Lecture_08_ETM_517_2_Environmental_Economics (1).pptx
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This document discusses environmental valuation and outlines several questions about valuing specific environmental resources in Sri Lanka, including bodies of water and national parks. It defines the total economic value of a resource as the sum of its use value and non-use value. Use value includes direct and indirect use, while non-use value includes existence, option, and quasi-option values. The document also discusses using environmental valuation to inform cost-benefit analyses, project evaluations, and sustainable development. It notes some issues like scale, aggregation, and data limitations that must be considered in valuation. Both direct and indirect valuation methods are outlined.
Lecture_08_ETM_517_2_Environmental_Economics (1).pptx
- 1. ETM 517 -2 Environmental Valuation Thusitha Kumara [email protected]
- 2. Environmental Valuation • What is the value of the water resource of the Badulu-oya at the Demodara Dam? • What is the value of Horton Plains National Park • What is the value of Udakiruwa Forest? • What is the value of Sigiriya fortress? • What is the value of water quality at Haliella area? • What is the value of water of the Victoria reservoir?
- 3. Environmental Valuation • Trying to attach value for non priced services of the environment • Motivation for environmental valuation is the ECBA (remember NPV = Bd – Cd – EC or Bd – Cd > EC ) • EC can be the environmental costs as well as environmental benefits that need to be estimated • Major services of the environment • Resource inputs to production by firms (I) • Sinks for the assimilation of wastes generated in production and consumption (W) • Amenity services to households (A) • life-support services for firms and households (L)
- 4. Services of an old forest
- 5. Valuation of environmental resources • Try to estimate the demand curve and the area under the demand curve. • Provides the proxy value for the goods and services (consumer or intermediate) provided by the environmental resources thus welfare of the people P Q 0 D
- 6. Economic Valuation of Environmental Resources • Integrated Assessment • Three principles • Economic efficiency and cost–benefit analysis, • Given the scarcity, decision making on resources should be at least informed by the full economic value of the resource (cost and benefits up to the maximum possibilities) • Integrated analysis • Environmental resources have social, cultural, political and economic impacts on society • An extended spatial and temporal perspective • Equality of the availability of the resources at all areas and management at inter generational level
- 7. Total Economic Value of a resource (EC) • Use value (UV) • arises from the actual and/or planned use of the service by an individual, ex. cutting timber • Existence value (EV) • arises from knowledge that the service exists and will continue to exist, independently of any actual or prospective use by the individual ex. Willingness to protect Udakiruwa forest by UWU undergraduates • Option value (OV) • relates to willingness to pay to guarantee the availability of the service for future use by the individual, ex. willingness to pay a higher price for the fossil fuel • Quasi-option value (QOV) • relates to willingness to pay to avoid an irreversible impact now, given the expectation of future growth in knowledge relevant to the implications of development ex. Protection of Crudia zeylanica (Sri Lankan legume) • EC = UV + EV + OV + QOV
- 8. Total Economic Value or Cost (EC) • With the assumption of full knowledge, • EC = UV + EV (Non Use Value, NUV) • EC = UV + NUV • Use Value • Direct use value • Direct interaction with the resource, ex. Consumptive (timber), Non consumptive (enjoying the view) • Indirect use value • Receives the services of resource but no direct interaction, ex carbon fixation • Non use value • Not associated with the use of the resource and no tangible benefits are received. It is received by knowing that the resource is maintained (ethical and altruistic)
- 9. Use of EC in environmental resource management • Highlighting the importance of environmental resources in national development strategies • Cost benefit estimation of a project • Modification of national accounts • Allocation for depletion of natural resources in GDP estimations • Setting of national and sectoral priorities • Allocation for depletion of natural resources • can be used to influence the allocation of irrigation water, ensuring that water is directed towards priority areas
- 10. • Evaluation of projects and programmes • returns to development projects/programmes should be assessed with reference to environmental enhancement/depletion • Contribution to sustainable development • Every unit of resource used today is at the cost of foregone use of a unit tomorrow and pure economic analysis may over utilize the resources (ground water depletion)
- 11. Some issues • Scale • Few variables, few areas and shorter period of time, may not requires a full valuation • Aggregation and double counting • The valuation is based on the functional approach, thus aggregation is necessary, • Attention is required to avoid the double counting of benefits • Interactions can occur between functions • Allocation over time • Individuals prefer consumption in the present to consumption in the future • Discounting provides a common matrix that enables comparison of costs and benefits that occur at different points in time
- 12. • Risk and uncertainty • Risk is with the known probability, hence can be accommodated in to the NPV with discounting • Uncertainty is incorporated into economic valuations through the use of sensitivity analysis or scenario analysis • Irreversible change • The standard procedures for economic valuation do not account for irreversible impacts, such as the extinction of species or exhaustion of minerals. • Under such circumstances, it needs to be taken of the uncertain future losses that might be associated with potential irreversible change.
- 13. • Data limitations • Some of the data required for an economic valuation will not be readily available mostly due to lower budgetary allocation • This should be acknowledged and the measures taken in response to this limitation specified clearly • The results and recommendations should be made explicitly conditional on these limitations
- 14. Economic Valuation of environmental resources • Indirect methods • Indirect approaches rely on observed market behaviour to deduce values. • Direct methods • Direct valuation techniques seek to get the preferences directly through the questioning (surveys) of individuals on their willingness to pay for a good or a service
- 15. Indirect methods • Observations based on market transactions • The travel cost method • Hedonic pricing approach • Averting behaviour method • Residual imputation approaches • Replacement cost • Cost savings methods