Economic Analysis of the Environmental Impacts of Development Projects

John A. Dixon, Richard A. Carpenter, Louise A. Fallon, Paul B. Sherman, Supachit Manipomoke

• Publisher: Routledge
• Year: 2013
• ISBN:
  9781134046850
• Edition: 1
• Topic: Economics
• Subtopic: Environmental Economics
• Index: Economics

It has always been thought that some level of pollution and waste is unavoidable in development projects. But no one has made much effort to quantify and assess the extent of this sort of damage.

In this book a group of analysts from the Asian Development Bank and from the East West Center propose a means of constructing useful economic evaluations of the impacts of development projects on the environments in which they are constructed. This study demands the systematic evaluation of all the intentional and unintentional consequences of development initiatives before they are determined upon. It is essential reading for development economists, analysts and bankers. Originally published in 1986

1   Development projects, their impact on the environment and the role of economic analysis

Economic development, the ultimate goal of which is to improve human welfare, is crucially dependent on the environment and natural resources to provide the goods and services which directly and indirectly generate socioeconomic benefits. At the same time, however, economic development is often accompanied by significant adverse impacts on the environment. This has led to the belief that economic growth and environmental conservation are mutually exclusive. Many people still feel that some deterioration in environmental quality is a necessary and justifiable cost of economic growth, and also that the management of natural resources for sustainable use is a luxury which poor developing nations can ill afford. However, a growing body of opinion has gradually emerged which recognizes that degradation of the environment and misuse of natural resources will result in real losses in the long term and, furthermore, will undermine the basic objective of development – the sustainable improvement of human welfare.

Governments in developing countries are becoming increasingly aware that environmental and natural resource degradation endangers the potential for long-term development. As a result, they are becoming more receptive to the implementation of measures which ensure that development projects take both the environment and natural resources into account.

Many countries have experienced instances where the degradation of their natural resource base has resulted in the impairment of long-term growth. One common instance is that of fisheries, both inland and marine, damaged by water polluted by domestic and industrial effluents. In some areas this damage has reduced the traditional primary source of protein. Another example is the deforestation of upland regions produced by both shifting agriculture and excessive timber extraction for fuel and wood products. This has led to the disruption of the hydrological cycle of major watersheds and has caused erosion, siltation of rivers and reservoirs, and increases in both the incidence and severity of flooding. The result of all this has been a significant reduction in the productivity of many forests, agricultural lands, and fisheries. It has also decreased the returns from major investments in hydroelectric power and irrigation schemes.

Most people in developing countries work on the land and are directly dependent on natural resources for their food, shelter, and employment. Their welfare in both the short and the long term is inextricably tied to the productivity of natural systems. Thus the socioeconomic effects of degraded environments often hit the poor hardest. It is clear that successful economic development depends on the rational use of environmental resources and on minimizing, as far as possible, the adverse impacts of development projects. This can be done by improving project selection, planning, design and implementation.

Both bilateral and multilateral institutions devoted to funding development projects and programs see their role as promoting the most efficient use of available resources within the context of the socioeconomic priorities of the individual developing countries. Economic analyses of alternative development projects must therefore assess both the direct and indirect benefits and costs of proposed actions. Such analyses require a broader perspective – one that includes the whole range of benefits and costs involved in the proposed activity.

Most lending institutions feel that the direct economic costs of a project are relatively easy to quantify, except where significant externalities such as environmental impacts are involved. Even in these cases, they realize that the costs of such effects should be quantified as far as possible, but the difficulties involved in this process have prevented this quantification; hence environmental effects have often been described and evaluated only in qualitative terms. The real question, therefore, is: How can the environmental impacts of development projects be identified, quantified, and valued?

There are two major elements in assessing environmental impacts: first, they have to be identified and measured; second, ways must be found to place monetary values on these impacts so that they can be included in the formal analyses of projects. Only when a monetary value cannot be given to a particular environmental impact should it be dealt with qualitatively within the analyses.

Both components are reviewed in this book, and suggestions are given as to how economic measurement of environmental impacts generated by development projects may be undertaken. The approach and techniques presented are based on work done over the past five years by researchers at the East–West Center Environment and Policy Institute (EAPI) in Hawaii, with collaborators in the United States and Asia. The techniques themselves have been developed by economists around the world; the EAPI contribution has been to synthesize existing information and provide a practical application of the techniques to handle environmental quality effects of development projects.¹

This book focuses on the better analysis of projects and their environmental or resource impacts. We do not deny the major importance of macrolevel government policies on the patterns of resource use. Such policies as pricing of fertilizer, pesticides, and water have major impacts, both good and bad, on resource use and the environment. Similarly, trade policies, foreign exchange rates, the use of taxes or subsidies all have far-reaching impacts. Nevertheless, the development, analysis, and funding of discrete projects is a major form of economic development in all parts of the world. These projects are the focus of this work.

The Analytical Sequence

Projects are frequently identified and developed in a process known as the project cycle. Figure 1 illustrates the main components of the project cycle used by the Asian Development Bank, but similar patterns are used by the World Bank and other major regional development banks (Rees, 1983). There are numerous places within the project cycle where environmental and resource concerns may be injected. It is crucial, however, that these concerns are taken into account early in the cycle, during the design stage. Only in this way can alternatives be considered before too much time and effort have been invested in one concept. The project designers must work in a multidisciplinary team to design projects that consider a variety of goods and services – economic, social, environmental – at the same time.

FIGURE 1: Project Cycle

Source: Asian Development Bank (1986), Environmental Planning and Management

The purpose of this book is to demonstrate the use of this new analytical approach and to provide a range of techniques with which to determine the monetary values for the impacts of projects on the environment. The use of environmental assessment procedures, valuable at the early stages of project identification, are discussed in Chapter 2. The remaining chapters of the book deal with attributing monetary values to the environmental impacts. The basic theoretical assumptions underlying our proposed approach to valuation are outlined in Chapter 3. The techniques themselves are presented in Chapters 4, 5, and 6; Chapter 4 focuses on techniques that are generally applicable to project analysis, while Chapters 5 and 6 concentrate on techniques which are more difficult to apply and whose use in project analysis has therefore been limited. Chapter 5 covers potentially applicable techniques that rely on the existence of surrogate markets or the use of cost-analysis approaches. Chapter 6 presents the use of survey-based techniques and introduces macroeconomic, mathematical models. The limitations of the economic measurement of environmental impacts are discussed in Chapter 7.

In the interests of brevity we summarize each technique, discuss its applicability and illustrate its use. Several case studies, which illustrate complete economic analyses as well as the use of individual techniques, are presented in the Appendix.

¹ The work has resulted in the publication of a book: M.M. Hufschmidt et al., Environment, Natural Systems, and Development: An Economic Valuation Guide (Johns Hopkins University Press, 1983), referred to in this volume as the Guide. A case-study workbook illustrating the techniques has also been published: J.A. Dixon and M.M. Hufschmidt (eds), Economic Valuation Techniques for the Environment (Johns Hopkins University Press, 1986).

2 The use of environmental assessment for analyzing the impacts of development projects on natural resources and the environment

Environmental and natural resource degradation can be the result of existing conditions as well as of projects designed to promote economic development. For example, extensive rural poverty and intense population pressure can exert stress on productive natural systems: the degradation of range and pasture lands as a consequence of overgrazing; the loss of productive soil as a consequence of inappropriate agricultural practices and poorly designed irrigation schemes; the loss of productive forests as a consequence of shifting agriculture and fuelwood collection are all examples of such pressures. Urban areas are equally affected as the influx of people from the countryside overtaxes facilities and gives rise to polluted water and air, congestion and increased incidence of disease. To the extent that these problems are the result of inadequate development, some of their solutions may lie in well-planned economic growth. On the other hand, economic growth itself frequently results in environmental and resource degradation.

These unwanted consequences of development need not, however, occur, since the technical and managerial means of preventing and controlling them exist. Many current problems have arisen from overexploitation of natural resources or poor planning and design of development projects, coupled with inadequate assessment of potential impacts. It is rarely a simple choice between development and the environment; rather, it is generally a question of incorporating sensible measures for environmental protection into the earliest stages of development projects. Without systematic analysis, however, potential problems will not be recognized early enough to allow for the examination of alternative approaches within the project.¹

Environmental assessment involves identifying, quantifying, predicting and evaluating the impacts of various development activities on natural resources and the environment. It complements the conventional package of engineering, socioeconomic and financial analyses and provides a practical aid to project analysts. The methods of assessment are systematic and allow the recognition of appropriate opportunities for development as well as warning when the degradation of sustainable production capabilities seems likely.²

Undertaking the Analysis

As far as possible, systematic attention should be given to environmental aspects in all phases of the development project, and this should begin at the initial stages of project formulation and preparation. Only then can costly errors in conception and design be avoided.

Natural systems are holistic and interconnected.³ Consequently it is essential from the very beginning of the planning process to determine carefully which natural systems will be affected. A “scoping process” may be used to set appropriate boundaries – the geographical limits, time horizon, and the range of issues, actions, interrelationships, alternatives and impacts that need to be considered. When appropriate, natural boundaries should be used: for example, the watershed is often a good planning and management unit.

Three criteria for identifying significant impacts on the environment were suggested in the World Conservation Strategy.⁴ The first concerns the length of time and geographic area over which the effect will be felt. This criterion would include an assessment of the numbers of people affected, how much of a particular resource would be degraded, eliminated or – depending on what action is taken – conserved. The second criterion is that of urgency. It is important to establish just how quickly a natural system might deteriorate and how much time is available for its stabilization or enhancement. Finally, it is important to assess the degree of irreversible damage to communities of plants and animals, to life-support systems, and to soil and water.

There are several other criteria which are relevant to this identification process. One important consideration is the nature of the effects on the environment including such issues as health, agricultural productivity and changes in micro-...

Table of contents

• Cover
• Half Title page
• Title page
• Copyright page
• Table of Contents
• Preface
• Authors’ Foreword
• 1. Development projects, their impact on the environment and the role of economic analysis
• 2. The use of environmental assessment for analyzing impacts of development projects on natural resources and the environment
• 3. Economic measurement of impacts on the environment - theoretical basis and practical applications
• 4. Generally applicable techniques
• 5. Potentially applicable techniques
• 6. Additional methods of valuing environmental impacts
• 7. The limits to economic measurement of environmental impacts
• Appendix: Case Studies
• References
• Index