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Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized --- ___ _J __ -- . ECONOMIC ANALYSIS OF ENVIRONMENTAL IMPACTS John A. Dixon, Senior Environmental Economist with the World Bank Environment Department, is widely published on the topics of applied economic analysis of environmental impacts and natural resources management. Formerly with the Environment and Policy Institute of the East-West Center, Honolulu, he holds a Ph.D. in economics and has extensive field experience in Asia and Latin America. His address is: The World Bank, 1818 H Street, N.W., Washington, DC 20433, USA. Louise Fallon Scura, Natural Resources Management Specialist with the World Bank Environment Department, specializes in economic analysis of natural resource and environmental impacts, natural resources management and coastal zone management, and has significant practical experience in Asia, Africa and the Americas. She has a Ph.D. in agricultural and resource economics, a B.S. in environmental sciences and aquaculture, and worked as a biologist before switching to economics. Her address is: The World Bank, 1818 H Street, N.W., Washington, DC 20433, USA. Richard A. Carpenter, formerly a Research Associate at the Environment and Policy Institute of the East-West Center, Honolulu, is an independent consultant based in Virginia. He has a master's degree in chemistry and specializes in environmental assessment. His address is: Route 5, Box 277, Charlottesville, VA 22901 USA. Paul B. Sherman, formerly with the East-West Center Environment and Policy Institute and the State of Hawaii Department of Business, Economic Development and Tourism, obtained a Ph.D. in economics and a master's degree in environmental management. His work focused on applied economic valuation, and economics of protected areas and drylands management. - __ I_ ECONOMIC ANALYSIS OF ENVIRONMENTAL IMPACTS JOHN A DIXON LOUISE FALLON SCURA RICHARD A CARPENTER PAUL B SHERMAN PUBLISHED IN ASSOCIATION WITH THE ASIAN DEVELOPMENT BANK AND THE WORLD BANK ~~13iil:Jr;Jri~~ Earthscan Publications Ltd, London ·----r First published in 1986 by The Asian Development Bank First Earthscan edition published in 1988 Second edition published 1994 by Earthscan Publications Ltd 120 Pentonville Road, London Nl 9JN Copyright © Asian Development Bank and The International Bank for Reconstruction and Development, The World Bank, 1994 All rights reserved A catalogue record for this book is available from the British Library ISBN: 1 85383 185 9 Typeset by Florencetype Ltd, Stoodleigh, Devon Printed and bound by Clays Ltd, St Ives plc Earthscan Publications Ltd is an editorially independent subsidiary of Kogan Page Ltd, and publishes in association with the International Institute for Environment and Development and the World Wide Fund for Nature. Contents List of Illustrations Vl Foreword ix Authors' Preface Xl Part I From Theory to Practice 1 Development, Environment and the Role of Economic Analysis 3 2 Assessing Impacts and Setting Priorities 9 3 Economic Measurement of Environmental Impacts - Theoretical Basis and Practical Applications 24 4 Generally Applicable Techniques of Valuing Environmental Impacts 42 5 Selectively Applicable Techniques of Valuing Environmental Impacts 63 6 Potentially Applicable Techniques of Valuing Environmental Impacts 84 7 The Limits to Economic Measurement of Environmental Impacts 104 Part II Case Studies 1 Nepal Hill Forest Development Project 120 2 Mangrove Valuation in Bintuni Bay, Irian Jaya, Indonesia 133 3 Estimating the Health Impact of Air Pollution: Methodology and Application to Jakarta 141 4 Benefits and Costs of Soil Conservation in the Loess Plateau of China 149 5 Tongonan Geothermal Power Plant, Leyte, Philippines 154 6 The Benefits and Costs of Establishing a National Park in Madagascar 165 7 An Economic and Ecological Analysis of the Bonaire Marine Park 170 8 Willingness to Pay for Improved Water Supplies in Onitsha, Nigeria 181 9 Setting Priorities in Central and Eastern Europe i ' References 193 Index 205 ii v List of Illustrations FIGURES 1 Project cycle 7 2 Multipurpose Dam Project: Loss of Economic Development Opportunities 14 3 The Salt Balance 18 4 Dust Fall Concentration Near Batu Caves, Kuala Lumpur, Malaysia 21 5 Total and Marginal Utility Curves and Individual Demand for Good X 26 6 Relation Between Location and Valuation of Environmental Goods and Services 27 7 A Simple Valuation Flow Chart 33 8 Plot of Hypothetical Survey Data Used in the Travel-Cost Approach 65 9 Current Availability of Yard Taps and Consumer Surplus 73 10 Simulated Change in Consumer Surplus with a Higher Price and Unconstrained Connections 74 11 Willingness to Pay for lpphm Improvement in NOx Concentration By NOx Level for Households at Three Income Levels 86 12 Indonesian GDP and 'NDP' in Constant 1973 Rupiah 94 13 Mexico: Estimated Impacts of Adjustments for Depreciation of Manmade and Natural Capital, and Environmental Degradation 97 14 Location of Bintuni Bay, Irian Jaya, Indonesia 134 15 Isopleths of Annual Average TSP Concentrations in Jakarta 143 16 Downstream Deposition of Sediment Flows from the Loess Plateau 150 17 Location of Tongonan Geothermal Field, Leyte 156 19 Diving Intensity and Threshold Stress Level 171 20 Willingness to Pay for Park Management, Bonaire Marine Park 173 21 Park Management, Diver Education and Apparent Stress Threshold 177 22 Bonaire, Netherland Antilles 179 23 Money and Water Transactions in Onitsha, Nigeria 182 24 Frequency Distribution of Willingness to Pay Bids 184 25 Percentage of Households Connecting to Piped Water System vs Annual Revenues of Water Utility 186 TABLES 1 Examples of Economic Damages from Environmental Impacts 11 2 Selected Environmental Effects and their Economic Impacts 16 3 Menu of Valuation Methods 30 4 Measurement and Valuation Techniques 34 VI -- - J_ - 5 Ten-Year Sum of Gross Revenues and Present Values of Gross Revenues for Each Industry Sector Under Options 1 and 2 45 6 Total Estimated Annual Costs of Soil Erosion on Java 47 7 Willingness to Pay for Improved Surface Water Quality in MRRJ 77 8 Comparison of Estimates of the Value of Water Quality, West Okoboji Lake 88 9 Elasticities for Total Gasoline Consumption, Mexico City 101 10 Preference Valuation for Endangered Species and Prized Habitats 110 11 Projected Land Use With and Without Project, Five-Year Intervals 121 12 Per Hectare Production of Various Products (Without Project) 123 13 Production and Value of Animal Products (Without Project) 123 14 Per Hectare Values of Various Products (Without Project) 126 15 Projected Yields (With Project) 127 16 Per Hectare Values of Various Products (With Project) 128 17 Total Value for Unmanaged Lands 129 18 Total Value for Managed Lands 130 19 Economic Evaluation: Benefit-Cost Streams 132 20 Linking Scenario Assumptions 136 21 Mangrove Cutting Options Evaluated 137 22 Mangrove Area and Related Assumptions 138 23 Summary of Benefit-Cost Analysis Results 139 24 Marginal Change from Base 'Cutting Ban' Scenario 139 25 Impact of a Change in Discount Rate on NPV of Management Alternatives 140 26 Morbidity Effects of 10 microgram/m3 Change in PMlO 145 27 Health Benefits of Reducing Particulates in Jakarta to Indonesian Standards 146 28 Cumulative and Average Annual Sediment Reduction Benefit by Treatment and Province 152 29 Percentage Reduction in Sediment Yields 152 30 Annual Benefits per Ton from Sediment Reduction 153 31 Calculation of Direct Capital, OM and R Costs of Alternative Waste-water Disposal Options 161 32 Calculation of Environmental and Resource Costs of Alternative Waste-water Disposal Options 163 33 Costs of Water Disposal under Alternative Scenarios 164 34 Value of Forest Products Collected by Villagers 166 35 Summary Statistics for International Visitors 167 36 Summary Economic Analysis of Mantadia National Park 168 37 Revenues and Costs Associated with the Bonaire Marine Park 175 38 Average Prices Charged by Vendors in Onitsha, Nigeria 183 39 Minimum Damage Costs from Pollution Emitted by High and Low Stacks 189 40 Typical Costs of Controlling Emission from the Power and District Heating Sectors 191 vii -- - ----,---- BOXES 1 Criteria for Project Evaluation 37 2 Discount Rates 39 3 Costs of Soil Erosion on Java 46 4 Environmental Damage Costs in Mexico 50 5 The Viewing Value of Elephants 67 6 Contingent Valuation of Rural Water Supply in India 72 7 Willingness to Pay vs Willingness to Accept Compensation 75 8 Property Rights and Land Abandonment in the Brazilian Amazon 102 9 Economic Valuation of Health Effects 14 7 Vlll Foreword The past several decades have witnessed a growing realization that economic development and environmental management are mutually supporting goals. Accompanying this realization has been an important transition in the policies and implementation strategies of major international development and finance organizations such as the Asian Development Bank (ADB) and the World Bank. Both the World Bank and ADB are now actively involved in the effort to promote development which is both economically and environmentally sustainable. The World Bank has created a Vice Presidency for Environmentally Sustainable Development and the ADB has an Office of the Environment to lead the efforts. More generally, the environmental knowledge and skills of the banks' staffs have been enhanced through recruiting new staff and offering expanded train ing on environmental topics. Both banks have supported the preparation of guidelines and procedures