PAPER NO. 94 E N V I R O N M E N T A L E C O N O M I C S S E R I E S A Review of the Valuation of Environmental Costs and Benefits in World Bank Projects Patricia Silva Stefano Pagiola December 2003 THE WORLD BANK ENVIRONMENT DEPARTMENT A Review of the Valuation of Environmental Costs and Benefits in World Bank Projects Patricia Silva Stefano Pagiola December 2003 Papers in this series are not formal publications of the World Bank. They are circulated to encourage thought and discussion. The use and citation of this paper should take this into account. The views expressed are those of the authors and should not be attributed to the World Bank. Copies are available from the Environment Department of the World Bank by calling 202-473-3641. The International Bank for Reconstruction and Development/THE WORLD BANK 1818 H Street, N.W. Washington, D.C. 20433, U.S.A. Manufactured in the United States of America First printing December 2003 Contents ACKNOWLEDGMENTS v ABBREVIATIONS vii WORLD BANK REGIONS ix EXECUTIVE SUMMARY 1 Chapter 1 Introduction 3 Chapter 2 The Role of Environmental Valuation 5 Environmental Valuation in the Project Cycle 5 Environmental Valuation Methodologies 6 Chapter 3 Assessing Environmental Valuation in World Bank Projects 9 Projects Reviewed 9 Methodology 10 Limitations 11 Chapter 4 Overall Results 13 How often is Environmental Valuation Used? 13 Use of valuation techniques 17 Impact of Environmental Valuation 19 Chapter 5 Energy 21 Air Quality Impacts of Energy Projects 21 Valuing Changes in Air Quality 22 Outdoor air pollution 23 Indoor air pollution 25 Chapter 6 Transportation 27 Environmental Impacts of Transportation Projects 27 Environmental Economics Series iii A Review of the Valuation of Environmental Costs and Benefits in World Bank Projects Valuing the Environmental Impacts of Transportation Project 28 Air quality impacts 28 Land use impacts 29 Chapter 7 Agriculture, Fishing, and Forestry 31 Irrigation and Drainage 31 Forestry 35 Natural Resources Conservation 35 Chapter 8 Water, Sanitation, and Flood Protection 37 Water Supply and Sanitation 37 Flood Protection 42 Solid Waste Management 44 Chapter 9 Global Costs and Benefits 45 Chapter 10 Conclusion 47 APPENDIX -- PROJECTS REVIEWED 49 NOTES 53 REFERENCES 57 BOXES 1 What Is Required? 3 2 Presenting the Results of Environmental Valuation 12 3 Which Costs Should Be Included in the Economic Analysis of a Project? 14 4 Selecting the Appropriate Type of Economic Analysis 16 5 Using Environmental Benefits Estimates to Revise Project Design 17 6 Valuing Environmental Costs in the Chad/Cameroon Oil Pipeline Project 24 7 Irrigation in Central Asia 34 8 Valuing the Health Benefits of Rural Water Supply and Sanitation 39 9 Willing to Pay but Unwilling to Charge -- Do WTP Studies Make a Difference? 41 FIGURE 1 Valuing the impacts of a reforestation project 7 TABLES 1 Environmental assessment, economic analysis, and the project cycle 5 2 Number and cost of projects evaluated, by sector and region 10 3 Valuation of environmental impacts in project analysis 13 4 Valuation techniques employed in projects reviewed 18 5 Effect of including environmental benefits on estimated project returns 20 6 Willingness to pay for water and sanitation 43 iv Environment Department Papers Acknowledgments This paper benefited from detailed comments Bapna, Adriana Damianova, Paavo Eliste, and suggestions provided by Jan Bojö, David Liping Jiang, Smita Misra, Joop Stoutjesdijk, Hanrahan, Rama Chandra Reddy, and and A.K. Swaminathan for providing participants in the 12th Roundtable on the additional information regarding their projects. Economics in Environmental Assessment, held Alexandra Sears provided assistance with on April 9, 2003. We would also like to thank obtaining and maintenance of the database of Ghanasham Abhyankar, Sameer Akbar, Manish projects. Environmental Economics Series v Abbreviations AET Actual evapotranspiration APL Adaptable program loan CBA Cost benefit analysis CEA Cost effectiveness analysis CO2 Carbon dioxide CV Contingent valuation DFID Department for International Development, UK EA Environmental assessment ESW Economic and sector work EU European Union GEF Global Environment Facility HEP Hydroelectric power IBRD International Bank for Reconstruction and Development IDA International Development Agency IDB Inter-American Development Bank IRR Internal rate of return LIL Learning and innovation loan NOx Nitrogen Oxide NPV Net present value NRM Natural resource management O&M Operations and maintenance OED Operation Evaluation Department PAD Project appraisal document PCF Prototype Carbon Fund PM10 Fine particulate matter (less than 10 microns in diameter) SIL Specific investment loan SIM Sector investment and maintenance loan SO2 Sulfur dioxide TAL Technical assistance loan TCM Travel cost method TOR Terms of reference TSP Total suspended particles WTA Willingness to accept WTP Willingness to pay Environmental Economics Series vii World Bank Regions AFR Sub-Saharan Africa Kazakhstan, Kyrgyz Republic, Latvia, Lithuania, Macedonia, Moldova, Poland, Angola, Benin, Botswana, Burkina Faso, Romania, Russian Federation, Serbia and Burundi, Cameroon, Cape Verde, Central Montenegro, Slovak Republic, Slovenia, African Republic, Chad, Comoros, Democratic Tajikistan, Turkey, Turkmenistan, Ukraine, and Republic of Congo, Republic of Congo, Cote Uzbekistan. d'Ivoire, Equatorial Guinea, Eritrea, Ethiopia, Gabon, Gambia, Ghana, Guinea, Guinea-Bissau, Kenya, Lesotho, Liberia, Madagascar, Malawi, LCR Latin America and Caribbean Mali, Mauritania, Mauritius, Mozambique, Namibia, Niger, Nigeria, Rwanda, Sao Tome Antigua and Barbuda, Argentina, Belize, and Principe, Senegal, Seychelles, Sierra Leone, Bolivia, Brazil, Chile, Colombia, Costa Rica, Somalia, South Africa, Sudan, Swaziland, Dominica, Dominican Republic, Ecuador, El Tanzania, Togo, Uganda, Zambia, and Salvador, Grenada, Guatemala, Guyana, Haiti, Zimbabwe. Honduras, Jamaica, Mexico, Nicaragua, Panama, Paraguay, Peru, St. Kitts and Nevis, St. Lucia, St. Vincent and the Grenadines, Trinidad EAP East Asia and Pacific and Tobago, Uruguay, and Venezuela. Cambodia, China, Fiji, Indonesia, Kiribati, Democratic People's Republic of Korea, MNA Middle East and North Africa Republic of Korea, Lao Peoples' Democratic Republic, Malaysia, Marshall Islands, Federated Algeria, Bahrain, Djibouti, Arab Republic of States of Micronesia, Mongolia, Myanmar, Egypt, Islamic Republic of Iran, Iraq, Israel, Palau, Papua New Guinea, Philippines, Samoa, Jordan, Kuwait, Lebanon, Libya, Morocco, Solomon Islands, Thailand, Timor-Leste, Tonga, Oman, Saudi Arabia, Arab Republic of Syria, Vanuatu, and Vietnam. Tunisia, United Arab Emirates, West Bank and Gaza, Republic of Yemen. ECA Europe and Central Asia SAR South Asia Albania, Armenia, Azerbaijan, Belarus, Bosnia- Herzegovina, Bulgaria, Croatia, Czech Afghanistan, Bangladesh, Bhutan, India, Republic, Estonia, Georgia, Hungary, Maldives, Nepal, Pakistan, Sri Lanka. Environmental Economics Series ix Executive Summary The World Bank's Operational Policy on Many projects that did not use environmental Economic Evaluation of Investment Operations valuation pleaded the difficulty of doing so. (OP 10.04) requires that project evaluations This review, however, included several include all the costs and benefits generated by examples of projects that valued the same the project, including environmental costs and environmental benefits that other projects in the benefits. A well done economic analysis would same sector claimed were too difficult to value include any positive or negative external or "un-quantifiable." Given the substantial impacts generated by the project, regardless of methodological progress that has been made in whether these impacts are directly linked to this field in the last decades, "un-quantifiable" financial transactions or flows. In practice, can no longer be considered an acceptable however, valuing environmental impacts is a excuse in most cases. Lack of data can be more challenging exercise as they are often difficult to difficult to overcome, but is also not insoluble in quantify in physical terms and to value in most cases. monetary terms. Among those projects that value environmental The review examines the use of environmental impacts, only one values environmental costs valuation in 101 projects in the World Bank's and all the others focus solely on valuing environmental portfolio approved in fiscal years benefits. This asymmetry can be partly 2000, 2001, and 2002. It has three broad explained by the fact that most projects seek to objectives. First, it examines the extent to which avoid or mitigate potential negative impacts environmental costs and benefits have been through project design or the implementation of incorporated in the economic analysis of environmental management plans, although it projects. Second, it examines how well valuation strains credibility that there would be no was used. Third, it seeks to identify areas of weakness so as to feed into plans for capacity remaining damages. building. The degree to which environmental benefits are The results show that the use of environmental valued differs from sector to sector. In the valuation has increased substantially in the last energy and transportation sectors, the valuation decade. Ten years ago, one project in 162 used of changes in air quality benefits from a large environmental valuation. In recent years, as body of literature that has developed and many as one third of the projects in the applied the existing valuation techniques. environmental portfolio did so. While this Quantifying the impacts of project measures on represents a substantial improvement, there outdoor air pollution does not appear to be a remains considerable scope for growth. significant obstacle, at least not in the energy Environmental Economics Series 1 A Review of the Valuation of Environmental Costs and Benefits in World Bank Projects sector. However, not all projects which quantify To ease the task of project teams, a series of emissions reductions take it to the next stage toolkits is being assembled for some of the more and value these environmental benefits. In the commonly-occurring valuation problems. These agriculture and water supply and sanitation toolkits will describe the available valuation sectors, on the other hand, quantifying the methodologies from a problem-centric physical impacts of project measures are perspective and provide detailed examples of generally the major obstacle to valuation of how to use these methodologies in a project environmental impacts. context. 2 Environment Department Papers 1 Introduction The economic analysis carried out to ascertain This review examines the use of environmental the desirability of a project should take into valuation in World Bank projects. It has three account all the costs and benefits generated by broad objectives. First, it examines the extent to the project. In principle, that should include which environmental costs and benefits, environmental costs and benefits as well (Box 1). whether direct or in the form of externalities, In practice, however, including environmental have been incorporated in the economic analysis impacts is a challenging exercise because they of World Bank projects. Second, it examines are difficult to quantify in physical terms and to how well valuation was used. Third, it seeks to value in monetary terms. The Environmental identify areas of weakness so as to feed into Assessment Sourcebook states that "in spite of plans for capacity building. these difficulties, a greater effort needs to be made now to `internalize' environmental costs An earlier review of the quality of economic and benefits by measuring them in money terms analysis in Staff Appraisal Reports (SARs)1 and integrating these values in economic carried out by the Operations Evaluation appraisal" (World Bank 1991). A well done Department (OED) found that only one of the economic analysis is more than just a process for 162 projects examined quantified environmental adjusting prices from the financial analysis to costs and benefits and considered those in the correct for market inefficiencies. It should be a cost-benefit calculation (OED, 1995).2 The process that includes social costs and benefits purpose of the current review is much narrower regardless of whether the impacts are directly and does not focus on the overall quality of the linked to financial transactions or flows. In economic analysis, but solely on how particular, it should include in the evaluation environmental values are incorporated into that any positive or negative external impacts which analysis. We therefore adopt a different are generated. sampling strategy. The main finding of this Box 1. What Is Required? The requirements for the economic evaluation of projects are given in the Bank's Operational Policy (OP) 10.04 on economic evaluation of investment operations, and its companion Bank Procedure (BP) 10.04. OP 10.04 specifies that "economic analysis [must be conducted] to determine whether the project creates more net ben- efits to the economy than other mutually exclusive options for the use of the resources in question." BP 10.04 further elaborates that "[t]he economic evaluation of projects integrates financial, institutional, technical, so- ciological, and environmental considerations." Environmental Economics Series 3 A Review of the Valuation of Environmental Costs and Benefits in World Bank Projects review is that, there has been a substantial The review begins by discussing the potential increase in the number of projects incorporating role of environmental valuation in World Bank environmental values into the analysis since the projects. The methodology used in the review is earlier review. However, many projects that presented in Chapter 3. The overall results are carry out a cost benefit analysis (CBA) still do presented in Chapter 4. Chapters 5 to 8 then not quantify or value environmental impacts. examine in more detail the use of valuation in The use of environmental valuation in projects, each broad sector: agriculture, energy, trans- moreover, is often poorly documented, making portation, and water supply and sanitation. it difficult to assess both the extent to which it is Chapter 9 discusses the special case of used and the quality of the work. evaluating global environmental benefits. 4 Environment Department Papers 2 The Role of EnvironmentalValuation For many years, the environmental impacts of Environmental Valuation in the Project projects--whether positive or negative--were Cycle either ignored or, at best, placed in a list of Environmental valuation can play a role at many `intangible' costs and benefits that points in the preparation of Bank-financed complemented the formal economic analysis. projects. The most obvious, of course, is in This was due partly to a lack of awareness about appraisal--in helping determine whether the the importance of environmental impacts, and benefits of a project justify its cost, or whether a partly to a lack of appropriate methodologies to project is a cost-effective way of meeting a given measure them in a way that would allow them objective. Many of a project's costs and benefits to be incorporated into standard cost-benefit are likely to be environmental in nature, and analyses. Both problems have been largely valuation allows these costs and benefits to be overcome in recent years. In particular, a very included in the overall analysis. But valuation extensive literature has developed on the can also play an important role at many other valuation of environmental costs and benefits. stages of the project cycle, as shown in Table 1. Table 1. Environmental assessment, economic analysis, and the project cycle Project stage EA activity Associated economic analysis activity Preparation Environmental screening Potential environmental costs and benefits are considered on a preliminary basis Preparation of EA terms of Requirement to quantify environmental impacts and assign reference (TOR) monetary values spelled out EA team selection EA team includes resource or health economist, as appropriate EA preparation EA team analyses the impact of project alternatives and compares them, using monetary values on their costs and benefits, where feasible Review of EA The Bank reviews the EA report, including the economic analysis Appraisal Incorporation of EA into EA findings, including the environmental costs and benefits, are project design and incorporated into the project economic analysis and the documentation estimation of the economic rate of return Negotiations Agreements reached on actions to be taken, based on the findings of the EA Implementation Environmental supervision Supervision includes monitoring the project's actual environmental costs and benefits Source: Dixon and Pagiola, 1998. Environmental Economics Series 5 A Review of the Valuation of Environmental Costs and Benefits in World Bank Projects · At the identification stage, or in prior Although valuation of environmental impacts economic and sector work (ESW), it can can and should play an important role help diagnose problems and prioritize throughout the project cycle, the analysis in this interventions. For example, by showing that paper focuses on its role in project appraisal, as current land use practices lead to severe this is the step in which the best documentation downstream problems, it can help is available. determine that a watershed management project may be necessary.3 Environmental Valuation Methodologies · During preparation, it can help determine Many methods for valuing environmental what approach is best suited to addressing impacts are found in the resource and the problem. In the case of land use environmental economics literature (Dixon and practices that cause downstream problems, others, 1994; Hufschmidt and others, 1983; for example, it might point to the need for Braden and Kolstad, 1991; Hanemann, 1992). creating a mechanism that internalizes those Some are broadly applicable, some are externalities (as in the Costa Rica Ecomarkets applicable to specific issues, and some are Project). Alternatively, if use of damaging tailored to particular data sources. As in the land use practices is driven by policy case of private market goods, a common feature distortions, it may point to the need for a of all methods of economic valuation of policy reform program. As preparation environmental goods and services is that they progresses, valuation of expected are founded in the theoretical axioms and environmental costs and benefits can also principles of welfare economics. These lead to adjustments in project design--by measures of welfare change are reflected in dropping sub-components that appear less people's willingness to pay (WTP) or beneficial than originally anticipated, for willingness to accept (WTA) compensation for example, and expanding others that now changes in their level of use of a particular good appear more beneficial. or service (Hanemann, 1991; Shogren and Hayes, 1997). · During implementation, the extent to which expected environmental costs and benefits Valuation is a two-step process. The first step in are being realized--and whether any any economic valuation of environmental unexpected impacts occur--should be impacts is to determine what those impacts are. monitored, just as other project impacts are This includes understanding the nature of the monitored, so that mid-course corrections impact and its magnitude; who is affected and may be made if necessary. in what way; and what alternatives they have. As shown in Table 1, this step is often closely · During evaluation of completed projects, tied to the environmental assessment (EA) valuation plays the same role as it does in process. The bulk of the work involved in appraisal, namely it contributes to the valuation actually concerns quantifying the overall evaluation of the project's impact, biophysical relationships. In many cases, this this time on an ex post rather than ex ante requires tracing through and quantifying a basis. chain of causality such as that shown in Figure 1 6 Environment Department Papers The Role of Environmental Valuation Figure 1. Valuing the impacts of a reforestation project Change in Change in Change in Change in farm availability production Reforestation hydrological household of water to of irrigated flows income irrigation agriculture Other changes Other changes Other impacts Other impacts in ecosystem in ecosystem on human on human well- functioning services activity being Biophysical relationships Valuation in narrow sense (e.g., price of crops produced under irrigation) Source: Adapted from Pagiola, Acharya, and Dixon (forthcoming). for a hypothetical reforestation project. observed behavior of producers and Valuation in the narrow sense only enters in the consumers. They often use market prices second step in the process, in which the value of and are most often applicable in cases the impacts is estimated in monetary terms. where the environmental impacts are on goods and services traded on markets. Different users and authors often classify the various methods of valuing environmental · Indirectobservedbehaviormethods. This impacts differently, but the different grouping category of methods also uses actual and naming systems converge to a broad observed behavior data but not that of the classification that depends on whether specific environmental good or service in measures are based on observed or hypothetical question. In absence of actual market behavior, and whether measures are direct or behavior, these methods use observations indirect. on actual behavior in a surrogate market, which is hypothesized to have a direct · Measures of economic value based on relationship with the good or service of observed behavior. This category includes interest. Examples of methods in this methods of valuation that use data on category include hedonic pricing methods actual observed behavior and is further (which use statistical techniques to break divided into direct and indirect observed down the price paid for a good and service behavior methods. These methods, when into the implicit prices for each of its they can be applied, are generally attributes, including environmental considered preferable to those based on attributes such as access to recreation or hypothetical behavior. clean air) and travel cost methods (TCM) (which use observed costs to travel to a · Direct observed behavior methods. These destination to derive demand functions for methods derive estimates of value from the that destination). This group also includes Environmental Economics Series 7 A Review of the Valuation of Environmental Costs and Benefits in World Bank Projects cost-based methods (such as replacement and reliable estimates under certain conditions. cost methods, which value services at the These include that the commodity or service cost of replacing them, for example, the cost being valued is identical at the site where the of building a water treatment plant to estimates were made and the site where they replace a water purifications service are applied; and that the populations affected provided by an ecosystem) that do not have identical characteristics. Of course, the exactly reflect (sometimes underestimate original estimates being transferred must and sometimes overestimate) welfare themselves be reliable for any attempt at (benefit-based) measures of value. transfer to be meaningful. Measures of economic value based on Each of these approaches has seen extensive use hypothetical behavior. In this category of in recent years, and an extensive literature exists methods, valuation is based on hypothetical on their application. In general, measures based rather than actual behavior data: people's on observed behavior are preferred to measures responses to direct questions describing based on hypothetical behavior, and more direct hypothetical markets or situations are used to measures are preferred to indirect measures. infer value. These methods can be divided into However, the choice of valuation technique in direct hypothetical (for example, contingent any given instance will be dictated by the valuation (CV), in which respondents are asked characteristics of the case and by data directly how much they would be willing to pay availability. Several techniques have been for specified benefits) and indirect hypothetical specifically developed to cater to the (contingent ranking or conjoint valuation, which characteristics of particular problems. The TCM, ask respondents to rank different bundles of for example, was specifically developed to goods) measures of WTP or WTA. measure the utility derived by visitors from sites such as protected areas. The change in Benefits transfer. A final category of approach productivity approach, on the other hand, is is known as benefits transfer. This is not a very broadly applicable to a wide range of methodology per se, but rather refers to the use issues. CV is potentially applicable to any issue, of estimates obtained (by whatever method) in simply by phrasing the questions appropriately, one context to estimate values in a different and as such has become very widely used-- context. For example, an estimate of the benefit probably excessively so, as it is easy to misapply obtained by tourists viewing wildlife in one and, being based on hypothetical behavior, is park might be used to estimate the benefit inherently less reliable than measures based on obtained from viewing wildlife in a different observed behavior. Data availability is a very park. Benefits transfer has been the subject of frequent constraint and often restricts the choice considerable controversy in the economics of approach. Hedonic price techniques, for literature, as it has often been used example, require vast amounts of data, thus inappropriately. A consensus seems to be limiting their applicability. emerging that benefit transfer can provide valid 8 Environment Department Papers Assessing EnvironmentalValuation 3 in World Bank Projects This review focuses on the use of environmental environmental components and carry out some valuation in the economic analysis of World analysis of project benefits. However, most LIL Bank projects. It examines the extent to which and TAL projects are excluded, as those types of the economic analysis of World Bank projects loans generally do not require a full economic incorporates environmental costs and benefits, analysis. The review focuses on projects which whether direct or in the form of externalities, would usually be required to carry out a full and how well valuation was used. cost-benefit analysis, but also includes some projects that carry out a cost-effectiveness or incremental cost analysis. Projects Reviewed The review examines projects in the World The final sample of projects reviewed includes Bank's environmental portfolio, namely projects 101 projects. A full list of the projects examined which are classified as environmental according is provided in the Appendix. Table 2 shows the to the new thematic codes.4 The selection of projects included in the review, categorized into themes is based on the objectives of the project's four major sectors: agriculture, energy, operation. The `Environment and Natural transportation, and water supply and Resources' thematic group includes the sanitation. The agriculture sector includes following sub-themes: biodiversity, climate irrigation and drainage projects, as well as change, environmental policies and institutions, forest or other natural resource management land management, pollution management and (NRM) type of projects. Some projects have environmental health, water resources components in more than one sector; they are management, and other environmental and listed under both sectors as appropriate. For natural resources management. Projects with example, the Beijing Second Environmental Project environmental themes approved in fiscal years has a sewerage component (water sector) and a 2000, 2001, and 2002 are considered.5 This boiler conversion component (energy sector). portfolio of some 150 projects includes several The total number of project components is 108. types of lending instruments. The review Table 2 also shows the total costs of the projects, focuses primarily on investment lending which includes the amounts financed by instruments: specific investment loans (SIL), International Bank for Reconstruction and sector investments and maintenance loans Development (IBRD) and International (SIM), and adaptable program loans (APL).6 Development Agency (IDA) loans, Global Some learning and innovation loans (LIL) and Environment Facility (GEF) and other donors' technical assistance loans (TAL) are also grants, as well as any public and private sector included, when they have substantial financing of the project.7 Environmental Economics Series 9 A Review of the Valuation of Environmental Costs and Benefits in World Bank Projects Table 2. Number and cost of projects evaluated, by sector and region Number of project components East Europe Latin Middle Average Sub- Asia and America East and Total project Saharan and Central and North South cost cost Africa Pacific Asia Caribbean Africa Asia (billion (million (AFR) (EAP) (ECA) (LCR) (MNA) (SAR) Total US$) US$) Energy 2 6 10 1 0 6 25 6.0* 251.2* Transportation 5 5 0 3 0 3 16 5.7 354.0 Agriculture, 4 4 7 8 4 5 32 2.6 78.5 fishing, and forestry Water, 6 8 6 7 5 3 35 4.8 136.5 sanitation, and flood protection Total/Average 17 23 23 19 9 17 108 19.1 174.8 Notes: Projects with components in multiple sectors are counted separately in each appropriate sector. *Does not include the Chad/Cameroon Oil Pipeline Project, which alone costs US$3.7 billion. Agriculture and water supply and sanitation are Europe and Central Asia (ECA) region has the the two sectors with the most projects. The highest number of energy projects reviewed. average cost of projects in the water supply and Projects in the agriculture and water supply and sanitation sector is about twice that of projects sanitation sectors are found in all regions. in the agricultural sector. Although there are fewer projects in the energy and transportation Methodology sectors, they have the highest average cost per project, reflecting the magnitude of investments The review is based on information contained in in these sectors. the project's appraisal document (PAD), particularly the summary information Table 2 also shows the distribution of projects concerning the EA and the cost benefit analysis evaluated by sector and region. Most regions (CBA) in Annex 4 of the PAD. It does not take have several projects in each sector. The Middle into account any other documents that may East and North Africa (MNA) region has the have also been presented as a part of the fewest number of projects reviewed and also no project's approval process. In some cases, projects in the energy or transportation sector. additional documentation was sought from task There is only one energy projects in the sample teams to clarify how the analysis was from the Latin America and Caribbean (LCR) conducted, but time and resource constraints region, but seven projects in the water supply precluded doing so for more than a handful of and sanitation sector. The East Asia and Pacific projects. With some notable exceptions, the (EAP) region has the highest number of response rate to such requests for additional transportation projects reviewed, while the information was very low. 10 Environment Department Papers The Role of Environmental Valuation All projects do not necessarily require the use of objectives, similar types of interventions, and environmental valuation, and even among comparable scale of investments. This left those that do, needs are likely to vary several projects for which no information was substantially, given differences in local available on likely environmental impacts. In circumstances and in project activities. The the absence of any other information, these review initially planned to rely largely on the projects were assumed to have either no EA carried out for each project to assess the environmental impacts or only minor impacts need for valuation. The EA summary, however, that might not require valuation. proved to be of limited usefulness in this regard. In particular, there was little discussion Limitations of any expected positive environmental impacts, even though all the projects included in the Several limitations of the analysis should be review have one or more environmental borne in mind in interpreting results. First, the objectives. Indeed some of the projects with the analysis focuses only on approved projects. By strongest environmental objectives have definition, these are all projects for which sometimes been classified as category C benefits are deemed to exceed costs. If projects projects.8 The EA process, or at least the with large environmental benefits were not summary of it provided in the PAD9, seems approved--or perhaps not pursued in the first generally primarily concerned with identifying place--because their environmental benefits adverse environmental impacts that would were not measured, they would not be in the violate the Bank's operational and safeguard sample. policies or the country's own environmental regulations. Where positive environmental By focusing on PADs, the analysis also only impacts are expected, these are often discussed looks at the use of environmental valuation in outside the EA summary.10 In many cases, the the completed project design. The extent to PADs contain little if any discussion of specific which valuation may have been used in environmental impacts. In only a few cases is preceding steps, as discussed in Chapter 2, is sufficient information provided to indicate that largely invisible. a project is likely to have few significant Determining whether projects valued any environmental impacts that would warrant valuation.11 environmental impacts and included those in the CBA proved much more difficult than Several additional criteria were used, therefore, expected. In large part, this difficulty stems to assess whether environmental impacts in any from the limited amount, and sometimes poor given project are likely to be sufficiently presentation, of the information provided in the important to warrant a valuation effort. Projects PAD. In several instances, the environmental that listed one or more environmental themes as benefits generated by a project are discussed at their primary objectives were considered likely a great length in qualitative terms, but then only to have environmental impacts significant an overall net present value (NPV) of costs and enough to be valued. Projects that listed benefits is given. Whether any of the environmental themes as secondary objectives environmental benefits discussed were actually were compared to other projects with similar valued, and if so, how they were valued, is often Environmental Economics Series 11 A Review of the Valuation of Environmental Costs and Benefits in World Bank Projects unclear. Although BP 10.04 stresses that and replicable", this is often far from the case economic evaluations need to be "transparent (Box 2). Box 2. Presenting the Results of Environmental Valuation Presenting the results of the environmental valuation in a clear and transparent way is essential to assessing it. Unfortunately, most projects reviewed performed very poorly in this area. The table below shows an example of good presentation, taken from a project outside the review sample. In this case, all the benefits listed are environmental, but similar tables could easily combine environmental and non-environmental benefits. This table has several desirable properties: · It shows different benefits separately. This is particularly useful when projects have both environmental and non-environmental benefits, as it allows their relative importance to be compared. · It includes place-holders for costs and benefits that could not be quantified, with comments to provide what- ever qualitative information may be available. · It clearly shows the uncertainty of some of the estimates by giving results for different scenarios and show- ing ranges rather than single figures; further limitations of the estimates are noted in the comments. Estimated costs and benefits of the natural reserve management component of the Haiti Forest and Parks Protection Technical Assistance Project (US$ million)a Degradatio Degradatio n halted b n reduced b Comments Costs Project expenses 6 6 Includes post-project maintenance costs Forgone agricultural income 2 2 Forgone logging income ? ? Unlikely to be large Total quantified costs 8 8 On-site benefits Tourism potential ? ? Significant, but needs additional investment Sustainable harvest of · Timber ? ? Limited potential in one area · Non-timber products ? ? Probably important, but no data Biodiversity/natural habitats ? ? Global benefit: regionally outstanding ecosystems, many endemic species Off-site benefits Reduced damage to irrigation 4-14 6-24 Does not include maintenance cost savings Reduced flood damage 2.5-5 3.5-6 Only includes damages to roads and canals Increased water availability ? ? Reduced siltation ? ? Total quantified benefits 6-19 9-30 Source: Staff Appraisal Report, Haiti Forest and Parks Protection Technical Assistance Project. Report No.T­6948­HA. 1996. Notes: aQuantified benefits shown in present value terms, discounted at 10% over an infinite time horizon. bAlternative scenarios of project outcome. 12 Environment Department Papers 4 Overall Results The broad findings of the review are presented relative to that found in the 1995 OED Review. in this chapter. It examines the extent to which Whereas only one project in 162 undertook environmental values are incorporated into the environmental valuation in that review, about a projects' economic analysis. In other words, if third of projects in this review undertake some environmental impacts are identified, are those form of valuation, though some do not then impacts valued and incorporated into the include it in the economic analysis.12 Considering that this review includes only analysis? The following sections then examine projects with explicitly environmental the use of valuation in projects in each sector. objectives, however (whereas the OED review was based on a sample of all projects), the use How often is Environmental Valuation of valuation is still in many ways Used? disappointingly low. The energy and water sector have the largest number of projects Table 3 summarizes the use of valuation of valuing environmental impacts explicitly. The environmental impacts in project analysis. agriculture sector stands out for having the Overall, these results show a very notable largest number of projects valuing increase in the use of environmental valuation environmental benefits implicitly. Table 3. Valuation of environmental impacts in project analysis Water, Agriculture, sanitation, fishing, and and flood Energy Transportation forestry* protection Total Environmental impacts valued Explicitly 5 3 3 7 18 Implicitly 0 0 6 3 9 Valued but not included in analysis 2 0 1 1 4 Environmental impacts not valued Lack of data 0 1 2 3 6 Too difficult/`un-quantifiable' 6 1 4 7 18 No reason given 7 5 8 7 27 No economic analysis 1 0 1 1 3 Note: Two forestry projects that valued only carbon sequestration benefits were not counted as valuing environmental benefits. See * discussion on valuation of global environmental benefits in Chapter 9. Environmental Economics Series 13 A Review of the Valuation of Environmental Costs and Benefits in World Bank Projects The treatment of negative environmental evaluate impacts that may be expected. To the impacts is quite different from that given to extent that an environmental management plan positive environmental impacts. Discussion of a or changes in project design eliminate adverse project's potential negative environmental impacts, there would be no need to value them. impacts generally focuses on how they are to be Still, despite all best efforts, some negative resolved or are going to be addressed by impacts are unavoidable and may still occur. It implementing environmental management is surprising, therefore, to find that only one plans. The EA process is specifically designed to project in the sample, the Cameroon/Chad Oil identify any significant negative environmental impacts early in project preparation and Pipeline Project, directly values the negative develop plans to mitigate those impacts. These environmental costs associated with the may include changes in the project design itself project's activities--presumably because this and the location of project activities. project's very high visibility required it to cover Environmental management plans may be all its bases. Other projects presumably include established and put in place to monitor and the cost of mitigating the negative Box 3. Which Costs Should Be Included in the Economic Analysis of a Project? If a project activity causes environmental damage, that damage needs to be included in the economic analysis of the project together with the activity's benefits and any other damages. To do otherwise would be to make the activity appear artificially more attractive than it is. Likewise, if additional costs are incurred to avoid such damage, those costs need to be included in the project costs considered in the economic analysis. (The decision to avoid or mitigate expected environmental damages can, of course, itself be subjected to cost-benefit analysis or, where such an approach is mandated by Bank safeguard policies or country regulations, a cost-effective- ness analysis.) However, projects do not necessarily include all of the estimated costs in their economic analysis. For example, most projects tend to omit the cost of institutional strengthening components in the economic analysis, argu- ing that their benefits are difficult to quantify and extend beyond the project itself. In many instances, the costs of institutional strengthening activities supported by a project are to develop the capacity of the environment ministry to monitor and enforce compliance with existing environmental regulations and the environmental management plans required by the project. These institutional strengthening costs may be only one subset of the overall environmental management costs associated with the project. The question that arises, then, is which of the costs of dealing with potential environmental impacts that are directly or even indirectly related to project activities should be included in the economic analysis of a project? Several projects explicitly omit the cost of measures to abate environmental damages from the economic anal- ysis. The Georgia Irrigation and Drainage Community Development Project, for example, omits the costs of environ- mental and safety measures because, it argues, the benefits from these measures are not included either. If the need for the measures arose directly from project activities, however, their cost should have been included. Conversely, if the measures were adopted on their own merits, then that decision should have been the subject of its own cost-benefit or cost-effectiveness analysis. In this case, however, omitting the cost of mitigating environmental damage can be justified on more practical grounds: the cost of these measures is only about 1 percent of total project costs, and so it likely has little impact on the analysis. In contrast, the Yemen Irrigation Improvement Project excludes more than 50 percent of the total project costs from the economic analysis. Given that the estimated rate of return for the overall project is just below 12 percent, the exclusion of more than half of the project's costs is certainly a reason for concern. In contrast to these two projects, many projects do not indicate very clearly which costs are included in the economic analysis. 14 Environment Department Papers Overall Results environmental impacts of project activities in not valuing environmental benefits. Some the overall costs subjected to the CBA. projects argue that environmental benefits are However, these costs are not always explicitly either too difficult to value or that they lack the identified in the discussion of project costs, so data necessary to do so. As lack of data may be that their magnitude--or even whether they are one reason why some projects thought included in the CBA at all--is difficult to environmental benefits were too difficult to determine.13 Box 3 discusses some of the issues value, these two categories overlap to some related to determining which costs should be extent.14 In some cases, such as biodiversity included the CBA of a project. conservation, there are undoubtedly significant methodological difficulties involved in trying to The number of projects valuing environmental quantify and value environmental impacts. It is impacts in Table 3, therefore, refers almost interesting to note that the sectors with the exclusively to instances where environmental largest number of projects valuing benefits were valued. Projects are counted as environmental impacts--energy and water-- explicitly valuing environmental benefits if the are also the sectors with the largest number of results are shown, either by indicating the value projects stating that such impacts are too of environmental benefits in dollar terms or as a difficult to value. In both sectors, there are percentage of total benefits, or by giving the examples of projects that value the same NPV or rate of return for the project with and environmental benefits that other projects claim without the inclusion of environmental benefits. are too difficult to value or "un-quantifiable." In In some cases, although environmental impacts the energy sector, several projects go as far as are not explicitly valued, the analysis clearly quantifying emissions reduction, but then do rests on the assumption that the project's not take the additional step of valuing these positive environmental impacts would generate environmental benefits. In the water sector, benefits, such as increases in yields, many projects that consider environmental productivity, or conservation of natural benefits too difficult to value chose to do a cost resources. In such cases, the valuation of effectiveness analysis (CEA). Whether this is an environmental benefits is implicit in the appropriate strategy is discussed in Box 4. broader analysis. Projects are counted as valuing environmental impacts even if they do In most cases, projects with primary not value all impacts, or only value the impacts environmental objectives value at least some of for some of the project's components. Finally, the expected environmental benefits, or at least some projects value some environmental provide a reason for not doing so. Even among benefits, but decide not to include these projects with primary environmental objectives, estimates in the CBA, either because of the however, there are several that do not value any uncertainty regarding how these values were environmental impacts. calculated or because of the global nature of the environmental benefits generated (see Chapter 9). Although no PAD explicitly says so, it seems likely that one reason for not attempting to Table 3 also indicates the reasons given, if any, value environmental benefits is that the project by projects that do not value environmental may be already justified without them. Why go benefits. Most frequently, no reason is given for to the trouble of undertaking valuation when it Environmental Economics Series 15 A Review of the Valuation of Environmental Costs and Benefits in World Bank Projects Box 4. Selecting the Appropriate Type of Economic Analysis Several projects, particularly in the water sector, opt to undertake a CEA rather than a full CBA, citing difficul- ties in valuing environmental benefits. In some cases, projects actually carry out a CBA, but because the rate of return without environmental and health benefits proves to be too low or with those benefits too uncertain, a CEA is chosen instead. A CEA is appropriate when, for example, the goal is to meet a predetermined target and the relevant question is how to achieve this standard at the lowest possible cost (Dixon and others, 1994). This is the case for the Hungary Municipal Wastewater Project, for example. The project aims to reduce water pollution emissions to levels acceptable by the European Union's (EU) environmental standards, as the coun- try progresses to fulfill the requirements for EU membership. The amount of pollution reduction has been decided and for the purposes of the project, valuing these benefits is not necessary. However, for most of the other water projects carrying out a CEA, the primary justification for wastewater treatment investment are specific outcomes, such as the protection of existing water supply sources, a reduc- tion in the incidence and costs associated with water borne diseases, the protection of downstream water sources, improved agricultural yields, the protection of tourism and amenity values, and so on. Given that multiple objectives are desired and the difficulties in measuring the impact of the project on each of these objectives, the target chosen is often input based (for example, the quantity of wastewater to be treated) rather than outcome based. While the desired environmental benefits would be generated by setting a fixed target for the quantity of wastewater to be treated, the CEA cannot help in the decision of what the target should be. Also, the environ- mental impacts of the adopted measures will depend largely on not just the quantity of wastewater treated, but also the level of treatment chosen. A CEA based on the quantity of wastewater to be treated may reject a slightly more expensive treatment option which could generate substantial additional benefits relative to the additional costs. Alternatively, a CBA might have shown that most benefits could have been achieved with a lower-cost option, and that the last increment in benefits is disproportionately expensive. would not change the conclusion that the there is also a significant missed opportunity in project should be approved? From the narrow terms of improving overall understanding of perspective of getting the project through, it is the problem. Given the very significant effort hard to argue with this logic. Nevertheless, this and expense that already needs to go into does represent a significant missed opportunity. project preparation and appraisal, the First, in terms of the project itself, it means a additional effort needed to undertake missed opportunity to adjust the design so as to environmental valuation is often small. This maximize benefits (Box 5). If environmental relatively small marginal cost could provide benefits are valued, their magnitude relative to valuable information to future projects. As the other costs and benefits may lead to a re- number of observations increase, it would also evaluation of the effort devoted to various become simpler and less risky to base components. Components which are found to evaluation on cheaper techniques such as provide particularly large environmental benefits transfer. benefits may be expanded, for example. Conversely, components that are targeted It is interesting--and surprising--that some primarily at generating environmental benefits projects in the sample do not carry out any may be reduced in scope or dropped entirely if economic analysis of the benefits generated by the value of those benefits proves low. Second, the project, environmental or otherwise. This is 16 Environment Department Papers Overall Results Box 5. Using Environmental Benefits Estimates to Revise Project Design In many instances, economic analysis is used solely to determine whether an already-designed project should be undertaken or not. This misses an important opportunity to use the results of the analysis to improve the project design. This is equally true in the case of environmental benefits. The figure below shows the estimated costs and benefits of proposed reforestation activities in the Croatia Coastal Forest Reconstruction and Protection Project (which was not in the reviewed sample), by site. The overall analysis, shown in the last column, indicates that this component, as designed, is beneficial, with a NPV of $790/ha, and an internal rate of return (IRR) of 17 percent. However, this overall result masks the fact that the costs and benefits of reforestation vary substantially from site to site--even within the same county, benefits can vary by several orders of magnitude. If only the sites with positive net benefits are included, the average benefits almost double to US$1,570/ha, and the overall IRR rises to 24 percent. As a result of this analysis, the component was restructured to drop all the proposed sites that were found to have negative net benefits, and guidelines were developed, based on the characteristics of the high-benefit sites, to select additional sites to meet the original reforestation target. NPV ($/ha) 860 -300 1,370 -1,190 1,750 1,420 -390 -450 1,440 1,380 2,790 790 IRR (%) 19 18 25 23 22 23 34 17 4,000 )ah/$( 3,000 noi attserofer 2,000 1,000 of sti 0 benef and -1,000 stso C -2,000 j ca -ejn vi n-at acur rigo co en anol ne ci inrt jd Sr egare se koajnr kinu dargiv Tr S mid Pe apssu m Pe diu ser No cavokitr Po R B Av Ze Ja Os sei M B Costs Landscape Hunting Wood production Erosion protection Source: Based on data in Croatia Coastal Forest Reconstruction and Protection Project. Staff Appraisal Report No.15518-HR. despite the fact that projects in sectors that technique used is stated or can be deduced (in traditionally do not require an economic most cases, no information is provided on analysis were excluded from the review. which teschniques are used). Use of valuation techniques The change in productivity approach is used Table 4 shows the valuation techniques used in mostly in irrigation projects, to estimate the the projects reviewed, where the specific benefits of improved water supplies on Environmental Economics Series 17 A Review of the Valuation of Environmental Costs and Benefits in World Bank Projects Table 4. Valuation techniques employed in projects reviewed Frequency used Environmental benefits valued Change in productivity 5 Water quality (impact on agricultural output) Avoided costs 11 Water and air quality improvements Contingent valuation (CV) 6 Water quality Benefit transfer 4 CO2 reduction, `watershed' benefits Hedonics 2 Flood protection Notes: Projects may use multiple valuation techniques. agricultural yields. Avoided cost methods are The limited use of benefits transfer is good used frequently in projects that aim to improve news, as this approach can often provide very air and water quality. CV is used mostly in the misleading results. The data in Box 5 illustrate water supply and sanitation sector, although this well: even within a narrowly defined the WTP studies are often aimed primarily at category of problems (here, reforestation in determining the affordability of water tariffs coastal forests in Croatia), benefits can differ by and ensure the financial sustainability of the several orders of magnitude. Taking the net project. rather than at estimating consumer result obtained at a particular site, or even the welfare increases. Hedonic analysis is used in average result at all sites, and applying it estimating the benefits of flood control, by elsewhere would be quite risky. Taking part of comparing property values in areas under flood the result and applying it, with adjustments, risk to those in safe areas, although the analysis may be a better approach. Thus taking the falls short of a full hedonic analysis by not tourist WTP for forested landscapes used in the controlling for other factors. Croatia study and using it to estimate the benefits of forest landscape in tourist areas It may appear surprising that benefits elsewhere may be justified, if tourists in Croatia transfer--in which estimates obtained and the site of interest are drawn from the same elsewhere, by whatever method, are applied to pool. As noted, several of the air quality studies the case of interest--is used to such a limited rely on transferring dose-response functions extent. With its low cost, benefits transfer is estimated in one site to another. This approach often an appealing approach. The appearance is may seem a priori plausible, in that it transfers partly misleading, in that some of the other a medical relationship, but it does not allow for approaches also use benefits transfer to a the many other factors that can affect that degree. Thus the CV studies cited in several of relationship--such as lifestyle factors that affect the projects that rely on them were actually exposure (for example, time spent outdoors) or conducted for other purposes (three of the vulnerability (for example, through additional projects reviewed conduct CV surveys risk factors such as malnutrition or smoking). specifically for valuation purposes). Projects The transferability of dose-response functions that use avoided cost methods also rely on has thus been the subject of considerable benefit transfer to a certain extent. For example, controversy. For example, Chestnut and others air pollution valuation studies often take dose (1997) found that the value of averting illness, response functions from US studies and apply as a share of income, is similar in Bangkok and them to the target countries, with adjustments. the USA, but in the same issue of the journal, 18 Environment Department Papers Overall Results Alberini and Krupnick (1997) found that illness information on the total health benefits are in Taiwan is poorly predicted by the Los provided. In the China Water Conservation Angeles dose-response function, and call into Project, water savings benefits could be as much question the transfer of dose-response as US$100 million, but are not included in the functions. Barton and Mourato (2003) compare CBA. In the Chongqing Urban Environment the transfer of WTP for water quality as Project, reduced health costs, protection of estimated with benefits transfer from a CV tourism, and amenity values are estimated to be survey in Portugal to the results of a CV survey worth as much as US$482 million. While this in Costa Rica, and find errors of as much as 100 project undertakes a CEA, these benefits are not percent, which are not reduced by adjusting for far from the total project costs of US$535 income levels. million. As this table shows, environmental benefits can at times be very substantial, and It is useful to compare estimates to the results their inclusion in the analysis can raise obtained in other studies, as a check. The estimated project returns significantly. The estimates obtained in a given project area may results shown are probably un-representative, well fall above or below the range of results however. It seems likely that many projects that obtained elsewhere without necessarily being provide no explicit information on the wrong, but such a check would at least trigger a magnitude of environmental benefits do not do caution light and justify a close re-examination so because these benefits were found to be of data and assumptions. small. Additional details on how these valuation The remainder of the review examines the techniques were used is provided in the sector- analysis in those projects which carried out any specific sections below. valuation of environmental benefits. The evaluation of how this valuation was done Impact of Environmental Valuation focuses on the appropriateness of the methodologies chosen and how they were How important are these environmental applied. The assumptions underlying the benefits relative to the other benefits generated calculations and the source of values used are by these projects? The answer varies also discussed, where applicable. Evaluating the considerably from project to project. Table 5 quality of the analysis proved difficult, shows the effect of including environmental however, as PADs often provide only very benefits on the NPV and IRR of projects that limited information on how the valuation was provide enough information for this impact to done. The discussion is organized according to be computed. Other projects provide estimates the broad sector classifications presented in of environmental benefits in ways that can not Table 2. A general description of the types of be directly compared to total benefits. For projects financed in the sector is followed by a example, the health benefits generated by the discussion of the kinds of environmental Senegal Water Sector Project are estimated to be impacts that arise, and how those impacts have about US$10 million in the early years of the been valued in the existing economic literature. project, reaching as high as US$114 million in This provides a context to evaluate how the the project's final years. However, no environmental impacts were valued. Environmental Economics Series 19 A Review of the Valuation of Environmental Costs and Benefits in World Bank Projects Table 5. Effect of including environmental benefits on estimated project returns Change in Change in IRR Project NPV (%) (% points) Comments Poland Geothermal 4 Estimated health benefits range from US$20-23 million and represent 95% of total environmental benefits Krakow Energy Efficiency 60 Not clear whether global benefits are included China Hubei Hydropower 49 1.9 Additional global environmental benefits of US$13.6 million not included in NPV and IRR Beijing Environment (Energy 67 Environmental benefits include reduced health costs and Component) land savings (see project discussion in section 5) Uruguay OSE Modernization 10 Without the environmental benefits, the project's sewage treatment component is not justified Cartagena Water Supply 41 IRR with environmental benefits is 16% Tehran Sewerage 153 8 Higher benefits estimates based on WTP for sanitation and avoided costs. Lower estimates based only on avoided costs benefits Azerbaijan Irrigation 6 Water supply benefits important in sensitivity analysis Armenia NRM 130 4 Environmental benefits include both local and global environmental benefits Mumbai Urban Transport 36 20 Environment Department Papers 5 Energy Twenty five projects, relating primarily to projects, only four projects incorporate these provision of energy and reform of the power benefits into the analysis. Environmental costs, sector, are reviewed for this analysis. Regional on the other hand, are evaluated in only one differences in the focus of projects in this sector project, the Chad/Cameroon Oil Pipeline Project. are fairly pronounced. Fifteen of these projects concern improving the efficiency of Air Quality Impacts of Energy Projects transmission and distribution of energy supply and/or conversion of cleaner energy supply The burning of fossil fuels is a major cause of air sources (that is, switching from coal to gas pollution in urban areas. Energy production boilers). These are primarily in the ECA from coal fired power plants, large boilers, and region.15 All three of the large scale furnaces are certainly a main contributor to air hydroelectric power (HEP) projects reviewed pollution in urban areas, as are emissions from are in China. Four of the energy projects motor vehicles. Many studies have investigated reviewed focus on the development of the impacts of air pollution, particularly on renewable energy or small scale HEP, primarily health, and how to value those impacts.16 in context of expanding access to electricity in rural areas. Three projects concern the A detailed study of fossil fuel combustion in six development of new energy supply sources in developing country cities (Lvovsky and others, the oil, gas, and mining sector. The total cost of 2000) finds that local health impacts account for the reviewed projects amounts to US$6 billion-- approximately two thirds of the environmental not including the Chad/Cameroon Oil Pipeline damages from fuel combustion. Particulate Project, which by itself amounts to US$3.7 emissions alone contribute to almost three- billion. quarters of the local health costs. Global damages due to the effects of carbon emissions Environmental impacts can often be substantial on climate change are the second major source in this sector, given the scope and nature of of environmental damage, accounting for a fifth investments. However, there seems to be little of total environmental damages. Based on these connection between the environmental impacts results, Lvovsky and others propose a identified and discussed in the EA and the CBA. methodology for the rapid assessment of urban This is true even when the environmental air pollution health costs. The methodology impacts are positive. For example, while requires information on annual average reduced emissions of air pollutants are exposure, demographics of the population highlighted in the EA of a majority of the exposed, and average annual income (and the Environmental Economics Series 21 A Review of the Valuation of Environmental Costs and Benefits in World Bank Projects associated relevant income elasticities) to sources of additional energy include efficiency calculate health damages due to air pollution. improvements in the distribution and The study provides a particularly useful transmission of energy to reduce losses; the reference point for the health costs of development of renewable energy sources; the particulate matter, which is known to be the construction of HEP facilities; and the major contributor to health damages associated exploration and development of oil and gas with air pollution. reserves. Quantifying the emission impacts of alternative energy sources does not appear to be In rural areas, it is primarily the use of biomass the major obstacle in the valuation of fuels for heating and cooking that is often a environmental impacts, at least in the context of significant source of air pollution. It is estimated urban air pollution. In fact, several projects do that as many as 90 percent of rural households provide detailed estimates of the expected still rely on biomass fuels, the use of which can reduction of emissions of different types of lead to levels of indoor air pollution many times pollutants. Few projects, however, take it one higher than international ambient air quality step further and identify the health impacts of standards (Bruce and others, 2000). The burning these emission reductions. Identifying these of biomass fuels produces many substances that impacts is the crucial step in the valuation are damaging to human health, such as process, as the methodology to value the particulates, carbon monoxide, nitrous oxides, benefits of air pollution reduction in monetary sulfur oxides (from coal), formaldehyde, and terms is reasonably well developed. The other carcinogenic substances. Women and discussion below is intended to illustrate how children, in particular, may be exposed to very some of the projects in the energy sector high levels of these pollutants for 3-7 hours identify the health impacts of emissions daily for many years. In mountainous areas and reductions and use this information in the during the winter, exposure is even longer. valuation of the environmental benefits Consistent evidence suggests exposure to generated by the project. biomass smoke increases the risk of childhood acute lower respiratory infections, chronic Valuing Changes in Air Quality obstructive pulmonary disease, and lung cancer. Recent studies have also found Generally, the benefits of energy projects are associations between biomass smoke exposure estimated by calculating the consumer surplus and upper respiratory infections, asthma, generated by the consumption of the additional tuberculosis, low birth weight and prenatal energy produced. The change in consumer mortality, and eye irritation and cataract (von surplus is often proxied by the incremental Schirnding and others, 2002). A smaller number revenues generated by the project. A number of of studies quantifying the impacts of exposure the projects examined entail energy efficiency to indoor air pollution exist compared to investments that will reduce the amount of outdoor air pollution. inputs necessary to produce a given amount of energy output. In such cases, project measures The projects examined cover a wide variety of also generate benefits due to the resource contexts, but have in common the primary savings incurred. These resource savings are objective of providing additional energy. The typically included in the estimates of the project 22 Environment Department Papers Energy benefits when applicable. If a more efficient model developed by the World Bank (Hughes production process, or the switch to an and Lvovsky, 1998). To value the expected alternative production process (for example, the reductions in mortality and morbidity that switch from a coal to a gas boiler), also results result from the project's emission reductions, in lower emission of pollutants, the avoided the analysis uses estimates developed in the health costs can be viewed as just another type United States based on the costs of health care, of cost savings that should be considered in the wage rates, and the WTP to reduce the risk of evaluation. While the EA of fourteen projects death. These values are adjusted to reflect the emphasize the air quality improvements that differences in income levels between Poland will result from the project's measures, only 4 and the United States. In addition to the health projects actually value these benefits.17 These impacts, the benefits from reduced air pollution are the Poland Geothermal District Heating and in improving the attractiveness of the area for Environment Project, the Krakow Energy Efficiency both visitors and residents are also included. Project, the Beijing Environment Project, and the The estimated health benefits, however, China Hubei Hydropower Project. represent over 95 percent of the total environmental benefits, which amount to between US$20-23 million in NPV terms. It Outdoor air pollution would have been of interest to know how these The Poland Geothermal District Heating and environmental benefits compared to the heat Environment Project provides an interesting cost savings benefits, but this information is not example where the valuation of air quality presented anywhere in the PAD.19 benefits proved significant, as the heat cost savings alone would not have yielded a Two other projects, similar in spirit to the satisfactory rate of return for the project.18 The Poland project discussed above, replace coal- valuation of the air quality benefits also seems fired boilers with oil and gas boilers. One is the motivated by the supplemental funding Krakow Energy Efficiency Project, also in Poland. provided by the GEF, which requires that such While no information is provided on how the funds finance only the additional costs incurred environmental benefits were valued, they are to reduce carbon emissions which are not said to amount to US$9 million, or about 15 justified by the local benefits incurred. The percent of the discounted net benefits generated primary objective of the project is to reduce air by the project. The environmental benefits will pollution in a ski resort area in southern Poland result from annual energy savings equivalent to that experiences considerably higher levels of 73,000 tons of coal, an amount equivalent to 10 air pollution during the heating season. This is percent of total fuel consumption in 2000. It to be achieved by replacing coal-fired space appears the environmental benefits calculated heating boilers with cleaner energy sources include both the local benefits of improved air such as geothermal heat and natural gas boilers. quality and the global benefits of reduced greenhouse emissions.20 The Beijing The local health benefits resulting from the Environment Project also values the health estimated reduction in the emission of total benefits from reduced air pollution from boiler suspended particles (TSP) and sulfur dioxide conversion to natural gas. The air quality model (SO2) are calculated using a dose-response uses predicted emissions reduction for TSP and Environmental Economics Series 23 A Review of the Valuation of Environmental Costs and Benefits in World Bank Projects SO2, since no reliable estimates of ultra fine It could be argued that when the project particulate matter (PM10) reduction could be benefits, the additional consumer surplus and made. The project acknowledges that since resource savings incurred, are enough to justify the project costs, there is no need to estimate the PM10 are the most damaging to human health, the health damages are underestimated.21 environmental benefits for the analysis. However, different project alternatives under consideration may have different impacts on The China Hubei Hydropower Project entails the the amount of pollutants emitted. Nearly all construction of four small or medium HEP projects reviewed provide evidence of carrying stations to replace 226 MW of energy being out a least cost analysis to justify the chosen produced from coal fired units and gas turbines project alternative, as it is standard practice in units. This would result in an average annual the energy sector to consider both investment reduction of 4,400 tons of SO2, 1,000 tons of and operating costs of alternatives to meet the TSP, 2,200 tons of nitrogen oxide (NOx), and same energy requirements. However, there is 704,900 tons of CO2 emissions. These emissions no evidence to suggest that this comparison reductions are estimated to generate US$21.9 takes into account the environmental impact of million of local environmental benefits and different alternatives. Examining the pollution emission impacts of alternative energy solutions $13.6 million of global environmental benefits, should clearly receive more emphasis in the in NPV terms (but no details are given on how evaluation of energy projects. When these estimates were made).22 The presentation appropriate, the choice between alternatives of the project's rate of return with and without may necessitate the consideration of the the inclusion of environmental benefits is associated health impacts due to different particularly helpful. emission scenarios. Box 6. Valuing Environmental Costs in the Chad/Cameroon Oil Pipeline Project The Chad/Cameroon Petroleum Development and Oil Pipeline Project supports the construction of drilling produc- tion wells and other infrastructure in Chad and an oil pipeline to transport the oil to the coast of Cameroon to be exported. The financing for the project includes US$92.9 in IBRD and US$400 million IFC loans. Adding the US$2.2 billion from private oil companies and other sources of financing, the total cost of the project stands at US$3.7 billion. The massive scale of activities supported by this project has certainly been one of the factors contributing to concerns regarding its potential negative environmental impact. The project is expected to generate substantial benefits, in terms of oil revenues, for both countries. The devel- opment of the oil exploration capacity in Chad and the pipeline to transport it in Cameroon are expected to generate revenues worth US$463 million for Chad and US$144 million for Cameroon, in present value terms. By comparison, the present value of incremental environmental and social costs are estimated at less than US$10 million for both countries. The implementation of environmental management plans cost an additional US$15 million to each country. However, even with these environmental management plans, additional neg- ative impacts could impose a cost to the countries of Chad and Cameroon. The costs identified and valued in the CBA of the project include: oil spill costs, agriculture production losses, livestock fodder losses, and forest and bush product losses. These costs amount to approximately US$13.5 million and some would be compen- sated under the agreements with the oil producing consortium (for example, the clean up costs in the event of an oil spill). 24 Environment Department Papers Energy Indoor air pollution impact of this switch in energy sources on indoor air pollution is only briefly mentioned. Three of the projects reviewed focus on The rate at which households will switch increasing access to electricity in rural areas: the energy sources is a frequent source of Vietnam Rural Energy Project, the Bangladesh uncertainty in such projects. Clearly the Rural Electrification and Renewable Energy environmental benefits generated, if any, will Development Project and the Sri Lanka Renewable depend on the extent to which households Energy for Rural Economic Development Project. continue to use biomass fuel for cooking and All three projects partly support the heating. Only if electricity service becomes development of some form of renewable energy reliable and affordable enough could it be source (hydropower and/or solar), in addition expected to replace the use of biomass and to providing access to electricity from the make significant contributions to reducing conventional main grid lines. It is expected that indoor air pollution. Therefore, it may be that these energy sources will replace less efficient the impact of these projects on reducing indoor and more expensive sources, such as kerosene air pollution is very difficult to predict. (for lighting), diesel, and batteries. The potential Environmental Economics Series 25 6 Transportation Most of the projects in this sector consist of Environmental Impacts of Transportation construction, rehabilitation, and/or Projects maintenance of roads, rails, and ports. When The major environmental impacts of substantial construction is involved, the transportation projects are related to land use environmental screening process classifies such changes and air pollution. The impact on land projects as requiring a full EA. Of the 16 use changes will depend to a large extent on transportation projects reviewed for this whether the project under consideration analysis, 13 require a full EA and only 3 are involves new construction or just rehabilitation categorized as only requiring a partial EA. The and maintenance of existing infrastructure. If a total cost of the 16 transportation projects project involves new construction, the potential reviewed amounts to US$5.7 billion, or about environmental impacts would ideally be US$354 million per project. identified during the design phase of the project and some procedure to minimize adverse Despite the magnitude of the investments impacts chosen. Even so, some direct impacts of involved and the EA status of a majority of the construction and the choice of site may occur. projects, the EA of only 6 of the projects To the extent that land acquisition and reviewed concludes that there are significant compensation for resettlement takes place, environmental impacts and raise specific some of these costs are reflected in the project concerns. Some of the environmental impacts costs incurred. In addition to the direct listed are the possible negative impact of project environmental impacts, new infrastructure, measures on air pollution and on sensitive particularly roads, may also cause indirect ecological areas. Construction related impacts environmental impacts by providing access to are generally addressed by establishing areas previously undeveloped. These indirect environmental management plans, if they are impacts may be even more damaging than the temporary, localized, and amenable to direct impacts of the project. Efforts to identify mitigation through appropriate measures. The and mitigate such indirect impacts are therefore relevant costs incurred are part of the overall just as important. But as mitigation of budgeted project costs (see Box 2), but may not environmental impacts is costly, the costs and necessarily be subjected to the CBA carried out benefits of such measures should be assessed as by the project. The EA explicitly foresees well (Belli and others, 2001). positive environmental impacts, in the form of reduced air pollution, in only two of the For transportation projects where the projects. infrastructure already exists, most direct and Environmental Economics Series 27 A Review of the Valuation of Environmental Costs and Benefits in World Bank Projects indirect environmental impacts are likely to account for the largest share of these damages have already occurred. The major across all cities (Lvovsky and others, 2000). environmental impact of rehabilitation and maintenance of existing transportation Valuing the Environmental Impacts of infrastructure is therefore related to the impact Transportation Project of traffic volumes on air pollution, noise, and vibration. For road improvements, however, the The main benefits valued in transportation impact of higher traffic volumes on air projects are resource savings--generally pollution is difficult to predict a priori. Road reduced operating costs and passenger time improvements may reduce congestion and so savings, using for the economic analysis reduce emissions per vehicle, as less time is standard traffic management models such as spent idling or at low speeds. However, these the World Bank's Highway Design and same improvements are likely to divert traffic Maintenance standards model (HDM III), or similar models.23 In a few cases, the benefits of from other modes of transportation and to increased safety and reduced emissions are also generate additional traffic. Most models used to valued. The three projects which value reduced value the benefits of transportation investments emission benefits are the Senegal Urban Mobility were developed primarily to estimate vehicle Improvement Project, the Mumbai Urban Transport operating costs savings and passenger time Project, and the São Paulo Metroline 4 Project. savings. However, most models can now provide some estimate of emission impacts based on predictions of vehicle miles traveled Air quality impacts by different types of vehicle as a result of The Senegal Urban Mobility Improvement Project specific transportation investments. The is the only project that explains how the information on the emissions impact of project benefits of reduced air pollution are estimated. measures can then be used with other data, It is also the only project that values air quality such as air quality and respiratory illness data, benefits of road rehabilitation investments. To to quantify the environmental impacts of the estimate the associated health benefits from project. The Senegal Urban Mobility Improvement reduced air pollution, data on Dakar's Project, discussed below, provides one example emissions and air quality are used in of how this can be done. conjunction with data on the incidence of respiratory illnesses. Emissions estimates from a The importance of valuing the air pollution transportation model used to evaluate the impacts of transportation projects is highlighted impact of the project's impacts establish that the in a World Bank study of air pollution in six public transport sector contributes up to a third metropolitan developing country cities. In that of the air pollution in the city. The Dakar area study, motor vehicles are identified as the averaged 25,150 yearly respiratory related second largest source of pollution damages. In illnesses. Health benefit calculations are usually cities where the mix of fuel use is based on dose-response functions, which predominantly petroleum based, vehicles provide estimates of how changes in pollution account for about half of the total levels change the risk of specific respiratory environmental costs estimated. Health impacts diseases. As precise data on the average level of 28 Environment Department Papers Transportation pollution in Dakar are not available, the benefit Land use impacts calculations are based on the assumption that In three of the projects reviewed, the Goias State project measures will lead to a five percent Highway Management Project, the Grand Trunk reduction in the prevalence of respiratory Road Improvement Project, and the Gujarat State illnesses due to transport. Presumably, the Highway Project, concerns regarding the direct average cost of treatment for the reduced and indirect environmental costs of project number of respiratory illnesses is used to arrive measures are raised in the EA report. Project at a NPV of about US$6,240 for the health measures to mitigate these impacts are required benefits generated by the road and for compliance with operational safeguard rehabilitation component of the project. Compared to the other benefits generate, the air policies instituted by the Bank. However, even quality benefits are small and amount to only with mitigation measures in place, some one percent of the total benefits estimate for this adverse impacts may still occur as a result of component of the project. the project. An attempt to measure the magnitude of the potential environmental Both the Mumbai Urban Transport Project and the damages in question would be informative to São Paulo Metroline 4 Project estimate the assess the appropriate level of measures to benefits of reduced air pollution associated with mitigate these impacts. project investments in railway transportation. The Mumbai project also has a road For example, in the Goias project, the EA finds rehabilitation component, for which estimates that paving one particular road could facilitate of reduced vehicle emission are obtained. access to an area of rare natural beauty, thus However, the benefits of reduced emissions increasing the risks of degradation in the area. from the road component are not quantified To mitigate these impacts, the project and therefore not included into the CBA of the establishes a protected area to limit access to the project. Neither project provides any area and, with appropriate installations, protect information regarding how the reduced its natural stone bridges, waterfalls, and emission benefits are estimated.24 For the interesting geological formations. A CV study Mumbai Project, the benefits of reduced air to estimate the level of visitors to the area and pollution are the second largest source of how much they would be willing to pay to visit benefits, amounting to 17 percent of the total the protected areas could help determine how benefits from the rail component. The much should be spent in protecting this area. significance of these benefits to the project's The concerns raised in the other two projects overall benefits certainly warrant more mentioned relate to the proximity of the project information on how they are calculated. In the roads to existing protected areas. Some of the São Paulo project, the benefits of reduced air mitigation measures adopted in these projects pollution are a result of a reduction in total include a 10 meter thick band of roadside kilometers of bus travel and are considered plantation on either side of the highway (to act "minor" benefits. We can only conclude from as a buffer for noise and air pollution the available information that those benefits generated), physical barriers to prevent the amount to less than 10 percent of the project's dumping of wastes alongside the highway, and total benefits.25 the establishment of a contingent fund for Environmental Economics Series 29 A Review of the Valuation of Environmental Costs and Benefits in World Bank Projects further impact studies or further mitigation the design and implementation of road measures. maintenance" (Lantran, 1994). The assessment argues that the marginal costs of maintenance It is important to incorporate these indirect works that generate significant environmental environmental impacts in the evaluation of benefits are often low. Economic analysis can transportation projects. Indeed, an earlier help determine when that is indeed the case assessment of the impacts of road maintenance and therefore such work should become a part on the environment concludes that the of a project. "environment is seldom taken into account in 30 Environment Department Papers 7 Agriculture, Fishing, and Forestry A wide variety of issues are addressed by benefits in the form of carbon sequestration and projects in this sector, such as irrigation and biodiversity conservation. In irrigation projects, drainage, crop and livestock production, land most of the benefits generated accrue to the titling, research and extension, and forest and landowner, while most of the resulting other natural resources management. The environmental impacts are externalities. In primary objective of most projects in this sector contrast, in forestry and NRM projects, most of is to increase agricultural production. The value the costs are incurred by the landowner, while of the additional agricultural output is generally the benefits generated are externalities. the only benefit valued and often used as a proxy for the overall benefits generated by Sixteen of the agriculture projects reviewed project measures. The increase in agriculture involve irrigation and drainage infrastructure production may be a result of direct measures, investment. The total cost of these projects such as rehabilitating or expanding irrigation amounts to US$1.6 billion. About half of the infrastructure, or indirect conservation other 16 projects concern forestry issues, while measures that may increase productivity or the rest are relate to general land management avoid future losses. issues, such as agriculture research and extension, community or productive Most of the project measures in this sector are partnerships, and land access/titling. These likely to produce significant external impacts. projects amount to US$1 billion. The financing of irrigation infrastructure, for example, may lead to increased use of fertilizers Irrigation and Drainage and pesticides, thereby polluting water resources for downstream users. If drainage Irrigated agriculture accounts for 60 to 80 systems are not properly designed or percent of total water use (Tiwari and Dinar, maintained, increased use of irrigated water 2002). The amount of irrigated land worldwide may lead to salinization and waterlogging. On has tripled over the last five decades, the other hand, increased productivity can lead amounting to more than 275 million hectares in to less pressure to convert other land to 2000. The development of irrigation has agricultural cultivation (Shively and Pagiola, contributed to a substantial increase in food forthcoming). Reforestation and other production. It has also generated a polarized conservation activities may generate debate concerning the social and environmental downstream benefits, such as reduced siltation impacts of irrigation developments. As one and regular water flows, as well as global study concludes, the "inadequate information Environmental Economics Series 31 A Review of the Valuation of Environmental Costs and Benefits in World Bank Projects on estimates of the full range of costs and focus of the design of most pricing schemes for benefits and the overall impacts of irrigation irrigation projects.27 In general, these are the has been a major constraint in resolving this only costs included in the CBA of irrigation controversy"(Hussain and Bhattarai, 2002). The projects. irrigation projects reviewed involve the rehabilitation of existing irrigation and drainage There is no doubt that estimating the systems rather than the construction of new opportunity and the environmental costs of irrigation infrastructure. Therefore, most of the water is a difficult task. However, ignoring environmental impacts of the infrastructure these costs is "a matter of huge practical itself, such as conversion of land into significance when it comes to irrigation" agriculture and disturbance of natural habitats, (Briscoe, 1996:17). The opportunity cost of water have already occurred. The focus here is on used for irrigation is generally high because the water use decisions and the environmental sector uses large volumes of water. In contrast, impacts of water used for irrigation. water for domestic consumption is a high- value, low-volume use. The opportunity costs of Water is difficult to value. Water use generates water in supporting natural ecosystem's both commodity and environmental values, and functioning will depend on the specific set of these values tend to be site-specific. Market circumstances, but can be potentially large--as prices for water as a commodity, for private in the case of the decline of the Aral Sea, for consumption or as an intermediary good, are example. The exclusion of the opportunity and often non-existent or subject to pricing environmental costs of water in the CBA of distortions. Water's environmental values and irrigation and drainage projects could lead to a external impacts are rarely priced (Young, significant overestimation of the benefits of 1996). Estimating these values is becoming such projects where water scarcity is an issue. increasingly important as demand for water increases. Increasing demand for water has also Irrigation and drainage investments may affect generated significant debate on the appropriate soil and water quality, both positively and pricing of water to encourage its efficient negatively. Some of these impacts, such as allocation (Tiwari and Dinar, 2002). salinization and waterlogging, can have a direct impact on agricultural productivity. Other The concept of water's `full economic costs' is impacts may affect other water users, for useful in the discussion of efficient water example, when groundwater levels and the allocation. These costs include the use, inflow of water to surface water bodies opportunity, and environmental costs of decrease, and water quality deteriorates due to allocating water for a particular purpose.26 increased use of agrochemicals. In many cases, Water should be priced so as to reflect its full projects in this sector are addressing economic costs. In the case of irrigation, the use environmental problems caused by the existing costs are the costs associated with the irrigation systems, such as salinization or construction, maintenance, and operation of waterlogging, due to improper design or lack of any infrastructure for storing, treating, and maintenance of drainage infrastructure. If distributing the water (Briscoe, 1996). The implemented judiciously, these projects are recovery of use costs have become a central generally expected to have a positive impact on 32 Environment Department Papers Agriculture, Fishing, and Forestry the environment. That is not to say that there continues to be delivered to the city's main are no environmental risks associated with reservoir, which serves 40 percent of the these projects. Quite often the EA conclusion is population. Without the benefits of the water that the environmental benefits expected supply, the rate of return for the specific project outweigh any negative impacts that may result component falls by 6 percentage points to 17.3 from the project. percent. In some instances, however, the impacts of irrigation projects would be to Most projects value irrigation benefits based on reduce the amount of water available for other the estimated net value of agricultural output uses. Several projects, for example, raise with and without irrigation water. The concerns about the possible negative impact of availability of irrigation water may allow irrigation on groundwater level. Since such increased use of fertilizer and improved seed impacts are generally difficult to quantify, varieties, leading to higher yields on a given projects generally just require that these parcel of land; cultivation of additional land; impacts be monitored during implementation. and a switch to higher value crops. The difference in revenues between the two Project measures that enhance the efficiency scenarios, after all input costs other than water with which water is delivered to an irrigation are taken into account, is the value of irrigation distribution system and distributed in the field water. Most models employ a crop budget reduce the amount of water that is not used approach, although more advanced productively, thus increasing the supply of mathematical programming techniques are water available for irrigation without reducing sometimes used. The crop budget approach, the supply of water for other purposes. This is sometimes also called the "residual imputation" the primary objective of several of the irrigation approach (Southgate, 2000), is used in nearly all projects reviewed. For example, the Yemen projects reviewed. Irrigation Improvement Project estimates that the amount of water saved due to project measures The residual imputation approach provides an would allow the area irrigated to increase by 10 estimate of the benefits of irrigation to society as to 35 percent. The project analysis argues the long as the full economic costs of water are net value of the additional agricultural output taken into account. In practice, however, most produced in those areas reflects the value of the projects only consider the direct costs saved water. If this is the highest value use of (investment and operation and maintenance) of the water, then it is correct to say that the providing the water (that is, the user costs). The opportunity cost of the water used has been potential impact of a project on the availability taken into account. In the China Water of water for other uses is sometimes discussed, Conservation Project the value of the water saved but not quantified and incorporated into the is estimated from the avoided costs to obtain analysis.28 One exception is the Azerbaijan the same amount of water from an alternative Rehabilitation and Completion of Irrigation and source. However, because of the uncertainty in Drainage Infrastructure Project, which values the the prediction of the amount of annual water water supplied by the project to the city of savings due to project measures, these benefits Baku. The project's rehabilitation of the are not included in the CBA of the project. irrigation canals will ensure that water Environmental Economics Series 33 A Review of the Valuation of Environmental Costs and Benefits in World Bank Projects The impact of pricing mechanisms in increasing discusses the importance of fees in the amount the efficiency with which irrigation water is of water used and as a source of revenue to used is discussed in only one project, the maintain irrigation systems. Tajikistan Rural Infrastructure Rehabilitation Project. The project incorporates into the A reduction in water use can have significant analysis the impact of fees and management environmental implications--particularly in practices in reducing the per hectare water areas that are prone to salinization and requirements of different crops.29 Whether the waterlogging due to poorly drained soils. gradual increase in irrigation fees generates the Maintenance of appropriate drainage expected reduction in water consumption will infrastructure is also an important element to of course depend on reforms being fully mitigate the problems associated with implemented and on collection of these fees salinization and waterlogging caused or taking place.30 While a few other projects also exacerbated by excessive irrigation. Since both incorporate gradual increases in irrigation of these problems directly affect crop yields, water charges, it is not clear whether these are project benefits are estimated by the difference volumetric based charges which would lead to in the value of the agricultural output produced anticipate reductions in water use. The with and without drainage improvements. The establishment or increase of fees to cover the Egypt National Drainage Project, for example, operation and maintenance costs of irrigation assumes that the benefits of subsurface and drainage infrastructure are important to drainage improvements would immediately ensure the financial sustainability of a project's reduce waterlogging (and therefore increase investments. The potential of pricing crop yield within 2 or 3 months), while the mechanisms in mitigating some of the negative effects of the reduction of salinity would begin environmental impacts due to water overuse is to take effect on crop yields two years after the also important to consider in the analysis of installation of subsurface drainage. The irrigation and drainage investments. Box 7 estimated increase in crop yields varies from 5 Box 7. Irrigation in Central Asia Substantial investments in irrigation during the Soviet era have led to a massive dependence on irrigated agriculture in the Central Asian republics in the Aral Sea Basin. Agriculture, almost all of which is irrigated, provides 20­40 percent of GDP and employs some 28 million people. None of these irrigation systems charged more than nominal water fees, resulting in extremely high levels of water use, with water applications per hectare 50 percent higher than comparable countries such as Pakistan. The environmental consequences of this system have been well documented. They include, most spectacularly, the drying up of the Aral Sea, but also substantial salinization problems that affect downstream agriculture and the health of riparian popula- tions. Over the last decade, lack of funding has resulted in plummeting investment in irrigation and drainage systems, and near-collapse of maintenance. As a result, as much as 70 percent of water abstracted for irrigation is wasted before it reaches the fields, and many drainage systems are almost inoperable. Unreliable or scarce water supply have reduced the area irrigated substantially, usually affecting poorer households dispropor- tionately. Source: Pagiola and others 2002. 34 Environment Department Papers Agriculture, Fishing, and Forestry to 20 percent, depending on the type of crop specific conditions of the site under question and the location where it is planted. Most (Chomitz and Kumari, 1998; Pattanayak and projects, however, are not explicit on the Kramer, 2001). specific causes of the expected increases in crop yields. The impact of better drainage in Generating these environmental benefits are reducing salinization and waterlogging, as well among the objectives of most of the forestry and as other factors influencing crop yields, such as NRM projects reviewed. Measures supported the total area irrigated, cropping intensity, and by projects to achieve these goals vary and types of crops grown, are jointly evaluated. include, for example, providing secure land access to poor farmers, developing/ demonstrating sustainable farming activities, Forestry restricting activities in protective buffer zones, The loss of forest cover over the last few and improving environmental regulations and decades has been a cause of concern (FAO, management practices to reduce forest fires. 2001). Forests provide many valuable Still, it is possible that some of the activities environmental services at the watershed level pursued by the projects will create (reduced sedimentation, stream flow environmental risks. The EAs of about half of regulation), at the national level (ecotourism, the projects reviewed acknowledge and list scenic values), and at the global level (carbon such risks. sequestration, biodiversity conservation). Valuing these benefits is difficult because most Natural Resources Conservation of these services have not been traded in a market and because of the limited Like the irrigation projects discussed above, understanding of the biophysical relationships most forestry and NRM projects use farm involved (Chomitz and others, 1998; Bishop, models to value the benefits of project measures 1999). Forests and other natural ecosystems also by the changes in income with and without the provide benefits by supporting the growing project. Several factors contribute to the nature-based tourism industry. These benefits predicted changes in productivity. The analysis can be valued using the travel cost or CV does not usually separate these effects. For methods--but again the benefits generated are example, in the Karnataka Watershed Development very site specific. Forests also provide many Project, the impact of conservation activities are global benefits, as discussed in chapter 9. expected to increase moisture retention in soils, reduce soil erosion and the loss of nutrients, Some of the environmental benefits of natural and increase groundwater tables. Along with resources management and watershed measures to encourage improved cropping protection measures are site specific and systems, including appropriate tillage, the use depend not just on physical characteristics, such of improved seed varieties, and balanced use of as rainfall pattern and soil types, but also on the fertilizers and pesticides, yields are expected to number of downstream users affected and how increase by 10 percent for rainfed crops and 15 they are affected. Several studies have tried to percent for irrigated crops. Thus the effect of estimate these values and emphasize that the improved NRM is embedded in the estimated values derived are highly dependent on the impact of a broader package of interventions. Environmental Economics Series 35 A Review of the Valuation of Environmental Costs and Benefits in World Bank Projects Two of the 16 projects reviewed, however, do services provided by forests ranging in value value the environmental benefits associated from US$7 to $20 per hectare.32 This is an with reduced soil erosion and increased water example of the use of Benefits Transfer. The flow due to project activities directly. These are estimated environmental benefits, including the Armenia Natural Resource Management and carbon sequestration benefits, amounts to Poverty Reduction Project and the Papua New US$0.9 million, or about 10 percent of total Guinea Forestry and Conservation Project.31 project benefits. Valuing these benefits involves some judgment as far as what values to use because impacts are The Papua New Guinea project, on the other site specific and depend on the types of hand, involves moving from large scale logging downstream uses affected. In the Armenia NRM to sustainable forest management by small Project the watersheds where project activities landowners. The value of improved soil and take place play an important role in providing water management under sustainable forest water for agricultural production and HEP management is assumed to be US$2 per hectare generation in downstream areas. The project of forest area logged for a period of 8 years. uses a value of US$10 per hectare for the After the 8 years, the benefits are assumed to watershed benefits of newly established forests fall to zero. There is no discussion on the basis and US$5 per hectare for the benefits of new for the assumptions used. It is not possible to tree plantations and the rehabilitation and judge how significant the environmental improved management of pasture land. These benefits are relative to other benefits generated values are based on a review of the literature by the project. that showed hydrological and ecosystem 36 Environment Department Papers Water, Sanitation, and Flood 8 Protection The analysis of the environmental impacts of irrigation and industrial sectors can also benefit. projects in the water, sanitation, and flood Increasing water scarcity has also highlighted protection sector differs somewhat from that in the importance of water's environmental most other sectors, where environmental costs values--its role in maintaining ecosystem and benefits are often externalities caused by functions and providing recreational benefits. project activities. The expected benefits of most The impact of water supply projects on water projects in this sector are often direct availability are generally not very significant, improvements in environmental quality-- particularly when compared to irrigation improvements in water quality, or reduced projects. Water supply investments are often pollution from wastewater discharge, for accompanied by sanitation and/or sewerage example. Although valuing these benefits can treatment investments, and the impacts of such be complicated, it is essential to justify project projects on water quality can be very investments as they are the primary objective of significant. While the disposal of household these projects. waste is only one of the sources of pollution affecting water quality, sanitation and sewage Of the 35 projects reviewed, 30 carry out a CBA treatment projects are often a key component to and 5 a cost-effectiveness analysis. Twenty three achieve reductions in the pollution levels projects have both a water supply and a affecting surface water bodies and groundwater sanitation component, 6 have only a sanitation sources. or sewerage component, and 6 deal primarily with flood protection and waste disposal and The relative merits of different methodologies management. The total cost of these projects to value improvements in environmental amounts to US$4.8 billion, with about 95 quality have been the topic of considerable percent of that amount going to projects in the debate in the environmental economics urban sector. More than in any other sector, a literature. This debate has led to substantial variety of valuation techniques are employed to development in the non-market based valuation value environmental impacts. techniques, such as CV, over the last twenty years (Griffin and others, 1995). Several of the water supply and sanitation projects carry out Water Supply and Sanitation WTP studies, often as a part of the social The valuation of water for domestic assessment to evaluate the distributional impact consumption tends to focus on the benefits of of proposed tariff changes or to assess the increasing the availability, reliability, and project's financial feasibility. In some cases, the quality of drinking water, even though the WTP estimates are used to value the benefits of Environmental Economics Series 37 A Review of the Valuation of Environmental Costs and Benefits in World Bank Projects improved water quality. The reliability of WTP information on what methodologies underlie estimates depends on the survey accurately their calculation of benefits, this is particularly describing the exact nature of the service to be important in cases where alternative provided. WTP values also depend on the methodologies can produce dramatically specific context, such as the availability of different results. This can often happen with the alternatives and relative ranking of priorities. valuation of health benefits. For example, a CV study for the Philippines The choice of valuation methodology applied finds that households in Davao have a low WTP often depends on the specific context of for wastewater treatment to improve the water projects. Of the 23 water supply and sanitation quality of rivers and sea. The improvements in projects, 7 are in rural areas. The projects in water quality are aimed primarily at making a rural areas value the benefits of water supply popular beach near the community safe for using the avoided costs of obtaining water from swimming and other recreational activities. The alternative sources. The time savings from low WTP values may in part reflect the fact that collecting water are often the main source of the households take private measures to avoid quantified benefits. The benefits of additional suffering damages from polluted water and the consumption are also calculated, but are population's greater concern for other generally of secondary importance. The benefits environmental problems, such as solid waste of increased water quality, often one of the disposal (Choe and others, 1996). The value of main motivations for most rural water supply improved water quality at the popular local and sanitation projects, are rarely assessed. beach in the Philippines study is also estimated Only one of the 7 rural projects reviewed, the using the TCM. Both methods produced similar Karnataka Rural Water Supply and Sanitation results, which is reassuring. However, that need Project, values the benefits of improved water not always be the case. A study of the quality by estimating the reduced health costs environmental costs of water pollution in incurred.33 How these benefits are estimated is Chongqing, China, for example, finds that the explained in more detail in Box 8. methodology employed in valuation can sometimes produce very different results. Using In urban settings, the valuation of water supply the human capital approach (which calculates and sanitation benefits tends to focus primarily the discounted value of production lost when a on estimating the incremental revenues person dies prematurely) to estimate the cost of generated by the project. The calculation of premature deaths, health damages are incremental revenues is mostly based on the estimated to account for 18 percent of the total estimated expansion of water supply and damage costs from water pollution. Damages to sanitation coverage with and without the agriculture and fisheries account for a majority project.34 Improvements in water quality are of the costs. However, when the implied WTP likely not captured if the analysis focuses solely to reduce the risk of death from wage on incremental revenues,35 particularly when differential studies is used, health damages current water and sanitation tariffs are used to become 76 percent of the total damages, and calculate incremental revenues. The Colombia agricultural damages fall to 18 percent of total Water Sector Reform Assistance Project, however, damages (Yongguan and others, 2001). While uses data from a household survey conducted projects should always provide clear by the government's statistics department to 38 Environment Department Papers Water, Sanitation, and Flood Protection Box 8. Valuing the Health Benefits of Rural Water Supply and Sanitation The Karnataka Rural Water Supply and Sanitation Project describes the typical benefits expected for rural water supply and sanitation projects: the time savings in collecting water, the increased availability and convenience of water to be supplied, and the health benefits from access to cleaner water. Most rural water supply projects only value the time savings and increases in availability of water. This project stands out not just because it values the associated health benefits of cleaner water, but because it presents very clearly how each type of benefit was calculated. The health benefits estimates are based on information collected from a survey of 970 households. The survey data is used to determine the time and treatment costs incurred due to diarrhea and gastroenteritis and the proportion of the population affected by these illnesses. The incidence of those diseases from the survey data is compared with information from other sources, such as health surveys, for validation. The information collected is then used to calculate of the morbidity and mortality costs incurred. The calculations of morbidity costs are based on an incidence rate of 68 per 1000 population for both diseases, treatment costs between Rs 50 (US$1.1) and Rs 350 (US$7.6) per episode, direct person days lost of between two and seven days, and indirect person day losses between one and three days. The lower end of the estimated monetary and time costs are for diarrhea, while the higher end of these estimated costs are for gastroenteritis. Based on experience from a previous project, it is assumed the project would lead to a 25 percent reduction in the incidence of diarrhea and a 40 percent reduction of gastroenteritis. The valuation of mortality risk reduction is based on information from a Health and Family Welfare study conducted by the Government of Karnataka during 1996-1998, which estimated a 1.6 ratio of number of deaths to the number of cases of gastroenteritis. The value of a statistical life (VSL) approach is used to value the reduction of mortality risks for different sex-age groups. The health benefits generated from improved water quality are likely known to users and their WTP for water from improved sources may capture at least some portion of these benefits. However, since the Karnataka project values the incremental water consumed at the cost of provision, rather than household's WTP, it is unlikely that adding the avoided health costs could lead to double counting. The health benefits are also generated in part by the sanitation component of the project, which will expand access to individual house- hold latrines to 25 percent of the population. The estimated health benefits are therefore attributed to both the water supply and sanitation components of the project. estimate a demand function for water supply. are distinct components, the analysis should try The estimated demand curve is then used to to assess the economic feasibility of each predict household consumption with the component separately.36 Valuing the benefits of proposed tariffs. Although the project is water supply generally does not present a expected to improve water quality, the analysis problem. However, the benefits of sanitation, assumes water quality would remain particularly sewage treatment, are often unchanged. regarded as being "too difficult" to value. The projects discussed below provide some Because water supply and sanitation services examples of how these environmental benefits are often bundled, particularly in urban areas, have been valued. separately estimating the benefits of each component may not always be possible. The Uruguay Modernization and Systems Evaluating the project as a whole, as in case of Rehabilitation Project provides perhaps the the Colombia project, may be the only clearest example of how important a full alternative. However, in instances where these economic analysis can be. A `short-cut' Environmental Economics Series 39 A Review of the Valuation of Environmental Costs and Benefits in World Bank Projects economic analysis, which amounted to simply connected to the sewage system or living adjusting financial prices to reflect taxes and downstream of the rivers. However, the subsidies, was carried out, and led to the valuation of some of the environmental benefits conclusion that the benefits of the sewage generated is enough to justify the inclusion of treatment plants were not justified. The full the sewage treatment component in the project. economic analysis, however, establishes that the sewage treatment facilities generate significant The Cartagena Water Supply, Sewerage, and social benefits by reducing the level of pollution Environmental Management Project also conducts affecting water quality in the rivers and nearby a similarly detailed WTP survey for sewage beaches. collection and treatment. Approximately 500 households are surveyed about their WTP for To value improvements in water quality, the sewage collection and another 500 households Uruguay project conducts a detailed analysis of are surveyed about their WTP for sewage water and sewage tariffs and a household treatment. The results of the survey are very survey. The tariff analysis establishes that the similar to the Uruguay project, with most current water tariffs being charged are households willing to pay about 5 percent of appropriate to cover the costs of supplying their income for sewage collection and 1 water to households, but that the sewage tariffs percent for sewage treatment. The cover the cost of sewage collection but not of environmental impacts of the sewage treatment treatment. To assess the benefits of sewage would contribute to the recovery of beaches and collection and treatment, a sample of 900 enhance tourism activities. A separate study is households are surveyed about their WTP for also conducted to evaluate the benefits of these services. Households without sewage improved water quality, using the TCM. The collection services are asked, through a results of this study are not available, however, referendum method, about their WTP for the analysis provides additional support for the sewage collection. Households with sewage inclusion of the sewage treatment component in collection services are asked about their WTP the project. for sewage treatment. Econometric analysis of the survey results is used to derive the demand Several other projects reviewed also conduct for sewage collection and treatment. In each WTP assessments, but depending on how the case, the mean WTP for these services is information is collected, it may or may not be between 50 to 160 percent more than the useful for the economic analysis. The Vietnam average tariffs charged. The WTP values Environmental Sanitation Project, for example, obtained for sewage collection are between 3.5 surveys 1,000 households about their WTP for to 4.5 percent of household income, and wastewater collection and treatment.37 considered "quite acceptable" costs for these However, the WTP values derived from the services. The WTP values for sewage treatment survey are not used in valuing the project's are lower, between 1.0 and 1.8 percent of benefits, as the information elicited in the income, as might be expected since some of the survey is thought likely to only be capturing the benefits generated from sewage treatment are private benefits of improving the water quality externalities. The value of these environmental in the canal, and not the broader public benefits are likely still underestimated, as they benefits.38 An alternative approach to valuing will also benefit other people, such as those not the project's benefits is conducted, based on the 40 Environment Department Papers Water, Sanitation, and Flood Protection Box 9. Willing to Pay but Unwilling to Charge -- Do WTP Studies Make a Difference? The water and sanitation program in South Asia recently conducted an evaluation of WTP studies in India and the impact of such studies on the levels of tariffs charged. The study identified eight WTP studies conducted in the water supply and sanitation sector. Field visits to the locations where four of the studies took place fol- lowed to evaluate the impact of these studies on policy reforms. Besides generating additional government revenues, the study identifies two reasons why policy makers may want to assess WTP for water and sanitation and increase those fees accordingly. First, knowledge of consum- ers' WTP can guide future investments to provide the services that consumers want. Second, it can assist the move towards financial sustainability and independence for the agencies providing these services. Despite such incentives, the results of the evaluation show a mixed outcome regarding the impact of WTP surveys. In one instance where tariffs were increased, the increases cannot be attributed to the survey that took place, as the results of the survey were not presented to authorities setting water tariffs. Rather, the increase in water charges was a condition for the city to receive a loan from the housing and urban development govern- ment agency. In the other three cases, tariffs were not increased for political reasons. The study also identifies instances where policy reform has taken place in the absence of WTP studies to support tariff increases. By estimating the costs of alternative supply sources and health damages from existing water supply sources, a convincing case for policy reform can also be made. Source: DFID 1999. avoided cost of using septic tanks.39 However, different methodologies are used to value this approach also provides only a partial project benefits. For example, the WTP for assessment of the benefits generated, since it water and sanitation services can in part reflect only values the private savings from the the expected reduced health costs that result avoided construction and maintenance of septic from the provision of safer drinking water and tanks. These benefits, as the project states, "are proper sanitation. Therefore, estimating the likely of only secondary importance in relation benefits of project measures by WTP for water to improved public health benefits and general and sanitation services and the avoided health environmental improvements." costs as a result of provision of these services could lead to double counting. The Senegal Long In order to separate private and public Term Water Sector Project may have run into this environmental benefits, a WTP study must be problem, although this is difficult to determine carefully structured to elicit the information of without specific information on the exact interest. In the Uruguay Modernization and questions consumers were asked in the WTP Systems Rehabilitation and the Cartagena survey. Environmental Management projects discussed above, the studies are careful to distinguish the Whereas in the above examples there was a valuation of the private benefits accruing to the choice between different methodologies to households from sewage collection from the value the same benefits, oftentimes project more public environmental benefit generated measures generate multiple benefits or benefits by the sewage treatment component. Knowing to multiple users. In such cases, different what benefits a WTP study elicits values for is methodologies may be used together to value also important to avoid double counting when these benefits. The Second Beijing Environment Environmental Economics Series 41 A Review of the Valuation of Environmental Costs and Benefits in World Bank Projects Project, for example, uses CV to estimate the integrating different methodologies when benefits of improved water quality for drinking valuing multiple benefits. These issues are purposes, and avoided costs to estimate the important, particularly when CV methods are benefits of improved water quality for applied. CV methods can potentially be very agricultural and industrial uses.40 The benefits useful to value some of the perceived to agriculture are based on the expected `unquantifiable' environmental benefits increases in yield from using cleaner water. generated by projects in this sector. Conducting Yields are assumed to increase by 10 percent in the surveys and analyzing the data, however, the areas immediately downstream from the can be quite costly and time consuming. Table 6 wastewater treatment facility.41 The benefits of summarizes the findings of the projects that improved water quality for industry are based value these benefits and other results from the on the avoided cost of treating polluted water to available literature. The Uruguay Modernization acceptable levels for different types of industrial Project and the Cartagena Environmental uses. The costs of water treatment are expected Management Project's findings are very similar, to increase without the project. 42 which is not surprising given that both projects are estimating essentially the same type of The Lebanon Water and Wastewater Project also benefits in a very similar context. These two values the benefits of sanitation services in projects' results are also in line with estimates multiple ways. First, it estimates the benefits of WTP from project analysis carried out by the accruing to households that will connect to the Inter-American Development Bank (IDB) for centralized system. These consist of the avoided similar sewage projects (Russell and others, expenditures of maintaining on-site sanitation 2001). However, country and project specific systems and the higher quality of services variation in the IDB project sample is so households will enjoy by being connected to the significant that the report warns against using centralized system. Wastewater will be treated, these simple WTP averages for benefit transfers. thus improving the quality of water used for The WTP values reported for various EAP irrigation. The net value of the additional countries in Table 6 further illustrate the agricultural output produced with treated potential pitfalls of simple WTP value transfer. wastewater is the second source of benefits The WTP values are much lower, even when estimated in the analysis of the sanitation adjusted for income. Comparison is also component.43 A similar approach is also difficult because each project or study addresses adopted in the Tehran Sewerage Project. While different situations. Great care must therefore these projects do not value all the be taken when transferring WTP values from environmental benefits associated with project one study or project to another. However, as the measures, the valuation of some the benefits number of CV studies carried out increases, generated is at least better than no valuation at useful benchmarks may begin to be established. all. Flood Protection A variety of environmental valuation techniques can be applied to value the benefits The projects with flood protection components of improved water quality. The discussion reviewed consist primarily of drainage above highlighted some of the issues in improvements to prevent the loss of life and choosing among alternative methodologies and reduce the damages incurred in the event of a 42 Environment Department Papers Water, Sanitation, and Flood Protection Table 6. Willingness to pay for water and sanitation Mean WTP per household Benefits valued (US$/month) (% income) World Bank projects Uruguay Modernization Project · Sewage collection 15 to 22 3.7 to 4.5a · Sewage treatment 5 to 7 1 to 1.8a Cartagena Environmental Management Project · Sewage collection 8 to 12 4.8 to 5.7 · Sewage treatment 5.5 1 Vietnam Environmental Sanitation Project · Sewage collection and treatment 0.85 ..b · Improved water quality and canal appearance 0.76 ..b Other sources IDB's average for similar sewage projects (Russell and others 2001) 20.5 3.3c EEPSEA Bangkok Study (Tapvong and Kruavan 1999) · Improving water quality in the Chao Phraya River and its canals from 2.3 <1 `boatable' to `fishable' · Further improving water quality from `fishable' to `swimmable' 2.7 <1 Beijing Study (Swanson and others, 1999) · Maintain water quality at 3 major rivers 1.8 1.3 Philippines Study (Choe and others 1996) · Improved surface water quality aimed at making surface water bodies safe 1.4 to 2.3 <1 for swimming and other recreational uses Notes: a. A similar project, the Colombia Water Sector Reform Project, uses household expenditure data to estimate that water and sanitation tariffs average 4 to 8% of household income. b. Average income information for households surveyed is not reported, but from the available income data it appears the mean WTP for both benefits amounts to 1 to 2 % of income for the lower income half of the sample, and less than 0.5% for higher income half of the sample. c. Sample standard deviation of $10.7 and 4.2 for the mean WTP values. Sources: PADs of cited projects; other sources as cited. flood. In addition to damages to physical cause the spread of waterborne diseases by structures and from the loss of livestock and providing a breeding ground for snails and agricultural output, all projects recognize that mosquitoes. floods create significant environmental and health risk. These environmental and health Three flood protection projects value the risks are most severe when sewage networks benefits of project measures by estimating the receive both wastewater and storm water avoided costs incurred. Using loss-probability overflow. The still waters after a flood can also curves for the baseline and project scenario, the Environmental Economics Series 43 A Review of the Valuation of Environmental Costs and Benefits in World Bank Projects expected annual flood losses are estimated from landfill sites. Only one of the three solid waste the difference in the probability and the severity projects reviewed, the Liepaja Region Solid Waste of floods occurring under the two scenarios. Management Project in Latvia, conducts a CBA Generally the avoided costs of damage to and is therefore the focus of the discussion property or due to lost output are the main here.45 Grants from international donors source of benefits. The avoided costs of flood account for 55 percent of project investments. mitigation measures are the second most This includes US$2 million from the Prototype important benefits. These include the avoided Carbon Fund (PCF) to extract methane gas from cost of private flood protection, as in the the existing landfill and use it in electricity Vietnam Ho Chi Minh Environmental Sanitation generation. The alternatives examined by the Project, and of public health measures instituted project include several options for expanding in the event of a flood to control the spread of the existing landfill or establishing a new vector diseases, as in the Yangtze Dike landfill at another location. The existing landfill Strengthening Project. Both projects cite surveys facility is located in an area with a number of conducted to assess the damage of previous endangered species and leachate from the site floods as the basis of the cost estimates adopted polluted a nearby lake. The CBA without in the analysis.44 consideration of environmental impacts identifies expansion of the existing facility to The Belize Roads and Municipal Drainage Project, meet sanitary standards as the best alternative. on the other hand, values the benefits of drainage improvements by estimating the Including the benefits of carbon sequestration, increased property values resulting from the to be financed by the PCF grant, improves the project's investments. The discussion of the rate of return of all alternatives. The inclusion analysis notes that property values in well of carbon benefits, therefore, is not sufficient to drained areas are 20 to 100 percent higher than make the relocation options examined in poorly drained areas. It determines that an 18 preferable to expanding the existing landfill percent increase in property values would be site. When the grants from other donors are sufficient to justify the project's investment in included in the analysis, the relocation of the the drainage component. The break-even landfill site becomes feasible. These grants can analysis assumes that property values would be thought as payments for the internalization increase "modestly" in the initial years of the environmental benefits relating to the following project completion, until households reduction of pollution affecting regional surface realize the benefits of flood protection are water bodies. While the expansion of the taking place and they no longer need to invest existing landfill remains the option with highest in raising their plot level to avoid flooding. rate of return, the feasibility of the relocation alternative and the recognition that there are some environmental impacts not included in Solid Waste Management the CBA are enough to justify the selection of Solid waste disposal and management projects relocating the landfill site. The incorporation of are also primarily concerned with environmental values thus has a significant environmental health hazards created by the impact on the choice to establish a new landfill lack of waste collection services in poor areas or rather than to expand the capacity of the the inappropriate handling of solid waste at existing landfill. 44 Environment Department Papers 9 Global Costs and Benefits Global costs and benefits are a special case of applying the estimates of climate change environmental benefits, as they accrue to the damages to the amount of carbon sequestered global community rather than to the country per hectare of forest land. These projects use undertaking the project. Because of this, OP values for damages in the range of US$5 to $20 10.04 specifies that these benefits, although they per tCO2e should be "identified in the Bank's sector work or in the EA process" should only be A second approach takes the GEF or other "considered in the economic analysis when (a) donor's WTP as a lower bound measure of payments related to the project are made under value for the environmental benefits an international agreement, or (b) projects or generated.46 Actual payments made under project components are financed by the Global embryonic carbon emissions markets have Environment Facility." tended to be at the low end of the range of damage estimates, however. The PCF, for The most valued type of global environmental example, pays US$3-4 tCO2e equivalent (PCF, benefit are carbon sequestration benefits. Some 2002). This approach, which would seem projects value these benefits and include them preferable in light of OP 10.04, is used in the in the CBA. Other projects may value such Poland Geothermal, the Liepaja Solid Waste benefits but do not include them in the analysis, Management, and the Papua Guinea Forestry as per OP 10.04. Conservation projects, for example. Two approaches are generally used to value In contrast to carbon sequestration benefits, the carbon sequestration benefits. The first benefits of biodiversity conservation are seldom estimates the benefits of carbon sequestration by valued. This is despite the fact that some of the using the estimates of climate change damages benefits of biodiversity conservation can in the environmental economics literature. potentially be captured by the host country, for While there are several uncertainties involved example, in the form of higher revenues from in trying to estimate climate change impacts and nature based tourism or bioprospecting the resulting damages (see Watson and others, contractual arrangements. The tourism benefits 1996), estimates in the literature have converged can be estimated using the TCM or CV. The in the range of US$5 and $40 per ton of CO2 development of the tourism industry is indeed equivalent (tCO2e). This approach has been one of the main motivations for the Mozambique used primarily in forestry projects, such as the Coastal and Marine Biodiversity Management Armenia NRM and the Tanzania Forest Project.47 The project does not, however, Conservation and Management projects, by estimate the potential benefits from tourism Environmental Economics Series 45 A Review of the Valuation of Environmental Costs and Benefits in World Bank Projects development of the coast. Instead, it just notes However, even with adequate compensation for that the potential development could equal the the collection of biotic samples and generation US$500 million a year generated by tourism of taxonomic information bioprospecting revenues in Kenya. Whether this is a reasonable revenues alone may not be sufficient for the assumption upon which to base the assessment conservation of these resources (Barbier and of the tourism benefits from the project could Aylward, 1996). The conservation of critically have been investigated. important biodiversity habitats will likely need other sources of funding. Two of the projects Attempts to value the benefits of biodiversity reviewed, the Armenia NRM and the China for bioprospecting purposes have been the Sustainable Forestry Development projects, receive focus of a number of biodiversity valuation GEF support for forest conservation activities in studies (Simpson and others, 1996; Ruitenbeek biodiversity rich areas. Whatever the actual and Cartier, 1999; Rausser and Small, 2000). benefit to the global community, from the Costa Rica has been the leading developing perspective of an individual country what country trying to capture the pharmaceutical matters is what it will be paid for the potential of biodiversity conservation. environmental benefits it provides. 46 Environment Department Papers 10 Conclusion Ten years ago, one project in 162 used through project design or the implementation of environmental valuation. The use of environmental management plans, although it environmental valuation has increased strains credibility that there would be no substantially, so that in recent years as many as remaining damages. one third of the projects in the environmental portfolio did so. Over the last 3 fiscal years, an The degree to which environmental benefits are average of 6 to 9 projects per year used valued differs from sector to sector. In the environmental valuation. While this represents energy and transportation sectors, the valuation a substantial improvement, there remains of changes in air quality benefits from a large considerable scope for growth.48 body of literature that has developed and applied the existing valuation techniques. Many projects that did not use environmental Quantifying the impacts of project measures on valuation pleaded the difficulty of doing so. outdoor air pollution does not appear to be a This review, however, included several significant obstacle, at least not in the energy examples of projects that valued the same sector. However, not all projects which quantify environmental benefits that other projects in the emissions reductions take it to the next stage same sector claimed were too difficult to value and value these environmental benefits. In the or "un-quantifiable." Given the substantial agriculture and water supply and sanitation methodological progress that has been made in sectors, on the other hand, quantifying the this field in the last decades, "un-quantifiable" physical impacts of project measures are can no longer be considered an acceptable generally the major obstacle to valuation of excuse in most cases. Lack of data can be more environmental impacts. difficult to overcome, but is also not insoluble in most cases. To ease the task of project teams, a series of toolkits is being assembled for some of the more Among those projects that value environmental commonly-occurring valuation problems. These impacts, only one values environmental costs toolkits will describe the available valuation and all the others focus solely on valuing methodologies from a problem-centric benefits. This asymmetry can be partly perspective and provide detailed examples of explained by the fact that most projects seek to how to use these methodologies in a project avoid or mitigate potential negative impacts context. Environmental Economics Series 47 Appendix -- Projects Reviewed Total Cost Project ID Region Country Project Name (US$ millions) P051059 AFR Cameroon Chad/Cameroon Pipeline Project 70.00 P044305 AFR Chad Petroleum Development and Pipeline Project 85.00 P050623 AFR Ghana Road Sector Development Project 1191.00 P050616 AFR Ghana Community Water and Sanitation Project (02) 28.00 P052208 AFR Madagascar Transport Sector Reform and Rehabilitation Project 66.00 P041723 AFR Mali National Rural Infrastructure Project 139.27 P044711 AFR Mauritania Integrated Development Project for Irrigated Agriculture 46.03 P069095 AFR Mauritania Urban Development Project 99.06 P070305 AFR Mozambique Coastal and Marine Biodiversity Management Project 10.60 P072996 AFR Niger Private Irrigation Promotion Project 48.39 P045182 AFR Rwanda Rural Water and Sanitation Project 21.42 P055472 AFR Senegal Urban Mobility Improvement Project 103.00 P041528 AFR Senegal Long Term Water Sector Project 248.43 P058706 AFR Tanzania Forest Conservation and Management Project 32.80 P002797 AFR Tanzania Songo Songo Gas Development and Power Generation 296.00 Project P064064 AFR Zambia Mine Township Services Project 38.00 P056516 EAP China Water Conservation Project 185.67 P064729 EAP China Sustainable Forestry Development Project 214.58 P068049 EAP China Hubei Hydropower Development in Poor Areas Project 222.41 P056424 EAP China Tongbai Pumped Storage Project 904.10 P056199 EAP China Inland Waterways Project (03) 220.22 P056596 EAP China Shijiazhuang Urban Transport Project 286.20 P045915 EAP China Urumqi Urban Transport Improvement Project 270.00 P064730 EAP China Yangtze Dike Strengthening Project 545.51 P042109 EAP China Beijing Environment Project (02) 1255.00 P049436 EAP China Chongqing Urban Environment Project (CUEP) 535.90 P047345 EAP China Huai River Pollution Control Project 226.89 P051859 EAP China Liao River Basin Project 203.60 P045910 EAP China Hebei Urban Environmental Project 293.00 P040528 EAP Indonesia Western Java Environmental Management Project 20.13 P056200 EAP Mongolia Transport Development Project 49.54 P004398 EAP Papua New Forestry and Conservation Project 22.29 Guinea Environmental Economics Series 49 A Review of the Valuation of Environmental Costs and Benefits in World Bank Projects Total Cost Project ID Region Country Project Name (US$ millions) P039019 EAP Philippines First National Roads Improvement and Management Project 305.42 P042568 EAP Vietnam Coastal Wetlands Protection and Development Project 65.60 P066396 EAP Vietnam System Efficiency Improvement, Equitization, and 347.90 Renewables Project P056452 EAP Vietnam Rural Energy Project 204.80 P052037 EAP Vietnam Ho Chi Minh City Environmental Sanitation Project (Nhieu 199.96 Loc- Thi Nghe Basin) P069479 ECA Albania Pilot Fishery Development Project 6.66 P074905 ECA Albania Power Sector Rehabilitation and Restructuring Project 35.06 P057847 ECA Armenia Natural Resources Management and Poverty Reduction 10.87 Project P008284 ECA Azerbaijan Rehabilitation and Completion of Irrigation and Drainage 46.86 Infrastructure P044748 ECA Belarus Social Infrastructure Retrofitting Project 40.43 P057950 ECA Bosnia- Solid Waste Management Project 21.00 Herzegovina P055068 ECA Georgia Irrigation and Drainage Community Development Project 32.80 P008497 ECA Hungary Municipal Wastewater Project 88.90 P046045 ECA Kazakhstan Syr Darya Control and Northern Aral Sea Phase 1 85.79 P058476 ECA Latvia Liepaja Region Solid Waste Management Project 16.97 P070112 ECA Lithuania Education Improvement Project 45.41 P063656 ECA Lithuania Vilnius District Heating Project 54.52 P038395 ECA Macedonia Water Supply and Sewerage Project 42.37 P037339 ECA Poland Podhale Geothermal District Heating and Environment 91.30 Project P065059 ECA Poland Krakow Energy Efficiency Project 78.04 P056337 ECA Romania Mine Closure and Social Mitigation Project 59.50 P053830 ECA Russian Sustainable Forestry Pilot Project 74.50 Federation P038551 ECA Russian Municipal Heating Project 127.88 Federation P008832 ECA Russian Municipal Water and Wastewater Project 168.90 Federation P058898 ECA Tajikistan Rural Infrastructure Rehabilitation Project 24.00 P055738 ECA Ukraine Sevastopol Heat Supply Improvement Project 35.70 P055739 ECA Ukraine Kiev Public Buildings Energy Efficient Project 30.20 P035786 ECA Ukraine Lviv Water and Wastewater Project 40.80 P040150 LCR Belize Roads and Municipal Drainage Project 18.40 P043869 LCR Brazil Natural Resources Management and Rural Poverty 107.50 Reduction Project P039200 LCR Brazil Energy Efficiency Project 125.50 P051696 LCR Brazil Sao Paulo Metro Line 4 Project 933.90 P055954 LCR Brazil Goias State Highway Management Project 130.00 P006449 LCR Brazil CEARA Integrated Water Resources Management Project 247.20 P041642 LCR Colombia Productive Partnerships Support Project 52.32 50 Environment Department Papers Appendix -- Projects Reviewed Total Cost Project ID Region Country Project Name (US$ millions) P044140 LCR Colombia Cartagena Water Supply, Sewage and Environmental 85.00 Management Project P065937 LCR Colombia Water Sector Reform Assistance Project 70.00 P052009 LCR Costa Rica Ecomarkets Project 49.20 P039437 LCR Ecuador Poverty Reduction and Local Rural Development Project 41.96 P049924 LCR Ecuador Rural and Small Towns Water Supply and Sanitation Project 50.25 P073035 LCR Honduras Access to Land Pilot Project 17.00 P057530 LCR Mexico Rural Development in Marginal Areas Project (02) 73.00 P056018 LCR Nicaragua Land Administration Project 38.50 P050595 LCR Panama Land Administration Project - APL 72.36 P070244 LCR St. Lucia Technical Assistance Water Sector Reform Project 8.36 P063383 LCR Uruguay OSE Modernization and Systems Rehabilitation Program 48.09 P045499 MNA Egypt National Drainage Project (02) 278.40 P069946 MNA Iran Tehran Sewerage Project Loan 340.00 P074042 MNA Lebanon Ba'albeck Water and Wastewater Project 49.63 P056978 MNA Morocco Irrigation-Based Community Development Project 42.40 P035707 MNA Tunisia Water Sector Investment Loan Project 258.00 P062714 MNA Yemen Irrigation Improvement Project 25.60 P070092 MNA Yemen Taiz Municipal Development and Flood Protection Project 50.00 P005906 MNA Yemen Rural Water Supply and Sanitation Project 29.40 P071794 SAR Bangladesh Rural Electrification and Renewable Energy Development 290.10 Project P057570 SAR Bhutan Urban Development Project 12.23 P071033 SAR India Karnataka Community Based Tank Management Project 124.97 P040610 SAR India Rajasthan Water Sector Restructuring Project 180.20 P050647 SAR India Uttar Pradesh Water Sector Restructuring Project 173.70 P067216 SAR India Karnataka Watershed Development Project 127.60 P035172 SAR India Uttar Pradesh Water Sector Restructuring Project 236.00 P035173 SAR India Powergrid System Development Project (02) 1314.00 P038334 SAR India Rajasthan Power Sector Restructuring Project 266.80 P049770 SAR India Renewable Energy (02) Project 300.00 P010566 SAR India Gujarat State Highway Project 533.00 P071244 SAR India Grand Trunk Road Improvement 756.00 P050668 SAR India Mumbai Urban Transport Project 945.00 P050653 SAR India Karnataka Rural Water Supply and Sanitation Project (02) 193.44 P055454 SAR India Kerala Rural Water Supply and Environmental Sanitation 89.80 Project P071092 SAR Pakistan NWFP On-Farm Water Management Project 32.05 P076702 SAR Sri Lanka Renewable Energy for Rural Economic Development Project 125.70 Environmental Economics Series 51 Notes 1. SARs have been replaced by Project Appraisal and do not significantly affect human Documents (PADs). populations or alter environmentally important 2. The review examined all projects approved areas, including wetlands, native forests, during the 1993 calendar year and included 162 grasslands, and other major natural habitats. projects in a wide variety of sectors. Of those Few if any of the impacts are irreversible, and in 162 projects, 112 were in sectors which most cases mitigation measures can be designed traditionally require a cost benefit analysis, more readily than category A projects." They namely agriculture, energy, financial, power, also require an environmental assessment, but telecommunications, transportation, urban, and of a more limited scope. Category C projects are water supply and sanitation. those "likely have no adverse impacts at all, or the impacts would be negligible." 3. The negative of this can also be important: by showing that an externality is much smaller 9. We did not examine the full environmental than had been supposed, valuation might lead assessment report, but rather relied on the to the conclusion that a project is not warranted summary information presented in the PAD. in a specific instance, and that efforts would be 10. The impression that the identification of better applied elsewhere. environmental benefits is considered to lie 4. Under the new classification system, each outside the mandate of the EA process is project can have up to five sectoral assignments reinforced by several instances where and five thematic objectives. The sectoral and environmental benefits were valued despite thematic assignments represent different there being no mention of such benefits in the dimensions of the same operation. The sectoral EA summary. classification is based on the sectors of the 11. For example, while the Mauritania Integrated economy affected by the project, while the Development Project for Irrigated Agriculture is a thematic classification relates to the stated category A project with both primary and objectives of the project. secondary environmental objectives, the first 5. The project list for 2002 was based on phase of the projects has only a few preliminary data at the end of FY2002. rehabilitation components and consists primarily of feasibility studies for future 6. Adjustment lending instruments and other non- investments. The project's classification reflects project lending instruments are excluded from mostly its future rather than its current impacts. our review. 12. Twenty-six percent of all projects reviewed 7. The project costs reported in Table 1 reflect the value environmental impacts and include those new sector code classification, which allocates values in the economic analysis. If projects with the share of project costs to components in no or only minor environmental impacts are different sectors. excluded, 32 percent of the projects value and 8. Category A projects are "likely to have include environmental impacts in the analysis. significant adverse impacts that are sensitive, 13. It would be interesting if these costs could be diverse, or unprecedented, or that affect an area made explicit, as several valuation techniques broader than the sites or facilities subject to are based on such cost estimates. physical works." They require a full environmental assessment. Category B projects 14. "Lack of data" and "too difficult" are treated as have impacts that are "site-specific in nature mutually exclusive categories in Table 3--that Environmental Economics Series 53 A Review of the Valuation of Environmental Costs and Benefits in World Bank Projects is, projects which list both reasons as obstacles 22. However, the alternative of hydropower for valuing environmental impacts are listed generation also entails possible environmental under one category only. costs. Indeed, the environmental assessment (six 15. Nine of the 15 such projects are in ECA. Three volumes) of the project is primarily devoted to others are in India, two in China and one in the potential environmental impacts of the Vietnam. construction of the dams. The EA argues that since these rivers have existing dams, most of 16. For a brief review of these studies, particularly the environmental damage to the aquatic in the context of developing countries, see environment of the rivers in question has Hegde (2001). already taken place. The new dams constructed 17. None of the projects reviewed explicitly for the project will thus only have an small acknowledge situations where increased air additional impact on the river's aquatic pollution may result and therefore the environment. They will also affect water flow environmental costs of energy production are during the dry season and to downstream not valued. irrigation infrastructure in some locations. 18. This is the case when all investments costs Relatively little inundation of valuable land is (including those already incurred) are expected, as the reservoirs will be long and evaluated. However, if the investments which narrow due to the geographical characteristics already took place are treated as sunk costs, as of the area. These environmental impacts have they should, the heat cost savings are enough to not been valued. Measures are included in the justify the incremental investments. The full project's environmental management plan to evaluation is carried out to establish the mitigate these impacts. replicability of such investments. 23. A simpler model, the roads economic decision 19. The value of CO2 emissions reductions is taken model (RED), has been devised to evaluate road to be the GEF's willingness to pay for the investments in rural areas where low traffic alternative that produces additional emissions volumes and uncertainty in the assessment of reduction than the base case scenario (see traffic and road conditions are likely to be chapter 9). common. RED also includes the additional benefits to local economic development and to 20. This is taken from the information discussed in non-motorized road users (Archondo-Callao, an associated GEF project, also called the Krakow 1999). For more on those issues, see OED (1996) Energy Efficiency Project The GEF project is which examines the education and health technically a separate project, but its main benefits of road projects in rural areas in objective is to finance risk guarantees that will Morocco. enable the private sector to invest in the energy efficiency measures supported by the IBRD 24. The Mumbai project classifies the environmental financed project--in other words, the GEF benefits into direct and indirect benefits from financing is essential to remove the market reduced air pollution, but provides no barriers preventing these financially sound information on what these direct and indirect investments. benefits might be. The indirect benefits account for 97 percent of the environmental benefits. 21. In addition to the health benefits estimated, the Beijing project also estimates the value of land 25. Vehicle operating cost savings and time savings that has been used as ash yards for the coal amount to 92 percent of benefits, other minor boilers. About 2,000m2 of land are needed for a benefits include the environmental benefits, typical boiler house consisting of three or four safety benefits from reduced accidents, and medium size boilers. Given that these boilers are operations and maintenance (O&M) savings due located in the center of urban districts, where to reduce number of kilometers traveled by land values are high, these land savings turn buses. out to be a significant source of benefits 26. The environmental costs and opportunity costs generated by the project. Although these are not necessarily mutually exclusive. The benefits are estimated on the basis of real estate highest valued alternative for water used for values, they may well have an additional irrigation may be the loss of its use to maintain environmental component, in terms of reducing ecosystem functions, in which case, the environmental disamenities to neighboring opportunity cost would be the environmental properties. 54 Environment Department Papers Scope for Improvement costs or damages incurred. The environmental impacts. Such costs may represent a significant cost of water used for irrigation can also be share of the health costs from water pollution those associated with the external impacts of than direct treatment costs, as in the case of the water on soil quality, for example, salinization Karnataka Rural Water Supply and Sanitation and waterlogging. Such environmental costs Project. would be independent of the water's 34. In some cases, incremental revenues are higher opportunity cost. due to increased efficiency or reduced O&M 27. A comprehensive review of World Bank costs, such as in the Ukraine Water and financed irrigation projects carried out by the Wastewater Project. The project's benefits are OED concludes that irrigation charges in most almost entirely justified by reduced energy developing countries do not cover operation costs. and maintenance costs (Briscoe, 1996). 35. The Lebanon Water and Wastewater Project, 28. For example, the Northern Aral Sea Project does discussed below, does factor in improvements in not quantify the benefits of a dam in providing the quality of the services provided, by water supply to downstream consumers and assuming the demand curve for sanitation shifts (strangely) of maintaining irrigated area--the out to reflect the difference between an on-site only benefits valued from the dam construction sanitation system and being connection to the are the power supply generated. Also the public system. benefits of a flood protection dike, which 36. The Russia Federation Municipal Water and according to the project would save an average Wastewater Project, for example, has stand alone of 800 million m3 of water annually, are not water supply and sanitation components in valued. different cities. Even though the project says 29. The amount of water to be supplied is actually that 54 percent of rehabilitation investments expected to decrease with the project. The water have been identified, very few are subjected to savings, however, are not quantified or valued. an economic analysis. The project only values 30. The irrigation service fees would be reviewed two water supply components (amounting to $3 and adjusted annually by the project, taking into million of the $169 million cost of the project). It account the willingness and ability of farmers to discusses a water quality improvement and a pay, and the collection rate in project areas wastewater treatment component, but the monitored. benefits of these components are not valued. Both are expected to produce significant health 31. These projects and two other projects also value and environmental benefits. the environmental benefits of carbon emission reduction. However, since these are global 37. The survey asks households to volunteer how environmental benefits we discuss their much they would be willing to pay for certain valuation separately, in Chapter 9. improvements in water quality. Open ended questions are usually not the recommended to 32. One could potentially argue whether the lower elicit WTP values. value for the benefits from pasture lands is appropriate, particularly if the primary interest 38. While the WTP values from the household is to increase water flows rather than regulate survey are not used to value the project's the timing of flows. A study of a watershed in benefits, the information from the survey is Lake Arenal, Costa Rica, suggests that if the useful in designing the project by establishing total flow of water is of primary interest, that biological treatment of sewage is not pastures generate higher positive externalities affordable to area residents. The project is than forest cover (Aylward and others, 1998). designed therefore to discharge screened wastewater in the Saigon River instead of 33. A survey carried out for the Ecuador Rural and directly into the canal., which is prone to Small Towns Water Supply and Sanitation Project flooding. finds that expenditures related to water borne diseases are not significant. Therefore, health 39. The project finances the construction of a benefits are omitted from the analysis of that sewage interceptor which will make septic tanks project. However, the survey does not assess no longer necessary. direct and indirect income losses due to 40. The benefits of improved water quality to illnesses, and so may underestimate health households amount to 55 percent of the total Environmental Economics Series 55 A Review of the Valuation of Environmental Costs and Benefits in World Bank Projects benefits from the wastewater treatment very many details of cost benefit analysis component, those to agriculture amount to 38 carried out. The project states that annually percent, and those to industry 7 percent. avoided damage per structure is approximately 41. The information presented in the PAD suggests US$600. It does not mention other key factors or that a 10 percent increase may be an optimistic assumptions, such as the average flood/storm assumption. The PAD cites a study finding that return period, the flood depth, or the conceptual agricultural production could increase by at model used, as the China and Vietnam project least 5 percent if the water quality level in the do. Hai River basin was raised to the government 45. The Western Java Environmental Management mandated water quality level. The project Project presents some results of the analysis of a estimates that the amount of water treated in the previous project. The Solid Waste Management wastewater plant will contribute to only about Project in Bosnia-Herzegovina says it carried out 10 percent of the planned reduction in pollution a cost-effectiveness analysis, but only presents a levels in the whole Hai River basin. table of per capita investment costs (which 42. Three other projects in China, the Huai River ranged from $12 to $30) in the three cities where Pollution Control Project, the Liao River Basin the project is to be implemented. Project and the Chongqin Urban Environment 46. Formally, the GEF is not paying for the benefits, Project, are wastewater treatment projects but reimbursing for the incremental cost of similar to the Beijing project discussed above. receiving them. From the perspective of the These projects appear to have estimated some of country implementing the project, however, it the benefits generated by the project, but do not does not matter whether the GEF grant is present their analysis, citing the uncertainties considered to be a reimbursement for cost or a involved in these estimations as a reason. payment for benefits, as the effect on the Instead these three projects opt for a cost project's NPV is the same. effectiveness analysis. 47. The conservation of coastal resources will also 43. The estimated IRR for the component based on benefit the local population. Approximately 43 these two benefits is low, but other-- percent of Mozambique's population live on the unquantified--benefits are thought likely to be coast, and most of these 7 million people sufficiently important to justify this component. depend on the coast's natural resources for their These benefits include the conservation of scarce livelihoods. water resources, the reduced health risks from 48. To some degree, the limited extent to which the use of untreated sewage water in environmental valuation is used in the economic agriculture, and overall environmental quality analysis of projects reflects the declining improvements that benefit households not emphasis that is being placed on economic connected to the sewage system. While efforts to analysis in general in Bank project preparation. value environmental benefits are important, Whereas a decade ago the NPV and IRR were data limitations or other problems may prevent the be-all and end-all of project preparation, a full assessment from being made. In such today it is not unusual for neither to be even cases, it is important to exercise good judgment mentioned in a PAD review meeting. It was not in assessing whether the remaining un- the objective of this review to assess the quality quantified benefits are likely to result in a of the economic analysis as a whole, but it different conclusion, as was thought to be the seemed to be very uneven. case here. 44. The Taiz Municipal Development and Flood Protection Project in Yemen does not provide 56 Environment Department Papers References Alberini, A., and A. Krupnick. 1997. "Air Bishop, J.T. 1999. 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