Session 3 Setting Priorities for Improved Environmental Management

1. Session 3Setting 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. 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? Caspian EVE 2005/UNDP and WBI John A. Dixon & Morteza Rahmatian, Valuation & Priority Setting

3. 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 Caspian EVE 2005/UNDP and WBI John A. Dixon & Morteza Rahmatian, Valuation & Priority Setting

4. Priority setting and available information–a simple example.Given this information, what is the priority?? Caspian EVE 2005/UNDP and WBI John A. Dixon & Morteza Rahmatian, Valuation & Priority Setting

5. 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” Caspian EVE 2005/UNDP and WBI John A. Dixon & Morteza Rahmatian, Valuation & Priority Setting

6. 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 Caspian EVE 2005/UNDP and WBI John A. Dixon & Morteza Rahmatian, Valuation & Priority Setting

7. An Example of Use of Expert Judgment in Nigeria—what are the priority problems?? Caspian EVE 2005/UNDP and WBI John A. Dixon & Morteza Rahmatian, Valuation & Priority Setting

8. 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 Caspian EVE 2005/UNDP and WBI John A. Dixon & Morteza Rahmatian, Valuation & Priority Setting

9. Priority setting and available information–with management cost information – what is the priority now? Caspian EVE 2005/UNDP and WBI John A. Dixon & Morteza Rahmatian, Valuation & Priority Setting

10. 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). Caspian EVE 2005/UNDP and WBI John A. Dixon & Morteza Rahmatian, Valuation & Priority Setting

11. Cost effectiveness in controlling Mexico City air pollution Caspian EVE 2005/UNDP and WBI John A. Dixon & Morteza Rahmatian, Valuation & Priority Setting

12. 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. Caspian EVE 2005/UNDP and WBI John A. Dixon & Morteza Rahmatian, Valuation & Priority Setting

13. Evaluation Criteria: all three measures use the same inputs(benefits, costs, time, discount rate) • Net Present Value (NPV): Caspian EVE 2005/UNDP and WBI John A. Dixon & Morteza Rahmatian, Valuation & Priority Setting

14. 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* Caspian EVE 2005/UNDP and WBI John A. Dixon & Morteza Rahmatian, Valuation & Priority Setting

15. Benefit/ Cost Ratio (B/CR): present value of benefits divided by present value of costs Caspian EVE 2005/UNDP and WBI John A. Dixon & Morteza Rahmatian, Valuation & Priority Setting

16. 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. 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 Caspian EVE 2005/UNDP and WBI John A. Dixon & Morteza Rahmatian, Valuation & Priority Setting

18. 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 Caspian EVE 2005/UNDP and WBI John A. Dixon & Morteza Rahmatian, Valuation & Priority Setting

19. 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. Caspian EVE 2005/UNDP and WBI John A. Dixon & Morteza Rahmatian, Valuation & Priority Setting

20. 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? Caspian EVE 2005/UNDP and WBI John A. Dixon & Morteza Rahmatian, Valuation & Priority Setting

21. Priority setting and available information –when both cost and benefit information are available --the full Benefit Cost Analysis Benefit Cost Analysis Caspian EVE 2005/UNDP and WBI John A. Dixon & Morteza Rahmatian, Valuation & Priority Setting

22. Example: Benefit Cost Analysis of air-pollution control in Santiago, Chile Caspian EVE 2005/UNDP and WBI John A. Dixon & Morteza Rahmatian, Valuation & Priority Setting

23. 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 Determining economic values to include in a BCA: Economic Valuation Methods (again!) Caspian EVE 2005/UNDP and WBI John A. Dixon & Morteza Rahmatian, Valuation & Priority Setting

24. Selecting the appropriate valuation technique (again) Caspian EVE 2005/UNDP and WBI John A. Dixon & Morteza Rahmatian, Valuation & Priority Setting

25. Limitations of Economic Policy Analysis • Incremental impacts of activities • Uncertainty (wrt the future) • Irreversible impacts • Preferences of future generations • Distributional effects across social sectors Caspian EVE 2005/UNDP and WBI John A. Dixon & Morteza Rahmatian, Valuation & Priority Setting