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Environmental Economics and Sustainable Development

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Environmental Economics and Sustainable Development a: WORLDBANK ENVIRONMENT PAPER NUMBER3 417t Environmental Economics Public Disclosure Authorized and Sustainable Development Mohan Munasinghe Public Disclosure Authorized Public Disclosure Authorized 9/:0f L e_ Xf W - E= t 00Sitt aQ½ Public Disclosure Authorized RECENT WORLD BANK ENVIRONMENT PAPERS No. 1 Cleaver, Munasinghe, Dyson, Egli, Peuker, and Wencelius, editors, Conservationof Westand Central African Rainforests/Conservationde laforet denseen Afrique centraleet de l'Ouest No. 2 Pezzey, SustainableDevelopment Concepts: An EconomicAnalysis WORLDBANK ENVIRONMENT PAPER NUMBER 3 Environmental Economics and Sustainable Development Mohan Munasinghe The World Bank Washington, D.C. Copyright G 1993 The International Bank for Reconstruction and Development/THEWORLD BANK 1818 H Street, N.W. Washington, D.C. 20433, U.S.A. All rights reserved Manufactured in the United States of America First printing July 1993 Environment Papers are published to commnunicatethe latest results of the Bank's environmental work to the development community with the least possible delay. The typescript of this paper therefore has not been prepared in accordance with the procedures appropriate to formal printed texts, and the World Bank accepts no responsibility for errors. The findings, interpretations, and conclusions expressed in this paper are entirely those of the author(s) and should not be attributed in any manner to the World Bank, to its affiliated organizations, or to members of its Board of Executive Directors or the countries they represent. The World Bank does, not guarantee the accuracy of the data included in this publication and accepts no responsibility whatsoever for any consequence of their use. Any maps that accompany the text have been prepared solely for the convenience of readers; the designations and presentation of material in them do not imply the expression of any opinion whatsoever on the part of the World Bank, its affiliates, or its Board or member countries concerning the legal status of any country, territory, city, or area or of the authorities thereof or concerning the delimitatiorLof its boundaries or its national affiliation. The material in this publication is copyrighted. Requests for permission to reproduce portions of it should be sent to the Office of the Publisher at the address shown in the copyright notice above. The World Bank encourages dissemination of its work and will normally give permission promptly and, when the reproduction is for noncommercial purposes, without asking a fee. Permission to copy portions for classroom use is granted through the Copyright Clearance Center, 27 Congress Street, Salem, Massachusetts 01970,U.S.A. The complete backlist of publications from the World Bank is shown in the annual Index of Publications, which contains an alphabetical title list (with full ordering information) and indexes of subjects, authors, and countries and regions. The latest edition is available free of charge from the Distribution Unit, Office of the Publisher, The World Bank, 1818 H Street, N.W., Washington, D.C. 20433,U.S.A., or from Publications, The World BanLk,66, avenue d'Iena, 75116 Paris, France. Mohan Munasinghe is chief, Policy and Research Division, in the Environment Department of the World Bank. Library of Congress Cataloging-in-Publication Data Munasinghe, Mohan, 1945- Environmental economics and sustainable development / Mohan Munasinghe. p. cm. - (World Bank environment paper ; no.3) Includes bibliographical references. ISBN 0-8213-2352-0 1. Environmental policy-Economic aspects. 2. Economic development-Environmental aspects. I. Title. II. Series. HC79.E5M865 1993 363.7-dc2O 92-42952 CIP Foreword The decade of the 1980shas witnesseda fundamental developmentmay be identified;based on economic, change in the way governments and development ecological, and socio-cultural criteria. Reconciling agencies think about environmentand development. these concepts and operationalizingthem will be a The two are no longer regarded as mutually exclu- formidable task, which is only now getting under- sive. It is now recognizedthat a healthy enviromnent way. In the meantime those maldng decisions have is essential to sustainabledevelopment and a healthy to find ways of introducingsuch concerns into their economy. Moreover, economists and planners are analysis in a practical way. beginning to recognize that economic development The objectives of this paper recognize these which erodes natural capital is often not successful. needs. It seeks to help analysts, practitioners and In fact, developmentstrategies and programs which policymakers in the field by reviewing the latest do not take adequate account of the state of critical thinking on the concepts and techniquesof sustain- resources-forests, soils, grasslands, freshwater, able developmentand the valuationof environmental coastal areas and fisheries-may degrade the re- impacts, so that they can be explicitly taken into source base upon which future growth is dependent. account in developmentdecisionmaking. Since its creation,the Vice Presidencyfor Envi- The application of environmental economic ronmentally Sustainable Development (ESD) has principles is examined, in order to not only extend placed the highest priority on the analysis of these conventionalcost-benefit analysis but also make bet- important issues. Within ESD, the EnvironmentDe- ter use of other methods such as multi-criteriadeci- partment's work, in particular, has focused on the sionmaking. This analytical discussion is further links between environment and development, and illustrated by a careful selection of the most recent the implications of these linkages for development empirical work. These case studies cover a range of policy in general.The objectiveof the Environment projects and circumstancesto be encountered in a Paper Series is to make the results of our work variety of developing countries. available to the general public. Increasing environmental awareness and con- cerns over sustainability have broadened the range of issues that need to be examined in the assessment Ismail Serageldin of the potential impacts of proposed projects and Vice President prograrns. Three different concepts of sustainable EnvironmentallySustainable Development Acknowledgement The author is pardcularly grateful to Noreen Beg. Special thanks are owed also to Emst Lutz. In addfition,the author is grateful to Shakeb Afsah, Edward Barbier, Robin Bates, Wilfred Beckerman, Jan Bojo, Wilfrido Cruz, Partha Dasgupta,John Dixao, John English, Gunnar Kohlin, Randy Kramer, Karl-Goran Maler, Anil Markandya, Peter Meier, David Pearce, AnnikaPersson, Narendra Sharma, Adelaida Schwab, Tom Teitenberg, Hirofumi Uzawa, Jeremy Warford, DialeWhittington, and Carlos Young, for assistance. This work was supported in part by grants from the Governments of Norway and Sweden. Contents Abstract vi PART I: ANALYTICALFRAMEWORK 1 1. Introduction I ConceptualBasis of Sustainable Development 1 Focus of the Paper 4 2. Linking Economics and the Environment 5 The Role of Environmental Economics 5 Recent Developments 7 ConventionalProject Evaluation 7 National Income Accounts and MacroeconomicPerformance 11 EconomywidePolicies and the Environment 13 3. Frameworkfor Environmental-EconomicDecisionmaking 19 Valuationof Environmental Costs and Benefits 19 Multi-ObjectiveDecisionmaking (or Multi-CriteriaAnalysis) 28 The Discount Rate 33 Risk and Uncertainty 35 PART II: CASE STUDIES 38 4. Short Case Studies of Environmental Valuation 38 Change in Productivity Method 38 Loss of Earnings Method 39 Travel Cost and Contingent ValuationMethods 40 Contingent Valuation Method to EstimateOption, Existence, and Bequest Values 43 5. Two WorldBank Valuation Case Studies 46 Vatuationof Biophysical Resources in Madagascar 46 ImprovingDecisionmaking in the Sri Lanka Power Sector 51 6. Conclusions 60 Bibliography 61 Annex 1. Using Shadow Prices 69 Annex 2. SummariesOf Environmental ValuationCase Studies 72 Change in Productivity Method 72 Loss of Earnings Method 78 Travel Cost and Contingent ValuationMethods 80 Annex 3. EstimatingInternational Travel Costs 93 Annex 4. Using a Simple Biodiversity Index 95 Annex 5. Recent Work on Policies and EnvironmentalImplications 97 Abstract One essential step towards achieving sustainable cation. To facilitate this, an extended bibliographyis development is the economicallyefficient manage- provided. ment of natural resources. This paper explains the First,a numberof shorterdevelopingcountry case key role of environmentaleconomics in facilitating studieswhich cover a widerange of practicalvaluation the more effective incorporaLtionof environmental methods,are reviewed.Next, two longer case studies concerns into development clecisionmaking.Tradi- describethe currentstate-of-the-art in applicalionof a tionally,the economic analysis of projects and poli- combination of valuation techniques in developing cies (including the techniques of shadow pricing), countries.The Madagascarexample focuses or the use has been developed to help a country make more ofmethods such as contingentvaluationandtravel cost, efficient use of scarce resources. However, "exter- to value forest resources and biodiversity.The Sri nalities",mainly those arisingfrom adverseenviron- Lanka case study examinesthe scope for application mental consequences,often have been neglectedin of multicriteriatechniques (in addition to economic the past. It is also important to recognize the social valuation),to improve decisionmakingin the energy and ecologicalobjectives
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