Evaluation of green economy II

Dr. G. Liobikienė
Content:
• Other methods for the evaluation of
environmental value (damage Cost Avoided,
Replacement Cost, and Substitute Cost
Methods; usage of hypothetical market).
• External cost evaluation methods;
• Political analysis;
Damage Cost Avoided, Replacement Cost, and Substitute Cost
Methods
• Methods that estimate values of natural resources based on either the
costs of avoiding damages due to lost services, the cost of replacing
ecosystem services, or the cost of providing substitute services.
• Do not provide strict measures of economic values, which are based on
peoples’ willingness to pay for a product or service.
• Assume that the costs of avoiding damages or replacing ecosystems or
their services provide useful estimates of the value of these ecosystems or
services.
• This is based on the assumption that, if people incur costs to avoid
damages caused by lost ecosystem services, or to replace the services of
ecosystems, then those services must be worth at least what people paid
to replace them.
• Thus, the methods are most appropriately applied in cases where damage
avoidance or replacement expenditures have actually been, or will actually
be, made.
• Example: Valuing improved water quality by measuring the cost of
controlling effluent emissions.
• Example: Valuing erosion protection services of a forest or wetland by
measuring the cost of removing eroded sediment from downstream areas.
• If the two substitutes provide the same good, not
market goods’ value is saved cost using substitute.
• In all cases avoidance encompasses expenditure of
substitution process.

To apply this method is important:

• a) that substitute has the same functions of goods
and services which we want to substitute;
• b) substitute is the best alternative or least cost;
• c) avoidance expenditure not creates further benefit
and is reversible;
• d) facts show the real demand of substitute.
The steps of applying the Damage Cost Avoided, Replacement Cost, and
Substitute Cost Methods
• Assess the environmental service(s) provided.
–This involves specifying the relevant service(s), how they are provided, to
whom they are provided, and the level(s) provided (for example, in the case
of flood protection, this would involve predictions of flooding occurrences
and their levels, as well as the potential impacts on property).
• Estimate the potential physical damage to property.
• The final step for the damage cost avoided method is to calculate either
the monetary value of potential property damage, or the amount that
people spend to avoid such damage.

For the replacement or substitute cost method need to identify the least
costly alternative means of providing the service(s).
• Calculate the cost of the substitute or replacement service(s).
• Finally, public demand for this alternative must be established. This
requires gathering evidence that the public would be willing to accept
the substitute or replacement service(s) in place of the ecosystem
service(s).
Usage of hypothetical market evaluating
environmental values
• Many natural resources are not traded in markets
and are not closely related to any marketed
goods.
• Surveys can be used to ask people directly what
they are willing to pay, based on a hypothetical
scenario: –=> contingent valuation
• Alternatively, people can be asked to make
tradeoffs among different alternatives, from
which their willingness to pay can be estimated: –
=> choice experiments
• It can assess both use and non-use environmental
values.
Contingent Valuation Method (CVM)
• CVM method involves directly asking people, in a survey,
how much they would be willing to pay for specific
environmental services.
• “Contingent” because people are asked to state their
willingness to pay, contingent on a specific hypothetical
scenario and description of the environmental service.
• The fact that the contingent valuation method is based on
asking people questions, as opposed to observing their
actual behavior, is the source of enormous controversy.
• Results are highly sensitive to what people believe they are
being asked to value, as well as the context that is
described in the survey.
• Survey must be properly designed, pre-tested, and
implemented.
• CVM can be conducted as in-person interviews, telephone
interviews or mail surveys.
• A wide variety of CVM studies have been carried out on a
wide range of environmental and nature issues: - preserving
biodiversity; - (water and nature) recreation; - water supply
and supply of sewerage; - increased access to natural
habitats; - etc.

• Analysing the results of a CVM study, it is important to

assess what the expected hypothetical relationship will be
between the willingness to pay for a service and certain
parameters (like level of the bid; income, household size,
gender, age, education, private interest). This can be used
afterwards, when analysing results, to check whether the
results are in line with the hypothetical expectations.

• As this method is based on questionnaires, the method can

be and has been applied to a variety of natural and
environmental resources and environmental problems.
Features of contingent valuation:
– Usually it is the only measurement to evaluate used and
non-used environmental values of goods and services;
– This method is applied for major environmental policy.

This method refers to two main assumptions: first,

consumers decide what is their interest, second they
can rage their priorities.

The steps of contingent valuation:

1) preparation of research (create questionnaire, select
respondents);
2) creation and administration (select survey model);
3) gathering of data (the best if this step is repeated two
times);
4) data analysis and presentation.
• Disadvantages of contingent evaluation:

– There is evaluated not real behavior of

respondents, but only their intention to behave;
– Unreliable evaluation of monetary value;
– Existing altruism problem;
– Consumers can’t understand the analysed
problem.
Biases of this research are:

Strategical bias- when respondents presented biased opinion

in order to distort the results;
Social norms bias –if people believe that they are socially
responsible they can evaluate their intension better than is
in reality;
Design bias – when for respondents is showed the way;
Information bias – when respondents don’t know about the
analysed problem;
Confirmatory bias – when respondents relate taxes with
environmental value;
Hypothetical market bias – when respondents answer airily
not evaluating the seriousness of problems;
Partial whole bias –when is assessed one lake referring to all
lakes;
Size of survey bias – when the survey encompasses too many
and not suitable respondents.
• The rules of questionnaire preparation:
– The questions should be accurate and not ambiguous;
– Should be control questions;
– The survey should be attractive and not very long;
– The questionnaire should have the literature background;
– Respondents should understand the analyzed problem.

Measurement of sample size:

n= ____1____
∆² + 1/N
• (where n – sample size, ∆ – error (0,05), N – size off population.

• The respondents should be randomly selected and show

the real distribution of gender and age.
Willingness to pay and accept

cost

Willingness to
accept

Willingness to
pay

Emissions

• W –well-being function, M0-current income, M1- willingness to pay for environmental goods, M2-willigness to
accept compensation of environmental damage (deterioration).

• Willingness to accept compensation is evaluation of damage.

The motives of willingness to pay:
• Pure selfishness - when we want something now;
• Future selfishness - when we want to save
something in the future and can consume later;
• Altruism - when we want to save something for
other people;
• Heritage – when we want to save something for
our children and future generations;
• Existence - when we want to save something just
that it is;
• Aspects of morality and subsistence.
Differences between willingness to pay and willingness to accept:

• 1) Impact of income and subsidies. Payment of goods is related with

incomes, compensation – not. Difference between these two
categories increases in the case of subsidy level reduction.
• 2) transaction cost: costumer and seller pay transaction cost when
the impact of transaction cost differed, there is observed and the
different values of willingness to pay and accept.
• 3) suppositional value: willingness to pay determine the price, when
we want to buy, then the value of good increased, meanwhile for
unwanted good value decreased.
• 4) motive of gain: when the price of good in the market is not defined
and fluctuated, then the consumer would like to pay lesser,
meanwhile seller would like to sell this good more expensive.
• 5) Ownership of environmental goods and services. For the
individuals which experience the environmental impact, the method
of willingness to accept would be more accurate comparing with
willingness to pay.
Disadvantages of willingness to pay and accept:
• It is impossible to evaluate functions of
important ecological systems;
• Separate species of animals and plants are
evaluated differently;
• It is uncertain the preferences of future
generations;
• It is difficult to assess the relationship
between market and environmental goods;
• The evaluation of ecosystem values in one
place can not correspond with value in
another place.
Choice Experiments method (CE)
• CE does not directly ask people to state their values in euros. Instead,
values are inferred from the hypothetical choices or tradeoffs that
people make.
• In a choice experiment exercise, respondents are shown a set of
alternative representations of a good and are asked to pick their most
preferred.
• Similar to real market situations, where consumers face two or more
goods characterized by similar attributes, but different levels of these
attributes, and are asked to choose whether to buy one of the goods or
none of them.
• Alternatives are described by attributes—the alternatives shown to the
respondent differ in the levels taken by two or more of the attributes.
• If we want to use conjoint analysis techniques for valuation purposes,
one of the attributes must be the “price” of the alternative or the cost of
a public program to the respondent.
• If the “do nothing”(or “status quo” option—i.e., pay nothing and get
nothing) is included in the choice set, the experiments can be used to
compute the value (willingness to pay) of each alternative.
 External Costs evaluation method
External costs - the major impacts coming from the production
and consumption of energy-related activities such as fuel
cycles. An external cost, also known as an externality, arises
when the social or economic activities of one group of persons
have an impact on another group and when that impact is not
fully accounted, or compensated for, by the first group.
Thus, a power station that generates emissions of SO2, causing
damage to building materials or human health, imposes an
external cost. This is because the impact on the owners of the
buildings or on those who suffer damage to their health is not
taken into account by the generator of the electricity when
deciding on the activities causing the damage. In this example,
the environmental costs are “external” because, although they
are real costs to these members of society, the owner of the
power station is not taking them into account when making
decisions.
Disadvantage of external cost evaluation:
– Refers to other researches results;
– Not consider essential features as: place, pollution
distribution, population density.

The ExternE methodology has been applied for a large

number of European and national studies to give
advice for environmental, energy and transport
policies. One of the first objectives of the ExternE
programme was to make a comparative evaluation of
different technologies and fuel cycles for electricity
generation. A decade of research has resulted in
detailed set of data for impacts from a wide range of
fuels, technologies and locations.
• Aspects of external cost evaluation:
– The model of pollution dispersion should
encompass not only the local pollution sources‘
environmental impact, but other places where
pollution is diffused;
– Environmental impact is assessed using life cycle
analysis;
– Individual preference method is used to evaluate
the environmental value, how much people agree
to pay that the negative environmental impact
should be avoided.
The steps:
• 1) The source of pollution:
– Origin source (town, village);
– Type of source (spot, linear);
– Parameters of smokestack;
– Pollutants.
• 2) Dispersion of pollution
– Local dispersion (-50 km);
– Regional pollution (50-100 km)
– International pollution.
• 3) Impact assessment
– Health
– Yield reduction
– Erosion of constructions
– Ecosystems.
• 4) Environmental impact assessment evaluating the
monetary value applying hedonistic and suppositional
market methods.
Principles of EXTERNE is:

• 1) Different impacts can evaluate and

compare referring to quantitate variables;
• 2) General monetary value (PPS);
• 3) Evaluation of society preferences;
• 4) It is important to evaluate the damage but
not pressure;
• 5) External cost depends on time and place.
Advantages of EXTERNE:
– Can evaluate the place of environmental damage;
– Can evaluate the place of receptors;
– Results are presented using comparable monetary
value;
– This method lets to compare the cost and benefit of
environmental tools.

Disadvantages of EXTERNE:
- Evaluation is very difficult and takes a lot of time;
- Results are vague;
- There can be missed important data which is not
evaluated due to the many difficulties;
- It is impossible to evaluate synergetic effect and
reflect real environmental issues.
Policy analysis
The growth in income and employment in a green
economy is driven by investments. For the investments to
be catalysed and leveraged, public expenditure, policy
reforms and regulation changes are needed. As a result,
methodologies and models must support the
policymaking process, allowing to quantitatively project
and evaluate trends:
• 1) identify entry points for interventions and set targets
(policy formulation, stage)
• 2) assess the potential impact across sectors and the
effectiveness in solving stated problems (or exploiting
opportunities) of selected interventions (policy
assessment, stage)
• 3) and monitor and evaluate the impact of the
interventions chosen against a baseline scenario
The main forms of policy analysis:
• Retrospective policy analysis involves the
production and transformation of information
after policies have been implemented. Policy
analysis is often retrospective and not well suited
to helping policy makers decide what to do;
• In contrast prospective policy analysis seeks to
assist in formulating responses to challenging
public policy questions. It involves the
production and transformation of information
before policy actions are initiated and
implemented.
The process of policy analysis
I Problem structuring
Problem structuring, which is a continuously recurring phase of policy inquiry in with
analysts search among competing problem formulations of different stakeholders, is no
doubt the most important activity performed by policy analysts.
It is important because policy analysts seem to fail more often because they solve the
wrong problem than because the get the wrong solution to the right problem.

The features of political problems:

1) Political problems could be related;
2) Political problems could be subjective;
3) Political problems could be artificial;
4) Political problems could b dynamical.
Steps of problem structuring
II Policy forecasting
• Forecasting is a procedure for producing factual information about future
states of society on the basis of prior information about policy problems.

Aims:
• Forecasts provide information about future changes in policies and their
consequences.
• Forecasting permits great control through understanding past policies and
their consequences, implying that the future is determined by the past.
• Forecasting also enables us to shape the future in an active manner,
irrespective of what has happened in the past

Forms of forecasting:
- Projection- a forecast based on the extrapolation of current and historical
trends into the future;
- Prediction – a forecast based on explicit theoretical assumptions;
- Conjecture – a forecast based on informed or expert judgment about
future states of society.
Limitations of forecasting:
• Forecast accuracy – recent simple forecasting models have
had huge errors in recent years in econometric
forecasting.
• Comparative yield – both simple and complex theoretical
models have been no more accurate than simple
extrapolative models and informed expert judgment.
• Context (institutional – nonprofit more accurate than
business and government; temporal – long term less
accurate than short run, historical – modern complexity
reduces accuracy).

Steps of forecasting:
• 1) identify object what we want to forecast;
• 2) To decide how to forecast, to gather the main data;
• 3) To choose the technique of forecasting and forecast.
Techniques of forecasting
III Policy recommendation
• The policy analytic procedure of recommendation
enables analysts to produce information about the
likelihood that future courses of action will result
in consequences that are valuable to some
individual, group or society as a whole
• The procedure of recommendation involves the
transformation of information about policy futures
into information about policy actions that will
result in valued outcomes.
• Policy recommendations are normative
(advocative) rather than empirical (descriptive) or
evaluative.
Criteria for policy recommendation:
• Effectiveness – does a given alternative result in the achievement of a
valued outcome (technical rationality)
• Efficiency – the amount of effort needed to produce a given level of
effectiveness (economic rationality)
• Adequacy – the extent to which any given level of effectiveness
satisfies the needs, values, or opportunities that gave rise to the
problem.
• Equity – the distribution of effects and effort among different groups
in the society (legal and social rationality)
• Responsiveness – satisfies the needs, preferences, or values of
particular groups.
• Appropriateness – the value or worth of a program’s objectives and
the tenability of assumptions underlying these objectives.

Approaches of recommendation
• Public versus private choice;
• Supply and demand;
• Benefit cost analysis.
IV Policy monitoring
• In order to help the implementation process, monitoring
helps to assess degrees of compliance, discover unintended
consequences of policies and programmers, identify
implementational obstacles and constraints, and locate
sources of responsibility for departures from policies.
• Policy monitoring is a process by which stakeholders follow
and assess policies to ensure they are developed, endorsed,
enacted, and implemented as intended. Policy monitoring
involves:
• (1) appraising the policy environment,
• (2) gauging the level and quality of stakeholder engagement,
• (3) documenting the progress of policy development and the
legislative endorsement of policy,
• (4) putting policies into practice through financing and
implementation planning,
• (5) evaluating outcomes of implementation.
The main functions of monitoring:
– Conformity (whether it confirm defined standards
and procedures);
– Audit (whether goods and services reached the
target group);
– Accounting;
– Interpretation.

In the monitoring process it is very important to

distinguish two aspects: output and impact.
• Techniques of monitoring:

– Graphical;
– Tables presentation;
– Indices;
– Break time series analysis (evaluating before and after
political changes);
– Control series analysis (when we want to evaluate
whether the implemented policy have impact
included and the values of control);
– Regression breaks analysis (using when we want to
evaluate and compare impact of policy
implementation in two or more groups).
VI policy evaluation
• The policy evaluation answer to the question: What is the value
of implemented policy.

• Criteria for policy evaluation

Steps of policy evaluation:

– Elaboration of policy programmer: what are aims

and objectives of program;
– Information of program gathering;
– Designing of political program (looking for
determinants and consequences)
– Evaluation of political program (what types of
political evaluation will be used);
– Feedback of evaluation.
Why is policy evaluation useful?
Policy evaluation generates knowledge addressing, among
other things:
• how well policies are doing – what are the achievements
made so far and how do they compare to the objectives
set out in the policy?;
• whether the policy provide added value - should it
continue doing the same things and are there alternative
ways of doing things?;
• whether the policy can do more with the same resources,
or do the same with fewer resources;
• if the policy is relevant to the needs of the recipients;
• how policy-makers interpreted reality and developed a
policy theory when designing a policy; and whether that
policy theory has any ‘blind spots’, i.e. areas not covered by
the policy theory leading to unanticipated side effects.
Policy evaluation framework
Development of policy arguments:

• Policy argumentation is the main tool of policy

analysis communication. This process is the main
moderator using with policy related information.
• Policy argumentation have the main elements:
information, affirmation, assurance, disjuncture
and clause.
• The principles of argumentation is: completeness,
consistency, coherence, in accordance with used
methods.
Presentation of policy analysis:
• Policy analysis is the first stem of policy improvement.
• The objectives of political documentation: synthesis,
organization, evaluation, simplification, visual presentation,
summary.
• Performing the policy formation, the main factors of the
usage of information are: characteristics of information
(clarity, accuracy), methods of researches, structure of
problems, interactions of participants, impact of people,
which are responsible for the policy formation.
• There is a big gap between policy presentation and
practice.
• Policy analysis is essential for policy discussion and for
public debates, because their aim is – create, critically
evaluate and present with policy implementation related
information.