Setting Priorities for Improved Environmental Management

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Use of cost benefit analysis, cost effectiveness analysis, and multi-criteria analysis. Setting priorities for environmental management.

John A. Dixon (johnkailua@aol.com)
The World Bank Institute
Morteza Rahmatian (mrahmatian@fullerton.edu)
California State University, Fullerton

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Setting Priorities for Improved Environmental Management

  1. 1. GEF Session 3 Setting Priorities for Improved Environmental Management John A. Dixon (johnkailua@aol.com) The World Bank Institute Morteza Rahmatian (mrahmatian@fullerton.edu) California State University, Fullerton Ashgabad, November, 2005
  2. 2. Caspian EVE 2005/UNDP and WBI Jo GEF Questions • What criteria and approaches can be used in ranking environmental problems? • What are the advantages and limitations of economic methods for defining priorities? (e.g. BCA, CEA) • What are the principles of and key lessons in environmental priority-setting?
  3. 3. Caspian EVE 2005/UNDP and WBI Jo GEF Priority Setting with limited information • In a “first best” world all costs and benefits can be valued and an economic efficiency criterion used to rank actions... • In a “second best” world all benefits cannot be valued and a cost-effectiveness criterion may be necessary…... • In a “third best” situation with little information, time or resources, qualitative ranking approaches are the best recourse
  4. 4. Caspian EVE 2005/UNDP and WBI Jo GEF Priority setting and available information –a simple example. Given this information, what is the priority?? Impacts on growth Air quality medium Water quality high Waste management medium Congestion high Noise low
  5. 5. Caspian EVE 2005/UNDP and WBI Jo GEF Priority setting and available information –if we add information on distribution of impacts, what is the priority now?? PROBLEMS: •How to compare a waste management project with a congestion reduction one? •Weighting of the different criteria depends on political considerations •It is possible to use experts’ opinion (Delphi technique) •The focus on weights to different cualitative criteria is known as “Multi-criteria analysis” Impacts on growth Distribution al impacts Air quality medium high Water quality high high Waste management medium high Congestion high medium Noise low high
  6. 6. Caspian EVE 2005/UNDP and WBI Jo GEF Priority setting and available information – with added information on health impacts, do priorities change now?? PROBLEMS: •It is necessary to define the spacial and time limits of the analysis: financial analysis vs. economic analysis •Pollution can have different impacts: -Productivity -Health -Recreation -Ecology Impacts on growth Distribution al impacts Health effects Air quality medium high high Water quality high high high Waste management medium high medium Congestion high medium low Noise low high low
  7. 7. Caspian EVE 2005/UNDP and WBI Jo GEF An Example of Use of Expert Judgment in Nigeria—what are the priority problems?? Problem Economic Growth Distributional Equity Resource Integrity Soil Degradation High High High Water contamination High High High Deforestation High High High Gully erosion Moderate Moderate Moderate Fisheries loss Moderate Moderate High Coastal erosion Moderate Moderate Moderate Wildlife & Biodiversity loss Low Low High Air pollution Low High Moderate Water Hyacinth Moderate Low Low
  8. 8. Caspian EVE 2005/UNDP and WBI Jo GEF Economic methods for defining priority actions: Cost-effectiveness analysis (CEA) • Identifies the cheapest means of attaining a given environmental objective, e.g. an emissions reduction target. • A powerful “second-best’ tool when data on benefits are not available. • Can only prioritize measures that mitigate the same type of environmental impact, i.e. have the same end-point
  9. 9. Caspian EVE 2005/UNDP and WBI Jo GEF Priority setting and available information – with management cost information – what is the priority now? Impacts on growth Distributional impacts Health effects Management costs Air quality medium high high 1000 Water quality high high high 800 Waste management medium high medium 900 Congestion high medium low 1500 Noise low high low 1200
  10. 10. Caspian EVE 2005/UNDP and WBI Jo GEF Cost-effectiveness in controlling air pollution in Mexico City Interesting features • Identifies measures with negative costs (benefits) illustrating “easy-win” actions with small budget implications. • Assumes that the marginal benefits of mitigating air pollutants are constant. • Analyzing different air pollutants requires a weighting of toxicity impacts on human health (the end-point: combination of multiple criteria and CEA approaches).
  11. 11. Caspian EVE 2005/UNDP and WBI Jo GEF Cost effectiveness in controlling Mexico City air pollution 1.2 -400 100 600 1,100 1,600 2,100 2,600 Retrofitting (natural gas and LPG) Emission standards Fuel improvements Inspection of passenger cars Taxis (replacement) Passenger cars Gasoline trucks Minibuses Strengthened inspection Target reduction Cumulative emission reductions (millions of weighted tons) Inspection of high use vehiclesa Marginal cost of emission reduction (dollars per ton) Technical controls only Controls, matched with gasoline tax Welfare cost when tax is excluded Note: Calculations are based on -0.8 elasticity of demand for gasoline. a. Including taxis, light-duty trucks, and minibuses. Source: Eskeland 1994b. 0
  12. 12. Caspian EVE 2005/UNDP and WBI Jo GEF The preferred form of analysis: Benefit Cost Analysis (BCA) • Maximizes the present discounted stream of all future benefits and costs of the action. • Economic efficiency criteria include: – Net present value (NPV) – Economic rate of return (ERR) – Benefit-cost ratio (B/CR) • Information requirements for a “social” or “full” BCA are large: data on all marginal benefits and marginal costs • constraints include poor data, but also poor knowledge and acceptability of non-market valuation methods among decision-makers.
  13. 13. Caspian EVE 2005/UNDP and WBI Jo GEF Evaluation Criteria: all three measures use the same inputs (benefits, costs, time, discount rate) • Net Present Value (NPV): ∑∑ == + − + = n t t t n t t t r C r B NPV 11 )1()1(
  14. 14. Caspian EVE 2005/UNDP and WBI Jo GEF ERR/ EIRR Economic Rate of Return (or Internal Rate of Return): r* is the discount rate that equates the present value of the benefits from the project to the present value of the costs of the project. IRR = r* ∑∑ == + = + n t t t n t t t r C r B 1 * 1 * )1()1(
  15. 15. Caspian EVE 2005/UNDP and WBI Jo GEF Benefit/ Cost Ratio (B/CR): present value of benefits divided by present value of costs ∑ ∑ = = + = + = n t t t n t t t r C C r B B 1 1 )1( )1(
  16. 16. GEF Measurement and Analysis of Benefits and Costs • “Benefits” refer to the benefits associated with additional environmental or natural resource preservation, conservation, or restoration. • Likewise “costs” refer to the costs of additional environmental or natural resource preservation, conservation, or restoration.
  17. 17. Caspian EVE 2005/UNDP and WBI Jo GEF Measurement and Analysis of Benefits and Costs (cont’d) • Costs are usually relatively easy to estimate in dollar terms. Examples: – The additional cost of producing diesel engines that comply with more stringent particulate matter regulations. – The additional costs and foregone revenues associated with certified sustainable timber harvest methods. – The reduced commercial fishing revenues due to more stringent fishing regulations
  18. 18. Caspian EVE 2005/UNDP and WBI Jo GEF Measurement and Analysis of Benefits and Costs (cont’d) • Benefits are more difficult to estimate in dollar terms. Examples include: – The improvements in human health associated with more stringent particulate matter regulations. – The watershed benefits associated with certified sustainable timber harvest methods. – The ecological and future gains to stocks associated with more stringent fishing regulations
  19. 19. Caspian EVE 2005/UNDP and WBI Jo GEF Measurement and Analysis of Benefits and Costs (cont’d) • Benefit/cost analysis usually uses money as a measure of utility, and thus monetizing benefits and costs is an important aspect of such an analysis.
  20. 20. Caspian EVE 2005/UNDP and WBI Jo GEF Limitations of benefit/cost analysis: Value of Human Lives: Some of the benefits of environmental improvements include the reduced loss of human life. What are the policy implications of placing an infinite value on a life? Of measuring the value of a life based on earnings capacity? Future vs. Current Generations: What discount rate is appropriate when bringing future impacts into present discounted value? Will future generations value things the same way we do? If not, then how can we bring their values and preferences into policy debates today that will affect them?
  21. 21. Caspian EVE 2005/UNDP and WBI Jo GEF Priority setting and available information – when both cost and benefit information are available --the full Benefit Cost Analysis Impacts on growth Distribution al impacts Health effects Management costs Benefits Net Benefits Air quality medium high high 1000 1300 300 Water quality high high high 800 900 100 Waste management medium high medium 900 1150 250 Congestion high medium low 1500 1300 (200) Noise low high low 1200 1100 (100) Benefit Cost Analysis
  22. 22. Caspian EVE 2005/UNDP and WBI Jo GEF Example: Benefit Cost Analysis of air-pollution control in Santiago, Chile Annualized benefits and costs of air pollution control strategy in Santiago, Chile (US$ millions) Program component Benefits Costs Net Benefits Fixed sources Gasoline vehicles Buses Trucks Control strategy 27 33 37 8 105 11 14 30 4 59 16 19 7 >4 46 Source: WB, 1994
  23. 23. Caspian EVE 2005/UNDP and WBI Jo GEF Determining economic values to include in a BCA: Economic Valuation Methods (again!) • Changes in Production – Crops, fisheries, water – Health – Opportunity cost • Hedonic Approaches – Property value – Land values – Wage differential • Survey Techniques – CVM (Contingent Valuation Method) • Surrogate Markets – Travel Cost
  24. 24. Caspian EVE 2005/UNDP and WBI Jo GEF Selecting the appropriate valuation technique (again)Environmental Impact Measurable change in production Change in environmental quality Yes Nondistorted market prices available? Use change- in- productivity approach Use surrogate market approaches, apply shadow prices to changes in production Yes No Habitat Opportunity- cost approach Replacement cost approach Land value approaches Contingent Valuation Air and water quality No Cost- effectiveness of prevention Preventive expenditure Replacement/ relocation costs Health effects Sickness Death Medical costs Loss of earnings Human capital CEA of prevention Recreation Contingent valuation Travel cost Aesthetic, Biodiversity, Cultural, Historical assets Contingen Valuation Contingent Valuation Hedonic wage approach Contingent Valuation
  25. 25. Caspian EVE 2005/UNDP and WBI Jo GEF Limitations of Economic Policy Analysis • Incremental impacts of activities • Uncertainty (wrt the future) • Irreversible impacts • Preferences of future generations • Distributional effects across social sectors

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