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p. 36 of 74 BACK | NEXT I. Introduction II. Background III. The Economic Rationale of A Project IV. Macroeconomic and Sectoral Context V. An Integrated Approach To Economic Analysis VI. Identification and Quantification of Costs and Benefits VII. Valuation of Economic Costs and Benefits VIII. Large Projects, Linkages, and National Affordability IX. Least-Cost and Cost-Effective Analysis X. Investment Criteria: Economic Viability XI. Discount Rate XII. Uncertainty: Sensitivity and Risk Analysis XIII. Sustainability of Project Effects A. Financial Sustainability B. Environmental Sustainability XIV. Distribution of Project Effects XV. Projects and Policies XVI. Appendices XVII. Others

Guidelines for the Economic Analysis of Projects : XIII. Sustainability of Project Effects

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B. Environmental Sustainability

170. Sustainable development is development that lasts. A specific concern is that those who enjoy the fruits of economic development today may be making future generations worse off by excessively degrading the earths resources and polluting the earths environment. A general principle of sustainable development, that current generations should meet their needs without compromising the ability of future generations to do the same, has become widely accepted.

171. The value of environmental effects can be included in the economic analysis of projects. Although it is not possible to put monetary values on all types of environmental effects, such costs and benefits should be as explicit as possible so as to inform policymakers and citizens. For some projects, beneficial environmental effects will be the main objective of the project and should be valued. For other projects, environmental benefits or environmental costs should be valued as far as possible, and incorporated into the economic analysis, together with related mitigation or monitoring costs.

172. Four broad approaches can be used to value environmental costs and benefits: market prices, costs of replacement, surrogate markets, and surveys. Transference modeling, that is, inferring input-output relationships and values from studies and experiences elsewhere, can be used to take account of environmental effects. In all cases, environmental costs and benefits based on financial values are in turn converted to economic values. These economic values need to be expressed using the same numeraire as other project items.

173. Market prices are used in valuation when environmental damage leads to losses in productivity. Common applications include valuation of damage due to soil erosion, deforestation, and air and water pollution. In applying this approach, the physical or ecological relationship between environmental damage and its impact on output or health is estimated and combined with prices to derive monetary values. For environmentally related health risks, income foregone because of illness or premature death can be used to measure welfare losses. However, such estimates are only partial because they rely solely on income losses.

174. People and firms can respond to environmental degradation by making expenditures to avert damage or compensate for possible consequences. Although some effects of degradation are not accounted for, these expenditures can provide an estimate of environmental damage. For example, when water supplies are polluted, factories can invest in private tubewells, and households can buy water from vendors. Losses of soil fertility caused by erosion can be approximated by the cost of using purchased fertilizers to replace nutrients.

175. Environmental degradation can sometimes be valued through its effect on other markets, especially on property values and wages. For example, clean air is implicitly valued in property markets, since buyers will consider environmental attributes as characteristics of property. Similarly, environmental risks associated with different jobs are traded in labor markets, and wage levels for higher risk jobs will include larger risk premiums. This technique is difficult to apply when property owners or workers are unaware of environmental problems or are constrained in responding to them.

176. Direct questioning can be used to find what value people place on environmental change or natural resources. This approach is particularly relevant where markets are nonexistent or where people value environmental resources that they do not use. Such surveys can be employed to determine the amenity value of species or landmarks and to determine willingness to pay for better access to clean water and improved sanitation.

177. Governments may seek to internalize environmental costs and benefits into financial prices. The main advantages of market-based instruments is that they directly alter incentives through the price mechanism. They also tend to have positive fiscal effects because they involve a reduction in environmentally damaging subsidies and increase environmentally improving taxation (see Appendix 24).

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