Setting Priorities for Improved Environmental Management

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

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?

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

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

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

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

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

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

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

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).

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

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.

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(

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(

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(

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.

GEF
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

GEF
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

GEF
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.

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?

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

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

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

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

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

Setting Priorities for Improved Environmental Management

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