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Environmental good valuation process ,(Discounting Approach)
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Presentation Topic : Environmental valuation and cost Benefit analysis .. Presented By : Group 2
Definition of Social Cost Benefit analysis(SCBA): • CBA is a systematic approach to estimate the short and long term consequences of project that will be undertaken . • SCBA aids in evaluating individuals and societies projects within the planning framework which spells out national economic objectives and broad allocation of resources to various sector .
Advantage of using SCBA: 1.SCBA have the ability to identify the projects that maximize the welfare of the country . 2. The SCBA have ability to objectively asses and quantify the purpose projects in relation to community needs. 3. Ability to rank and prioritize limited resources so that the maximized benefit is realized . 4.SCBA taking into account both quantitative and qualitative factors .
There are two approach of evaluating SCBA : 1.Discounting social cost- Benefit analysis . 2. Non discounting Social cost benefit analysis.
Discounting SCBA:(Discounting is the process of equating a future cash flow or benefit to its present value .) There are three criteria of discounting SCBA • Approach of Net present value (NVP). • Internal rate of return (IRR) • Benefit-Cost ratio.. Among three of them for environmental Goods most useful tool is NVP.
Approach of net present value : Net present value or net Benefit : The Differences between a projects benefits and costs is term the net present value or net present benefit . So the NB at initial period = Bo- Co
To compute NPV for a proceed project have following step : 1. Find the present value of each period and Discounted the value at the project cost . 2. Sum this discounted cash flow or benefit , this sum will give you the project NPV.
Mathematically determine Approach of NPV: NPV of a project = + + ……….+ Here Bo= benefit of initial period .. Co= cost at initial period N= life time of a project R= discounting rate =
Implication from this equation : • The discounting rate and NPV are inversely related . • The Higher the Discount rate lower the NPV.
The decision rules for NPV are : • NPV> 0 project accepted . • NPV <O project Rejected • NPV= 0 Then the project is in indifference position . ( further Analysis is needed.)
Total economic value(TEV):(TEV is a concept in cost benefit analysis that refer to value derived by people from a natural resources compared not to having it .) 1.TEV of a environmental resources is built up of use and non use values of the goods. 2. Use values are often easier to assess than non use values.
Use value : Use value of environmental goods can be split into three categories.. These are 1.Direct use value: The economic benefits can be calculated by making use of market information. The outputs of the resource can be directly consumed. For example, - pastures provide space for some livestock - a lake provides fish to fisherman;
2. Indirect use value : Indirect use of natural recourses relates to functional benefits, the outputs provide a social benefit from ecosystem functioning . For example, - water purification, - erosion protection or carbon sequestration
3. Option value : Option value, where individuals are willing to pay for the future use of the resource . For example , -future visits to national parks, -clean surface and ground water, -avoiding of erosion to enable future use of pastures.
Non –use value : Two types of non-use value of environment can be distinguished. 1.Bequest Value :This reflects the publics’ willingness to pay to ensure future generations to enjoy the same environmental benefit in the years to come. For example, extinction of species
Existence value: This non-use value reflects the “moral” or philosophical reasons for environmental protection, unrelated to any current or future use. For example , The scientific society and the value from knowledge of continued existence of species, habitats and ecosystems.
