,
approach and coverage in all Bank projects.
23. The Working Group, involving staff from the Programs Departments, the Projects
Departments, the Economics and Development Resource Center, the Post-Evaluation Office, and
the Office of the Environment, would focus on those methods that can be most readily and
plausibly applied given the data and time limitations common to project analysis and the probable
environmental effects of standard types of development projects.
The views expressed in this précis are those of the author and do not necessarily reflect
the views and policies of the Asian Development Bank, or its Board of Governors or the
governments they represent.
Appendix