Applications of Environmental Valuation for Determining Costs - Article Example

Applications of Environmental Valuation for Determining Externality Costs H. Scott Matthews and Lester B. Lave Summary In order to assess the effectiveness of the measures taken to control the environmental impact it becomes important that the costs and benefits of such measures is reduced to dollar terms so that a comparison is made possible. But the process of ascertaining the monetary value of the effect of regulatory and other measures is often found to be complicated and uncertain. In some cases they become controversial also. But there are ways to use them to effectively measure the environmental policy analysis. Professionals and engineers in the area of environmental protection have made significant advancements in the matter of improving technologies on the prevention of abatement of emissions. However the regulators and the companies alike have difficulties in converting the physical consequences of such abating into monetary terms. This becomes necessary to guide the regulators and the companies to fix the priorities in adapting various technologies on the basis of the costs and benefits of the individual processes involved. Elements of Valuation of Environmental Impact: In the case of goods and services that are being traded in a competitive market it becomes easier to value the externalities. The 'externalities' denote the external effects caused by positive or negative spillovers from the production of a product or service. The agency involved in such production of the product or service may be asked to provide additional technology or processes to reduce the negative impact of such externalities. In this case the cost of such externality will be shifted to the producer. Alternatively the consumer may be charged more to discourage the use of the particular product which has a negative externality and in that case the social cost of the externality is borne by the consumer. But problems may arise when the product or service is not traded in the market. For assessing the social values in the case of such products the economists have developed various models like Damage Functions, WTP Studies and other measures of damages like lost wages, medical expenditure, awards for wrongful injury and travel cost. Damage Function Models: In a process of evaluation of the benefits of abatement the first step is to estimate the effect of the emissions on the health, visibility, deterioration of materials and depletion of natural resources and damages to the natural environment. The logical next step is to convert the effect into dollar terms. For instance the deterioration on the steel structures caused by the emission of Sulphur dioxide can be arrived as a percentage on the weight of the structures over a period of year and later on this percentage can be converted dollars. This way the cost of replacing the deterioration of steel structures can be calculated. Thus damage functions can be established for all effects of environmental pollution including the health hazard to human beings caused by air pollution. It thus becomes possible to model all the physical effects which in turn help to arrive at the quantitative effects of changes in various levels of pollution. The final step in assessing the monetary value of the environment impact can be calculated by ascribing a dollar value to the physical changes. However in spite of spending more time and efforts on the research on the qualitative and quantitative effects of environmental pollution no certain models could be developed. This has made the damage function models somewhat ineffective in estimating the value of environmental impact precisely. Willingness to Pay (WTP) Studies: In the example of steel structures the cost of replacing can be ascertained by taking into account the market value of the replacement or repairs to the structures. This may turn out to be a good estimate of the monetary value of damages. But in those cases where it is difficult to monetize the physical changes like in the case of a health hazard due to pollutions of different kinds there are no market values. In these cases the approach is the creation of a surrogate market by the economists in which the people are asked the money value they would be willing to pay for any improvements. There is a necessity of asking a multiplicity of complementary questions to arrive at a precise monetary value of improvements in the process. Obviously the answers would be controversial and uncertain as some questions may need an answer in areas to which the respondents are not exposed. For example the question on the WTP for the protection of sea otters may not get an accurate answer from most of the people because of the novelty of the issue. In this connection the economists use the term 'Value of Life' which term implies the monetary value of the change in the likelihood that individuals at risk will experience a premature death. At the initial stages of the studies the economists looked at the earnings that an individual might have foregone due to the premature death as the WTP measure for the money value of any health hazard. However this measure suffered inherent shortcomings because of the variances in the earning capacity of men and women, of people of different races and also other demographic conditions like age. In the case of the retired persons no value could be assigned. The other idea was to take the award of the juries for wrongful deaths as the basis for valuing the premature death. But this method also was found inadequate as varying compensation amounts would be determined by the juries based on the intensity of motives. It is also not possible to equate the premature death to have same connotation as a death caused by any misdeeds of others. In the present scenario there are more logical bases on which the social WTP to avert the statistical premature mortality. These methods provide straightforward economic studies of the additional wages payable to the workers in case of premature deaths to arrive at the WTP values precisely. On similar grounds the medical procedures prescribe a 'quality adjusted life-years' which denotes an estimation of the additional life a patient would be expected to gain a medical procedure. This can be equated to a money value on the person's additional life. On the 'Retrospective Analysis' finally a median estimate of $ 4.8 million per life with a standard deviation of $ 3.2 million was adopted as WTP estimates. These calculations were based on per life-year value of $ 300,000. Externality Adders: The studies on the 'externality adders' enable the selection of alternative processes or equipments that would prevent damages to the environmental conditions. It is important that these adders recognize the social cost of the emissions. "Thus, when building a new coal-fired power plant, the company would need to consider not only the stream of discounted net benefits including construction and maintenance costs offset by revenues but also the sulfur dioxide and other conventional pollutant releases generated by the facility over its lifetime." (Matthews and Lave) Damage Valuation Studies and Statistical Results: Various empirical studies have provided the statistical results on the Social damage estimates of Air emissions. For the consideration of this paper the statistical results of the studies with respect to the emission of Nitrogen oxide, Sulfur dioxide and Global warming potential are taken. Estimated External Costs ($/Ton of Air Emissions Emission Gas No of Studies Minimum Median Mean Maximum Nitrogen Oxides 9 220 1060 2800 9500 Sulfur dioxide 10 770 1800 2000 4700 Global Warming Potential 4 2 14 13 23 From the above presentation of the statistical results it may observed that there are a wide deviations reported between the minimum and maximum values in the case of Nitrogen oxide and sulfur dioxide. Similarly the range between the mean, median and maximum costs are having a wide range. The results on the global warming potential also exhibit the same nature. This clearly indicates the uncertainties in estimates of damages resulting from any additional ton of pollution. The uncertainty results from: Variation in the damage function being studied Changes in the air emissions and diffusion modeling and Difference in the focus of studies among health hazards and visibility and several other damages. Policy Applications of Estimation of Damages: Despite the shortcomings the economic valuations of the damages are being used with necessary policy adjustments and they do help in estimating environmental benefits. These policies underlying the damage estimations can help in studying: (1) Policies that help in adjusting the aggregate governmental accounting measures (2) Polices that help bringing products and processes in line with social cost of production and (3) Polices to evaluate the cost- benefits of environmental regulations In view of the uncertainties and the difficulties involved in precisely estimating the monetized cost of environmental impacts it becomes important that significant improvements are made in the different models used to value the environmental damages. The developments should consider more of geographical differences and the reliability on the mortality and WTP estimates should be reduced as much as possible. It is desirable that the future work in this respect takes into account the entire life cycle of the products and processes. It is not enough if the direct emission of gases is only considered. The national goals on reduction of emission can be achieved with greater efficiency with improved data. With a social consensus on the environmental goals aided with common reference measures will enable the companies to make better attempts in protecting the environment and any serious efforts of the companies in this direction need to be rewarded. Read More