guide2008_en

Figure E.2 Percentage of low income spent on gas services by low-income consumers

Source: European Commission, DG Ecfin (2007).

When focusing on the bottom quintile, the shares can be much higher than in this study as long as average income in that group is considerably lower.

In fact, project implementation could be affected when the ‘losers’, because of the redistribution effects, are lowincome households, left without any compensation. Extremely poor households could have no other choice than to stop paying for the service or avoid using it, with consequences for the project’s financial sustainability and social unrest. Project proposers should consider appropriate remedies (e.g. progressive tariffs, vouchers or subsidies for avoiding serious social tensions due to the project).

Table E.4 shows some critical ratios from empirical observation: the share of persons who avoid using the service (replacing it when possible) or that do not pay for it, and the ratio of expenditure to total income they face.

Table E.4 Share of expenditure and service exclusion, self-disconnection, or non-payment in some sectors and countries for the bottom quintile

Source: Lampietti, Benerjee and Branczik (2007).

* Households may report zero payment for a variety of reasons, including lack of connection, self-disconnection free riding, poor service quality, billing cycles and arrears.

Table E.4 suggests as an empirical rule, that if the bottom quintile has to bear expenditure equal to or higher than a certain share of its revenues for utilities, then strong interventions are necessary because a substantial percentage of users will stop paying for the service or will disconnect.

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ANNEX F

EVALUATION OF HEALTH &

ENVIRONMENTAL IMPACTS

Why do we value the environment?

The economic evaluation of the environment helps decision-makers to integrate into the decision-making process the value of environmental services provided by ecosystems. Direct and external environmental effects are expressed in monetary terms120 in order to integrate them into the calculation of homogenous aggregate CBA indicators of net benefits.

When faced with strong uncertainty and irreversibility in the future availability of the environmental resources or for ethical reasons, other evaluation methods can be applied, such as Environmental Impact Assessments, multi-criteria analyses or public referenda. These methods avoid the need to express all the environmental impacts and individuals’ preferences in a single numeraire, but are often less consistent and open to manipulation of the information.

Evaluating environmental impacts in investment projects

Most public infrastructure projects have negative or positive impacts on the local and global environment. Typical environmental impacts are associated with local air quality, climate change, water quality, soil and groundwater quality, biodiversity and landscape degradation, technological and natural risks. A decrease or increase in the quality or the quantity of environmental goods and services will produce some changes, gains or losses in social benefits associated with their consumption.

For example, a road infrastructure will be expected to reduce the availability of useful rural land, will change rural landscape, will increase pressures on biodiversity and negatively affect air quality due to increased traffic flows. Each of these impacts will reduce the provision of environmental services by the ecosystems and will lower economic benefits. In contrast, investments in waste treatment facilities will decrease environmental negative impacts on soil and water and will increase economic benefits related to the provision of high quality environmental services to economic agents (consumers and producers).

Not taking into account environmental impacts will result in an overor underestimation of the social benefits of the project and will lead to bad economic decisions.

120 A direct effect can be observed on markets (through the variation of price and quantity) or in the decision-making process, while external effects arise when the economic behaviour of an individual (or a firm) affects the behaviour of another (individual or firm), without any economic compensation or transaction from the former to the latter. In economics, pollution or resource depletions are often analysed with the help of the externality concept.

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TOTAL ECONOMIC VALUE

The monetary measure of a change in an individual’s well being due to a change in environmental quality is called the total economic value of the change. The total economic value of a resource can be divided into use values and non-use values:

Total economic value = use values + non-use values.

Use values include benefits from the physical use of environmental resources, such as a recreational activity (sport fishing) or productive activities (agriculture and forestry). In this context uncertainty stems from a combination of the individual’s uncertainty about future demand for the resource and uncertainty about its future availability. Non-use values refer to the benefits individuals may obtain from environmental resources without directly using them. For example, many people value tropical ecological systems without directly consuming or visiting them. The components of non-use values are existence value and bequest value. Existence value measures willingness-to-pay for a resource for some ‘moral’, altruistic or other reason and is unrelated to current or future uses. Bequest value is the value that the current generation obtains from preserving the environment for future generations.

Non-use values are less tangible than use values since they often do not refer to a physical consumption of goods and services.

Values are directly linked to the ecological services produced by the ecosystems, which support them. For example, fishery depends on the ecological productivity of the water ecosystem as wetlands. Water availability is linked to the entire hydro-geological cycle and groundwater quality depends on the filtering capacity of soils. A reduction in the provision of ecological services (by a pollution for example) is likely to depreciate the values expressed by people on environmental quality with, as a final result, a decrease in social benefits associated with it.

It is important to understand that economic value does not measure environmental quality per se; rather it reflects people’s preferences for that quality. Evaluation is ‘anthropocentric’ in that it relates to preferences held by people.

Total economic value (TEV)

<<Tangibility>>

How to measure environmental benefits

Since the environmental impacts may represent an important outcome of the projects it is necessary to include them in the economic appraisal framework.

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Specific problems with this approach are related to ‘multiple purpose trips’; because many trips have more than one destination, it is difficult to identify which part of the total travel cost is related to one specific destination.

Since only the benefits of the direct consumption of the environmental services are considered in this approach, non-use values (option value and existence value) cannot be considered.

Averting or defensive behaviour method

The main assumption of the averting evaluation method is that individuals can insulate themselves from a nonmarket bad by adopting more costly behaviours to avoid it. The cost these behaviours require can be represented by extra-time or by the restrictions they impose on what individuals would otherwise wish to do.

Another way to avoid exposure to specific non-market goods is the purchase of a market-good to ‘defend’ the consumer from the ‘bad’ (defensive expenditures). The value of each of these purchases can be considered the implicit price for the non-market good that individuals want to avoid.

An example could be the installation of double-glazed windows to decrease exposure to road traffic noise. Doubleglazing is a market good that can be seen as a substitute for a non-market good (absence of road traffic noise) and so the cost of purchasing it can be considered as the price of the non-market good.

Specific problems with these approaches could be:

-defensive expenditures often represent a partial estimate of the value of the non-market good individuals want to avoid;

-many averting behaviours or defensive expenditures are related to joint products (e.g. heating and insulation from noise);

-individuals or firms may undertake more than one form of averting behaviour in response to any environmental change.

Cost of illness method

Like the defensive expenditures method, this one focuses on expenditures on medical services and products made in response to the health effects of non-market impacts.

The difference between the two methods is that usually the decision concerning health care expenditure is not made by individuals alone, but involves social administrators, politicians and taxpayers. This circumstance introduces a complex evaluation issue because the decisions of public administrators and politicians reflect not only the assessment of the negative impacts of the non-market good, but also other types of considerations (politics and ethics).

An additional problem with this approach is that changes in expenditure on treatments of health impacts are usually not easily directly observed, due to the stochastic link between health and non-market goods (for example air pollution).

Stated Preference Methods

Stated preference approaches are survey-based and elicit people’s intended future behaviour in the markets. Through an appropriately designed questionnaire, a hypothetical market is described where the good in question can be traded. A random sample of people is then asked to express their maximum willingness-to-pay for (or willingness to accept) a supposed change in the good’s provision level. Consequently, the focus is on real choices and implied willingness-to-pay.

The main strength of the methods based on this approach is represented by the flexibility they can assure. Indeed, they allow the evaluation of almost all non-market goods, both from an ex-ante and from an ex-post point of view. Moreover, this methodology is able to capture all types of benefits from a non-market good or service, including the so-called non-use values.

The main specific methods are:

-contingent valuation method

-choice modelling method.

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due to air pollution or water contamination by chemical products for example, is well known. The technique takes natural science information on the physical effects of pollution and uses this in an economic model of evaluation. The economic evaluation will be performed by estimation, through a production or a utility function of the profit variations of firms or the revenue gains or losses of individuals.

The two steps of the method are:

-the calculation of the pollutant dose and receptor function, and;

-the economic evaluation by the choice of an economic model.

To assess the monetary gain or loss of benefits due to the variation in environmental quality requires the analysis of biological and physical processes, their interactions with economic agents’ decisions (consumer or producer) and the final effect on welfare.

The major fields of application of the methodology are the evaluation of losses (in crops, for example) due to pollution, the pollution effects on ecosystems, vegetation and soil erosion, and the impacts of urban air pollution on health, materials and buildings. The approach cannot estimate the non-use value.

Benefit Transfer

Recent developments in policy behaviour have stressed the relevance of the so-called Benefit-Transfer Approach in the appraisal of non-market goods, specifically environmental goods and services (Pearce, Atkinson and Mourato, 2006). This method consists of taking a unit value for a non-market good estimated in an original study and using this estimate, after some adjustments, to value benefits (or costs) that arise when a policy or project is implemented elsewhere.

The Benefit Transfer method can be defined as the use of a good estimate in one site, the ‘study site’ as a proxy for values of the same good in another site, the ‘policy site’. For example, the provision of a non-market good at a policy site could refer to a lake at a particular geographical location. If sufficient data are not available for that country, analysts can use values for similar conditions in data-rich countries.

The interest shown in this approach is due to the opportunity to reduce the need for costly and time–consuming original studies of non-market goods values. Moreover Benefit Transfer could be used to assess whether or not a more in-depth analysis is worthwhile.

Clearly, the main obstacle in using this approach is that Benefit Transfer can give rise to seriously biased estimates.

Obviously judgement and insight are required for all the basic steps entailed in undertaking a BT exercise. For example, information needs to be obtained on baseline environmental quality, changes and relevant socio-economic data.

Benefit transfer is usually performed in three steps:

-the compilation of the existing literature on the subject under investigation (recreational activity, human health, air and water pollution…);

-the assessment of the selected studies for their comparability (similarity of the environmental services valued, difference in revenue, education, age and other socio-economic characteristics which can affect the evaluation);

-the calculation of values and their transfer in the new context of evaluation.

The most crucial stage is where existing estimates or models are selected and estimated effects are obtained for the policy site. In addition, the population at the relevant policy site has to be determined.

Adjustments are usually advisable in order to reflect differences at the original study sites and the new policy sites.

The analyst may choose from three main types of adjustment of increasing sophistication:

-unadjusted Willingness-to-pay Transfer => this procedure implies a simple ‘borrowing’ of the estimates made in the study site and the use of those estimates in the policy site, with an obvious advantage in terms of simplicity;

-Willingness-to-pay Transfer with Adjustment (value transfer) => it could be useful to modify the values from the study site data to reflect the difference in a particular variable that characterizes the sites. For example, the values can be adjusted through multiplication using the ratio between the income level of the study case and the income level of the policy case.

-Willingness-to-pay Function Transfer => a more sophisticated approach is to transfer the benefit or value function from the study site to the policy site. Thus, if it is known that Willingness-to-pay for a good at the study site is a function of, first, a range of physical features on the site, second, of its use, and third, of a set of socioeconomic characteristics of the population at the site, then this information itself can be used as part of the transfer process.

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