ECONOMIC VALUATION OF ENVIRONMENTAL IMPACTSECONOMIC valuation of the environment (EVE) is growing up. No longer is it aske...
Some of these anomalies are related to the `embedding problem or `part-whole bias, where WTP responses are very similaracr...
categories of industries from the central government which can be broadly categorized under sectors of industries, mining,...
After considering all the facets of a project, environmental clearance is accorded subject to implementation of the stipul...
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Environmental appraisal of projects

  1. 1. ECONOMIC VALUATION OF ENVIRONMENTAL IMPACTSECONOMIC valuation of the environment (EVE) is growing up. No longer is it asked, why do it? Its theoretical rationale has beenrehearsed at length. We need no longer ask how to do it, since considerable practical guidance is now available. We are now atthe stage where a variety of applications of EVE are being explored. However, EVEs higher public profile has stoked even greatercontroversy about this subject.EVE is proving useful in a number of areas: Project appraisal and environmental impact assessment, the planning of natureconservation programmes, assessment of the seriousness of global climatic effects, as basic data for national resource accounting,for the appraisal of environmental policies, in the regulation of public utilities and in litigation.EVEs most common application is still probably in the appraisal of individual projects, especially where formal appraisal ofenvironmental impact is required. In the latter case, EVE can complement the use of environmental impact assessment (EIA). Anumber of international aid agencies, to take one example, support the use of EVE on their own programmes (though it should beadded that practice lags well behind the theory in almost all cases). Sometimes, EVE is incorporated into ex post evaluation, toindicate how projects would have fared if they had been subjected to EVE at the time of appraisal.Much of the literature of contingent valuation (CV) and the travel-cost method is devoted to the appraisal of individual natural sitesand conservation features, especially in North America and Western Europe. This application is rapidly gaining ground in thedeveloping countries, too, because of the availability of international funds for nature conservation through the Global EnvironmentFacility and environment non-governmental organisations (NGOs) such as the WWF and the IUCN. The sponsors of such projectshave grasped that economic arguments provide cogent justification for the use of scarce national resources on conservation,compared to orthodox `bricks and mortar investments.A number of studies purport to measure the costs of global warming and chlorofluorocarbon (CFC) emissions, using an eclecticvariety of methods, with a wide range of resulting values. As regards global warming, economic valuation is hampered by scientificuncertainty about the existence, the force, and even the direction of the trend. The phenomenon of ozone depletion is betterestablished and its impact on human receptors somewhat clearer.Estimates have been made of the costs of increased ultraviolet radiation on human health (malignant melanoma, suppression ofimmunity and damage to eyes) materials damage (faster deterioration of paint, plastic and rubber), damage to biological foodchains (reduced crop growth and yields, decreased ocean plankton and fish production) and photochemical smog (damage tohumans, plants and animals).In a related mode, there are several estimates of the value of storing atmospheric carbon in trees, either in terms of the avoideddamage costs or the costs of alternative policies.In India, the NCAER has produced a study playing down the probable adverse effects of global warming. A few countries _ Franceand Norway _ regularly produce environmental indicators to complement their conventional national accounts (`satellite accounts).Studies have been done of other countries _ Indonesia, the Philippines, Mexico and Costa Rica _ illustrating the impact onconventional estimates of national income of the inclusion of environmental `depreciation, such as mineral depletion, reduced soilfertility or deforestation. Some of these studies make adjustments for a particular sector, such as agriculture. EVE provides thebuilding blocks for these accounting exercises.There is no reason why EVE should not apply to policies and programmes, just as to individual projects, provided theirenvironmental costs and benefits can be clearly identified and valued. Cost-benefit studies have been produced for the US air andwater quality legislation, the benefits of which are based on EVE methods. Indeed, in the US, cost-benefit analysis must now becarried out for all major regulations, including environmental ones.Britains Department of the Environment has produced guidance on the environmental appraisal of public policies. Nevertheless,many environmental policies have been adopted without close analysis of their benefits, at the major cost of industry, utilities and,ultimately, consumers. Examples include measures to counter acid rain emissions by large power stations and standards for riverwater. Other measures, on the contrary, are not implemented as fully as they might be if decisions were based on cost-benefitanalysis.In India, comprehensive studies on the above topics are rarely, if ever, carried out despite the plethora of institution to manage theenvironment _ government departments, pollution control boards and the like.It is widely acknowledged, even by the champions of that survey results are often anomalous and internally inconsistent. Answersto willingness-to-pay (WTP) questions are shown to depend on the order in which the questions are asked. WTP for specificindividual goods is frequently greater than that for the whole generic environmental good which includes that individual. WTP for aspecific environmental action or good is often practically the same as for an action or good of the same kind, but which is verymuch smaller. When individuals are asked simultaneously about many projects, WTP is usually well below the sum of WTP fromasking about the projects separately. WTP for a good is heavily influenced by the context of `theatre in which it is presented to therespondent.
  2. 2. Some of these anomalies are related to the `embedding problem or `part-whole bias, where WTP responses are very similaracross different surveys, whereas we would expect them to be very different, because a specific good is `embedded in a moreinclusive good. To some extent, WTP responses can be made more consistent by more careful survey design. But one of the mostdamming criticisms of CV is that the embedding problem merely illustrates the fact that people lack preferences for theenvironmental goods, sites or measures that they are questioned about.If valid, this is a fundamental flaw of CV, when no amount of tinkering with methodology will change. In a similar vein, comparisonsof hypothetical WTP and actual offers for private goods and charitable donations indicate large discrepancies. This is anuncomfortable reminder that CV measures what people say, rather than what they do.It is no defence against these criticisms to say that ``some number is better than no number (if the `real value is five, taking zerowill be less misleading than taking a figure of 20). Likewise, the argument that CV is the only methodology available for estimatingexistence values is a hollow defence if it contains deep and irremediable flaws. Or again, to defend CV by adducing weaknesses inother methods such as revealed preference approaches hardly amounts to a ringing endorsement.In the last few years, there has been much discussion of benefit transfers (BTs). BTs apply a data set developed for one particularuse to a quite distinct alternative situation. In a very general sense, where data on environmental values in a specific project and/orlocality are absent, it is common to borrow unit values developed elsewhere to illustrate orders of magnitude.The non-timber values of tropical rain forest, estimated from detailed surveys in a few parts of the Amazon, West Africa and South-East Asia, have been widely quoted to illustrate the potential values of other tracts of forest. A number of studies use empiricalrelationships on afforestation an soil fertility, or soil erosion and crop yield, developed in specific areas, more widely to `slot intoexercise where local empirical data are not available.However, BT has come to mean something more specific. It usually applies to non-market values (for example, of air and waterquality, or recreation), since these are not so easy to obtain as market values. The location where the data was generated is knownas the study site, and the project or area that the benefits are transferred to is the policy site. In some cases, the methodologydeveloped at the study site can be transferred to the policy site, using empirical data at the latter. In other cases, the methodology,data and values are transferred wholesale.BT is appropriate when certain conditions are present: There are insufficient funds, time, or personnel to undertake a satisfactorynew study; the study is similar to the policy site; the issues (for example, proposed policy change, or nature of project) are similar inthe two cases; and the original valuation procedures were sound and the exercise was done conscientiously.In the typical situation, a policy-maker or analyst is confronted with poor local data, and inadequate time and resources to carry outa fully satisfactory study. The choice is often between using BT, on the one hand, and carrying out a short-cut, rapid appraisalusing whatever local information is available at the time, on the other. The conscientious environmental economist may, in thesecircumstances, feel trapped between the devil and the deep blue sea. However, such are the problems attending BT, especiallyinternationally, that recourse to local data, even of a rough and ready kind, is not automatically an inferior option. The ideal is, ofcourse, to generate more relevant local data, which is starting to happen in, for example, the health impact of urban air pollution.How can EVE be made more credible and acceptable? The first obvious route is to increase the penetration of EVE into relativelyuncontroversial cases where its use would clearly improve the quality of decisions. The exploitation of underground water would beone such example. This example would involve using the simpler and more robust techniques based on the market valuation ofphysical effects (MVPE). This leads to the second suggestion that practitioners of EVE do not lose sight of the usefulness of suchmethods as MVPE, which are often more immediately appealing and comprehensible to the decision-maker.Third, the credibility of CV might be improved through the use of more fully detailed and realistic scenarios. Thus, instead ofenquiring about WTP for preserving a forest about to be destroyed in the construction of a road by-pass, the exercise would consistof describing alternative options with and without the proposed development, each of which would have its financial, economic andenvironmental implications fully spelled out. If the respondent voted `yes to the by-pass, it would be in full awareness of itsenvironmental and financial costs, as well as the presumed economic benefits of the road. If the vote was `no, this would also betaken full possession of the facts, including the economic costs of not proceeding. In this case, the CV exercise would betantamount to a pilot local referendum on the issue.Finally, it is vital to take account of the distribution of the costs and benefits of environmental chance. At a deeper level, thisinvokes the question, whose environment is it? Just as market-based economic values and prices reflect the distribution of powerand property in society, so EVE is influenced by our assumptions about rights and ownership of the environment, for example, thewell-known discrepancy between WTP and willingness to accept compensation (WTA). Every environmental appraisal shouldprobe who gains, who loses, and by how much.EIA (Environmental Impact Assessment) practice in IndiaThe Ministry of Environment and Forests (MoEF), Government of India has under the Environmental (protection) Act 1986promulgated a notification on 27 January 1994 making environmental clearance mandatory for expansion or modernization of anyactivity or for setting up new projects listed in schedule I of the notification. Till 1994, EIA clearance was the administrativerequirement for big projects undertaken by the Government or public sector undertakings. EIA clearance is required for 29
  3. 3. categories of industries from the central government which can be broadly categorized under sectors of industries, mining, thermalpower plants, river valley, ports, harbours and airports, communication, atomic energy, transport (rail, road, highway), tourism(including hotels, beach resorts). For some projects, EIA is not needed. The notification states that the requirement of EIA can bedispensed with by the IAA (Impact Assessment Agency which presently is the MoEF, Government of India). Environmentalappraisal committees constituted by the MoEF for various types of developmental projects include river valley, multipurposeirrigation and hydroelectric projects; atomic power and nuclear fuel projects; mining projects, industrial projects, thermal powerprojects, tourism/transport and miscellaneous projects; port and harbour projects. MoEF has developed guidelines for thepreparation of EIA reports along with questionnaires and check lists for the following sectors namely industry and mining projects,thermal power projects, river valley projects, rail, road, highway projects, port and harbours, airports, communications projects, newtowns, parameters for determining ecological fragility.MoEF amended the EIA notification (S.O.No. 60E) on 10 April 1997, making public hearing mandatory for environmentalclearance. The public hearing will be conducted by the State Pollution Control Boards before the proposals are sent to MoEF forobtaining environmental clearance and, for site specific projects, it is even before the site clearance applications are forwarded toMoEF. MoEF is also in a process of decentralizing the responsibilities of conducting EIA. In a move, Central Government hasnotified (dated 10 April 1997, No. S .O.319. E) that certain category of thermal power plants namely all capacity cogenerationplants, captive coal and gas/naphtha based power plants up to 250 MW, coal based power plants up to 250 MW usingconventional technologies, coal based plants up to 500 MW using fluidized bed technology and gas/naphtha based plants up to500 MW requiring environmental clearance from the state government. In case of pit head thermal power plants, the applicant shallintimate the location of the project site to the state government while initiating any investigation and surveys. Proposals whereforest land is a part of the project site, need prior forestry clearance before forwarding to MoEF for environmental clearance. In theenvironmental clearance process, the documents to be submitted to MoEF are project report, public hearing report, site clearancefor site specific projects, no objection certificate from State Pollution Control Board (SPCB), environmental appraisal questionnaire,EIA/EMP report, risk analysis for projects involving hazardous substance and rehabilitation plans, if more than 1000 people arelikely to be displaced.ENVIRONMENTAL IMPACT ASSESSMENT DIVISIONINTRODUCTIONEnvironmental Impact Assessment (EIA) is an important management tool for ensuring optimal use of natural resources forsustainable development. A beginning in this direction was made in our country with the impact assessment of river valley projectsin 1978-79 and the scope has subsequently been enhanced to cover other developmental sectors such as industries, thermalpower projects, mining schemes etc. To facilitate collection of environmental data and preparation of management plans,guidelines have been evolved and circulated to the concerned Central and State Government Departments. EIA has now beenmade mandatory under the Environmental (Protection Act, 1986 for 29 categories of developmental activities involving investmentsof Rs. 50 crores and above.ENVIRONMENTAL APPRAISAL COMMITTEESWith a view to ensure multi-disciplinary input required for environmental appraisal of development projects, Expert Committeeshave been constituted for the following sectors: • Mining Projects • Industrial Projects • Thermal Power Projects • River Valley, Multipurpose, Irrigation and H.E. Projects • Infrastructure Development and Miscellaneous Projects • Nuclear Power ProjectsENVIRONMENTAL APPRAISAL PROCEDUREOnce an application has been submitted by a project authority alongwith all the requisite documents specified in the EIANotification, it is scrutinised by the technical staff of the Ministry prior to placing it before the Environmental Appraisal Committees.The Appraisal Committees evaluate the impact of the project based on the data furnished by the project authorities and ifnecessary, site visits or on-the-spot assessment of various environmental aspects are also undertaken. Based on suchexamination, the Committees make recommendations for approval or rejection of the project, which are then processed in theMinistry for approval or rejection.In case of site specific projects such as Mining, River Valley, Ports and Harbours etc., a two stage clearance procedure has beenadopted whereby the project authorities have to obtain site clearance before applying for environmental clearance of their projects.This is to ensure avoiding areas which are ecologically fragile and environmentally sensitive. In case of projects where completeinformation has been submitted by the project proponents, a decision is taken within 90 days.MONITORING
  4. 4. After considering all the facets of a project, environmental clearance is accorded subject to implementation of the stipulatedenvironmental safeguards. Monitoring of cleared projects is undertaken by the six regional offices of the Ministry functioning atShillong, Bhubaneshwar, Chandigarh, Bangalore, Lucknow and Bhopal. The primary objective of such a procedure is to ensureadequacy of the suggested safeguards and also to undertake mid-course corrections required, if any. The procedure adopted formonitoring is as follows: • Project authorities are required to report every six months on the progress of implementation of the conditions/safeguards stipulated, while according clearance to the project. • Field visits of officers and expert teams from the Ministry and/ or its Regional Offices are undertaken to collect and analyse performance data of development projects, so that difficulties encountered are discussed with the proponents with a view to finding solutions. • In case of substantial deviations and poor or no response, the matter is taken up with the concerned State Government. • Changes in scope of project are identified to check whether review of earlier decision is called for or not.COASTAL AREA MANAGEMENTCoastal States/UTs are required to prepare Coastal Zone Management Plans (CZMPs) as per the provisions of the CoastalRegulation Zone (CRZ) Notification 1991, identifying and categorising the coastal areas for different activities and submit it to theMinistry for approval.The Ministry has constituted a Task Force for examination of these plans submitted by Maharashtra and Gujarat States have beendiscussed in the meetings of the Task Force and these need to be modified. The Government of Orissa has submitted a partialplan covering only a part of their coastal area. In respect of West Bengal, a preliminary concept document of the CZMP has beensubmitted. Revised CZMP/clarifications have been received from the State of Goa and UTs of Daman & Diu, Lakshadweep andAndaman & Nicobar Islands.During the year, the Task Force had seven meetings and two site visits for consideration of the plans. Once the plans of thedifferent States/UTs are finalised, the development activities in the coastal belt would be more forcefully regulated to ensure non-violation of CRZ Notification.ISLAND DEVELOPMENT AUTHORITY (IDA)The 9th meeting of IDA was held on 22.1.96 under the Chairmanship of the Prime Minister to decide on various policies andprogrammes aimed at integrated development of the islands, keeping in view the relevent aspects of environmental protection, andalso to review the progress of implementation and impact of the programmes of development.STUDIES ON CARRYING CAPACITYNatural resources are finite and are dwindling at a fast pace. Optimization of natural resources for achieving the objective ofsustainable development is therefore, self evidents, this can be done only when environmental considerations are internalized inthe development process. It has often been observed that one or more natural resource(s) becomes a limiting resource in a givenregion thereby restricting the scope of development portfolios. The Ministry of Environment & Forests has been sponsoringCarrying Capacity Studies for different regions. The studies involve: • Inventorisation of the natural resources available; • Preparation of the existing environmental settings; • Perspective plans and their impact on natural resources through creation of "Business As Usual Scenario"; • Identification of "Hot Spots" requiring immediate remedial action to overcome air, water or land pollution; • Formulation of alternative development scenarios including a Preferred Scenarios. A comparison between "Business As Usual" and the "Preferred Scenario" would indicate the future course of action to be adopted for development of the region after the package has been discussed with the local people as well as the planners.A few problem areas such as the Doon Valley - an ecologically sensitive area, the National Capital Region (NCR) which is sufferingfrom air and water pollution as well as congestion, Damodar River Basin which is very rich in natural resources and yet hasextensive environmental degradation and Tapi estuary which represents the problems in the coastal region both for water and landdevelopment, have been selected for carrying out such studies.A multi-disciplinary and multi-institutional approach has been adopted for conducting these studies. Draft reports are ready forDoon Valley and the NCR and are being discussed with the NGOs and the local people for finalising the same. Work relating toDamodar Basin and Tapi Estuary is continuing with respect to secondary data collection and analysis so as to identify therequirements of primary data collection and modification in the development scenarios.Government of IndiaMinistry of Environment & ForestsEnvironmental Impact Assessment DivisionParyawaran Bhawan, CGO ComplexLodi Road, NEW DELHI - 110 003 INDIA