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Unit 3 - project management unit 1

Project Management Context (Addis Ababa University)

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UNIT 3: ENVIRONMENTAL ANALYSIS

Contents
3.0 Aims and Objectives
3.1 Introduction
3.2 Environmental Impact Assessment
3.2.1 Screening
3.2.2 Scoping
3.2.3 Impact Assessment & Evaluation
3.2.4 Monitoring & Environmental Auditing
3.3 Timing of Environmental Assessments
3.4 Community and Public Participation
3.5 Environmental Impacts
3.6 Valuation of Cost & Benefit With Regard to Environment
3.6.1 Physical Impacts and Relations
3.6.2 Valuing the Impacts in Monetary Terms
3.6.3 Market Based Methods
3.6.4 The Discount Rate Issue
3.6.5 Issues of Risk and Uncertainty
3.7 Summary
3.8 Answer to Check Your Progress Exercise

3.0 AIMS & OBJECTIVES

Objective of the unit is

- to assess the impact of project on environment
- to identify ways to mitigate negative impact of a project
- to understand the need for community participation.

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3.1 INTRODUCTION

Environmental Assessment (EA) is a process whose breadth, depth and type of analysis
depend on the nature, scale and potential environmental impact of the proposed project. EA
evaluate a project's potential environmental risks and impacts in its area of influence, examine
project alternatives, identities ways of improving selection, siting, planning, design and
implementation by preventing, minimizing, mitigating or compensating for adverse
environmental impacts and enhancing positive impacts and includes the process of managing
adverse environmental impacts throughout project implementation.

Project will have a significant impact on the environment. These could be both positive and
negative. The positive environment effects needs to be enhanced and the negative effects need
to be prevented or reduced thorough appropriate mitigation measures to achieve this, project
should be subject to an environmental assessment.

Public and government awareness of the negative impact of development on the environment
has increased over the last thirty years in developed and developing countries. The first move
to assess the environmental impact from development projects originated in the USA in the
seventies. This led to the development of environmental impact assessment (EIA) methods,
which have been increasingly adapted and adopted by many other countries.

Concern for environmental degradation in Ethiopia has been growing in recent years. The
Ethiopian Federal Democratic Republic Constitution provides the basic and comprehensive
principles and guidelines for environmental protection and management. The government is
currently developing the institutional and policy framework for the implementation of
environmental assessment in the country. The constitution states that everyone has the right to
live in a clean and healthy environment and the government will make every effort to provide
such an environment. The constitution also holds the government and the people of Ethiopia
responsible for the preservation of natural resources and maintenance of ecological balances.
The three most urgent areas of environmental concerns are:
1. The considerable land degradation including loss of nutrients owing to removal of
animal manure a crop residues for use as a fuel and cattle feed

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2. The low quality and availability of water, as a result of which only about one-fifth of
the population has access to safe water.
3. The rapidly growing urban environmental problems including lack of sanitary
facilities, inadequate refuse collection, and low standard of housing.

In essence, this environmental assessment is not anti-development rather it is a means to

maintain the environment and for the sustainable development of the country's resources.

3.2 ENVIRONMENTAL IMPACT ASSESSMENT

In environmental assessment there are two main level of assessment. One for impact of
projects i.e., Environmental Impact Assessment (EIA) and one for the impact of policies,
plans and program Strategic Environmental Assessment (SEA). The later is becoming an
increasingly powerful tool to assess the impacts at the national or regional level of existing
policies and plans. In Environmental Impact Assessment (EIA) there are four major stages to
the process:

- Screening
- Scoping
- Impact Assessment and Evaluation – preparation of environmental impact statement
- Monitoring and Auditing

The overall Environmental Impact Assessment (EIA) process is illustrated in the following
diagram.

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Figure 1: Flow chart of simplified EIA process

Actions Outcomes

Review of projects to Decisions to proceed

Screening
Assess if an EIA is with environment
Necessary assessment

Identification of Major Potential and/or

Scoping
Environmental impacts of impacts of project to
project assessed and evaluated

Assessment of impacts, Magnitude and

Impact Prediction
and identification of significance of impacts
and Evaluation
Mitigation measures, and and mitigation or
Alternative options enhancement measures

Preparation and Drafting of Environmental Impact

consultation of draft and Environmental Statement
final EIS Impact Statement

Public and statutory

Review and
Review of EIS, and Yes or no to project
Decision on whether to Decision Making
Proceed

Monitoring of key Environmental Public reports (part of

Environmental variables, Monitoring & environmental management
and auditing against Auditing system and/or plan
Standard/plan

3.2.1 Screening

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Screening is the initial review of a project to determine if an EIA is required. For certain types
of project it can be a mandatory requirement to undertake an EIA. For others it will be a
matter for decision by the relevant regulatory authority. For all major agricultural project it is
likely that an EIA would be required, and desirable.

3.2.2 Scoping
Once a decision has been made to commence an EIA the next exercise is to assess the likely
major impacts of the project on the environment. This is known as scoping an initial
environment evaluation. This may identify very major adverse impacts of the proposed
project, which mean an outright rejection of the project. An example could be a proposed
development, which would have a major impact on the pack and be outside national policy.

On the other hand the evaluation may identify no possible significant adverse impact of the
project. When this is the case a full EIA will not be necessary and the project can move on to
its implementation stage. These are unlikely to be many major agricultural projects, which fall
into this category.

3.2.3 Impact Assessment &Evaluation

Following the decision to proceed with a full EIA the next stage of the process is the most
exhaustive and consequently expensive part of the assessment. This is the identification and
Box 1 Typical
prediction of allcontents of an environmental
the environmental impact of impact statement
the proposed (EIS)their likely affects both
project,

positive Background
and negative, information of project
the way to enhance and area,
or mitigate including
these impacts.history of project
The outcome andstage
of this its
stakeholders
will be a report and beneficiaries.
of the assessment, this is commonly called an Environmental Impact

StatementBiophysical and socio-economic
(EIS). The typical content of an EIA environmental description
or EIS are given in Box 1. of the area, and
assessment of the quality and reliability of this data.
 Review of legislative and institutional environment affecting the project.
 Assessment of significance and degree of potential impacts (positive and negative)
with ranking of importance and, where possible, a quantitative and economic
evaluation. Including the active participation of project beneficiaries and those local
communities affected by project.
 Analysis and appraisal of different project options, including a without project
option.
 Description of recommended mitigation measures for negative impacts, and of
measures to enhance positive impacts. 25
 Any institutional changes or requirements if the project is to be implemented.
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Depending upon the actual EIA the EIS may include recommendation on whether the project
should proceed of the changes, which should be made to its design to allow it to proceed to
implementation. The EIS should also include recommendations on environmental monitoring
to take place after project implementation.

This stage of the EIA should also be used to attempt an economic valuation of the
environmental impact, which can then be used in the appraisal of the project to help assess its
overall viability. Often this part of the EIA can be a lengthy and expensive, particularly where
it is necessary to assemble or survey baseline data. However, the investment on EIA and
valuation can be more than offset when negative impact are avoided or reduced, and positive
impacts enhanced.

3.2.4 Monitoring & Environmental Auditing

When a project has moved to implementation the final stage of the Environmental Impact
Assessment (EIA) process, or a component of project management, is environmental auditing.
This is linked to the environmental monitoring of the project. Auditing can be undertaken

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either by the project itself or by an external agency. The objective of auditing is to assess the
impact of the project against established standard. For example, where an agricultural project
has included a major processing plant it could be monitoring of water quality to make sure
that effluent from the plant is not exceedingly the agreed or mandatory levels.

Auditing can also be linked to the socio-economic impacts of a project. An irrigation project
may have the potential to increase water born diseases, and measure to mitigate these may
have been part of the project design, monitoring of health statistics and auditing of these
figures can be used to assess if this impact has occurred or been mitigated against. Monitoring
and auditing require resources and a commitment by the project operator and regulatory
authorities.

3.3 TIMING OF ENVIRONMENTAL ASSESSMENTS

A crucial factor with environmental assessment is when is it to be made in the development of

a project. In the past the environmental assessment of a project, if it happened at all took place
toward the end of the development of the project. This would often have been after the
identification, design and financial/economic appraisal of the project. But the environmental
viability of a project is essential for a successful and sustainable project. This to undergo the
preparation of project leaving the environmental to the end of makes no sense, especially, if
this assessment indicates that the project is not environmentally viable and sustainable.

It is, therefore, important that environmental assessment of projects and project options
commences as soon as a project has been identified. This could be only an initial evaluation to
rule out various options, which have serious environmental impacts. Later as the project
develops more detailed assessments should take place alongside the more traditional
economic and financial assessments of projects. As discussed later in this unit the
environmental economic valuation should be a part of the overall cost benefit analysis of a
project.

3.4 COMMUNITY AND PUBLIC PARTICIPATION

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Participation of project beneficiaries is also crucial when undertaking an Environmental

Impact Assessment (EIA). Unless local communities have been involved in the original
identification and design of a project, the onset of an EIA may be the first thing they know
about the project.

It is important to allow the participation of local communities in the assessment of potential

project impact possible alternatives. It is often they who will have to bear any adverse impacts
but hopefully enjoying the positive impacts the project may bring, though this is not always
the case with some projects. To achieve this very early in the EIA process the local
communities as beneficiaries and stakeholders should be identified.

3.5 ENVIRONMENTAL IMPACTS

Project will have its own positive as well as negative impact on the environment. For
example, if we take agricultural project, the impact of agricultural project can be grouped into
seven broad heading. These are given below with some of the main areas of impact.

- Ecological impact: loss of fauna and flora (including deforestation)

- Impact on soil: erosion, salinisation, alkalinization, fertility and structure
- Hydrology: water quality, surface flow, flooding, pollution
- Socio-economic impact: crop production, nutrition, employment, and health
- Infrastructure: transport, water supply, telecommunication
- Socio-cultural: cultural sites, and archeological sites
- Land use: land tenure, land rights, etc.

A checklist of these potential impacts divided into negative and positive effects is given in
Table 1. The table includes possible measures to enhance positive benefit and measure to
mitigate against negative impacts. This table is illustrated only as an example for
understanding the positive and negative effect of agricultural project on environment.

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TABLE 1: POTENTIAL NEGATIVE ENVIRONMENTAL IMPACTS OF

AGRICULTURAL PROJECTS
Potential Impact Possible Mitigation Measures
WATER RESOURCES/HYDROLOGY Control the use of agro-chemicals and do not use them
Water pollution from: near watercourses. Training of farmer sin use of
- pesticides and insecticides agrochemicals.
- fertilizers
Maintain fuel storage facilities and prevent accidental
- fuel and oils
spillage, provide facilities for disposal of waste oils
- sewage
Increase in surface runoff
Provide proper sewage disposal and treatment
Higher risk of flooding with increase in river flows
facilities
Higher sediment loads in rivers and siltation down stream
Lowering in water tale, particularly in arid areas Reduce soil compaction and soil erosion and increase
Drainage of wetlands: loss of flood control and increase in soil infiltration.
flows
Reduction in surface flows from water extraction of Drainage design should include water control devices
irrigation schemes (check gates, sluices, etc) to maintain water levels
SOILS Use appropriate land cleaning and conservation
Increase in soil erosion techniques, which reduce soil erosion and soil
Soil compaction compaction.
Loss in soil fertility
Avoid the use of heavy machinery particularly in wet
Soil acidification
conditions, use of animal traction or light machinery.
Soil salinisation/alkalization due to irrigation

Improve soil fertility by preserving top soils and using

good land husbandry to increase organic matter in the
soil.

Use of nitrogenous cover crops and tree species (agro

forestry) to improve soil fertility.

Better water management on irrigation schemes with

adequate drainage.

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Potential Impact Possible Mitigation Measures

ECOLOGY Use of non-forested lands for agricultural expansion or
Reduction in biodiversity through removal of natural intensification. Creation protection/conservation areas
forest and replacement by agriculture. of remaining natural forest.

Destruction of unique or endangered ecosystems and Use of indigenous and exotic tree species in mixed
species including wildlife and migration routes. plantations,.

Introduction of exotic trees and crops can lead to the Creation and maintenance of corridors between
uncontrolled weed like spreading to the local indigenous habitats.
ecosystems.
Preference should be given to indigenous tree species.
Introduction of pests and diseases to the area
Regular monitoring for outbreaks f pests and diseases
and research into the best measures to control them.
LAND USE Identify all land uses and users of land.
Displacement of other users from agricultural scheme. Identification of important sites and protection of these
Loss of goods and services by local communities. with guaranteed access for local communities.
Loss of grazing and pastoral rights.
Do not deprive other land users of the use of the land
Destruction of cultural, historical and scientific sites
except with their consent and compensation for any
loss.
LAND TENURE Use customary tenure systems to secure agreement of
Loss of customary tenure by local communities when local communities.
tenure is acquired by agricultural schemes-especially
Identify the legal and traditional owners of land.
resettlement schemes.
Delineate and agree all boundaries with local
Loss of tenure, or possibility of tenure, by groups
communities.
occupying state reserves/lands.
Establish good communications with the local
Disputes over actual ownership of land and increase in
community through regular meetings and agree a
social tensions.
method of setting tenure disputes.
Increase in land values and land speculation by
Establish land ownership and preferably buy or lease
outsiders.
locally owned land.

Potential Impact Possible Mitigation Measures

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INFRASTRUCTURE Selection of ridge tops for roads and avoidance of

Poorly planned roads, buildings, dams and other utilities poorly drained areas, construction of side drains and
culverts.
Increase in traffic flows
Regular maintenance of all roads and infrastructure.
Physical disturbance during construction phase of an
Consideration to environmental health factors in
agricultural development
location of any accommodation, office and workshop
areas.

Traffic controls on use of heavy lorries and plan.

ECONOMIC Ensure all components of the local community receive
Insufficient economic benefits to local groups, or material benefits from the agricultural development.
perceived insufficient returns.
Use local businesses to provide services where this
Lack of access to facilitates and services. possible.

Establish profit sharing schemes where appropriate.

Given the community access to clinics, schools,

communication facilities etc. provided by the
development.

Provide extension services to local farmer/forest users.

HEALTH Siting of households away from irrigated areas.
Increase in water born diseases on irrigation projects Access to better medical facilities.
Increase in cash crops can lead to less food crops and Nutrition programmes and maintenance of food crops.
nutrition problems.
MIGRATION Use as much local labour as possible.
Introduction of settlers/outsiders to the indigenous Obtain the consent of local community and
community through improved access and need for government for the introduction of migrants.
outside labor.
Identify and provide land and housing for migrants.
Breakdown in traditional social structures.

Law and order problems.

3.6 VALUATION OF COST AND BENEFIT WITH REGARD TO ENVIRONMENT

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In principle, economic analysis are to take into account all costs and benefits of a project.
With regard to environmental, impacts, however, there are two basic problems. First,
environmental impacts are often difficult to measure in physical terms. Second even when
impacts can be measured in physical terms, valuation monetary terms is difficult. In spite of
such difficulties, a greater effort needs to be made now "internalize" environmental costs and
benefits by measuring them in money terms and integrating these values in economic
appraisal.

Four key issues in measuring environmental costs and benefits are discussed hereunder;
a) Determining physical impacts and relationship
b) Valuing impacts in monetary terms
c) Discounting; and
d) Risk and Uncertainty

3.6.1 Physical Impacts and Relationship

The first step in environmentally sound economic analysis is to determine the environmental
and natural resource impacts of the project or policies in question. These impacts are
determined by comparing the "with project" and the "without project" impacts. The difficulty
in doing this varies greatly. For example, solid waste production of an industrial plant can be
estimated easily, whereas it is much more difficult to identify all the environmental impacts of
a trade policy reform, of air pollution, or even soil erosion on agricultural productivity.

For determining physical impacts, an economist will have to rely on the expertise of
engineers, ecologists, agronomists, social scientists, and other specialists. The task is complex
in that some physical relationships may not be known, may be stochastic or may occur only
over the long-term.

3.6.2 Valuing the Impacts in Monetary Terms

A number of conceptual approaches have been developed for valuing physical impacts and
relationships. An environmental impact can show itself in a measurable change in production
or environmental quality. Different methods are appropriate depending on the types of effects.
(See Table 2 below).

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The methods and approaches discussed below are applicable or potentially applicable in
developing countries. The techniques are presented in decreasing order of reliance upon
market information, beginning with those that rely on actual market prices, and ending with
survey-based and other hypothetical methods.
Table 2 Chief Valuation Techniques
DIRECT VALUATION SURROGATE MARKET POTENTIAL EXPENDITURES
VALUES OR WILLINGNESS TO PAY
- Changes of productivity - Property values - Replacement costs
- Loss of earnings - Wage differences - Shadow project
- Defends expenditures - Travel costs - Contingent valuation
- Market goods as proxies

3.6.2.1 Market Based Methods

The primary feature of these methods is that they are based directly on market prices
productivity. They are applicable where a change in environmental quality affects actual
production or production capability.

i) Change in Productivity Approach

Development projects can affect production and productivity positively or negatively. For
example, a land management project involving soil conservation measures, may yield
increased agricultural output. The incremental output can be valued by using standard
economic prices.

The environmental costs of reclaiming wetlands or of water pollution are now being
recognized. Where these affect fish catch either in the short-term or long-term the value of
fish catch can be estimated directly by using actual or projected market prices.

ii) Loss-of-earnings Approach

Changes in environmental quality can have significant effects on human health. Ideally, the
monetary value of health impacts should be determined by the individuals' willingness to pay
for improved health. In practice, "second best" techniques may be necessary, such as valuing
earnings that are foregone through premature death, sickness or absenteeism; and increased

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medical expenditures. This approach may be relevant, for example, when considering road
and industrial plant safety, and projects that affect air pollution in major cities.

The "value of health" approach is often questioned on ethical grounds. It is argued that it
dehumanizes life, which is of infinite value. In practice, however, society implicitly places
finite values on human life and health when it makes policy and project decisions that affect
environmental quality, workers' health or safety, etc. If this were not so, we would be justified
in spending all of GDP on health improvements.

In this case of an increase or reduction in numbers of deaths, a first estimate is made by

evaluating the projected loss in earnings of the individual involved. The value of an increase
or education in sickness can be approximated by adding medical costs to loss in earnings.

iii) Defensive or Preventive Expenditures

Individuals, firms, and governments undertake a variety of "defensive expenditures" in order
to avoid or reduce unwanted environmental effects. Environmental damages are often difficult
to assess, but defensive expenditures may be determined more easily in monetary terms than
direct valuations of the environmental good in question. Such actual expenditures indicate that
individuals, firms or governments judge the benefits greater than the costs. The defensive
expenditures can then be interpreted as a minimum valuation of benefits. However, caution is
devisable with this approach, especially in cases where governments arbitrarily mandate
defensive expenditures having little or no relationship to market forces or free choices.

3.6.2.2 Methods Based on Surrogate Market Values

The methods and techniques described in this section use market information indirectly. The
approaches discussed are the property value approach, the wage differential approach, the
travel cost method, and uses of marketed goods as surrogates for non-marketed goods. Each
technique has its particular advantages and disadvantages, as well as requirements for data
and resources. The task of the analyst is to determine which of the techniques might be
applicable to a particular situation.

i) Property Value Approach

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This approach, also referred to as the hedonic price technique, is a subset of the more general
land value approach. Its objective is to determine the implicit prices of specific characteristics
of properties. When used in environmental issues, its purpose is to place a value on
improvements or deterioration in environmental quality.

The property value approach has been used to analyze the effect of air pollution in certain
areas. Where pollution is localized, the method compares prices of houses in affected areas
with houses of equal size and similar neighborhood characteristics elsewhere in the same
metropolitan area. The approach is based on the assumption of a competitive real estate
market, and its demands on information and statistical analysis are significant; therefore,
applicability to developing countries is limited.

ii) Wages Differential Approach

This approach is based on the theory that in a competitive market the demand for labour
equals the value of the marginal product, and that the supply of labour varies with working
and living conditions in an area. A higher wage is therefore necessary to attract workers to
locate in polluted areas or to accept risky work. Again, as in the case of the property value
approach, the wage differential approach can only be followed if the labour market is very
competitive. Also, the approach reflects only private, not social, valuation of health risks.

iii) Travel Cost Approach

This approach is most often used in analyzing the economic benefits of recreational facilities
in industrial countries (parts, lakes, forests, wilderness, etc). Essentially the same approach
can also be used to value “travel time” in projects dealing with fuel wood and water
collection.

The surrounding area of a site is divided into concentric zones of increasing distance,
representing increasing levels of travel cost. A survey of users should be conducted at the site
to determine the zone of origin, visitation rates, travel costs, and various socio-economic
characteristics. Users close to the site would be expected to make more use of it, because the
implicit price for them, as measured by travel costs, is lower than for more distant users.
Based on analysis of the questionnaires, a demand curve can be constructed and the associated

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consumers’ surplus determined. This surplus represents an estimate of the value of the
environmental good in question.

iv) Marketed Goods as Surrogates for Non-Marketed Goods

There are situations where environmental goods have close substitutes that are marketed, and
where therefore the value to the environmental good in question can be approximated by the
observed market price. For example, the value of a non-marketed fish variety can be valued at
the price of the most similar fish being sold in local markets.

3.6.2.3 Methods Based on Potential Expenditures or Willingness-to Pay

Sometimes it is not possible to estimate the benefits of environmental quality protection or
improvements. In some of these cases it may be possible to estimate benefits by calculating
the costs of replacing the environmental services that have been or might be destroyed by a
project, or by estimating what people might be willing to pay (WTP) to protect an
environmental asset. Once again, however, great care needs to be exercise to avoid improper
valuation.

i) Replacement Cost Approach

Under this approach, the costs of replacing a damaged asset are estimated. The estimate is not
a measure of the benefit of avoiding the damage in the first place, since damage costs may be
higher or lower than the replacement cost. However, it is an appropriate technique if there is
compelling reason to restore the damaged asset, or certainty that it will be restored.

The replacement cost approach has been used to estimate the benefits of erosion prevention
measures by calculating the cost of the fertilizer that would be needed to replace the nutrients
lost through soil erosion. The method applies only if, in the absence of erosion control
measures, the fertilizer would actually be applied.

ii) Shadow Project Approach

Used for evaluating projects with negative environmental impacts, this approach involves the
design and costing of one or more “shadow projects” that would provide substitute
environmental services to compensate for the loss of the original assets. This approach is
essentially the same as the replacement cost approach; it is being mentioned increasingly as a

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way to make operational the concept of sustainability at the project level. It assumes a
constraint for maintaining environmental capital intact, and could therefore be most relevant
when “critical” environmental assets are at risk.

iii) Contingent Valuation Method

In the absence of market information about people’s preferences, the contingent valuation
method tries to identify them by posing direct questions about willingness to pay. Basically, it
asks people what they are willing to pay for a benefit, and/or what they are willing to accept
as compensation for tolerating a cost. This process of “asking” may be either through a direct
questionnaire/survey, or by experimental techniques in which subjects respond to various
stimuli in “laboratory” conditions. What is sought are personal valuations by the respondents
for increases or decrease in the quantity of some good, contingent upon a hypothetical market.
Willingness to pay is constrained by the income level of the respondent, whereas willingness
to accept payments for a loss is not constrained. Estimates show that willingness to accept
tends to be several times greater than willingness to pay.

The continent valuation method has many shortcomings, however, including problems in
designing, implementing and interpreting questionnaires. While its applicability may be
limited, there is now considerable experience in applying this survey-based approach in
developing countries, e.g., to evaluate the quality of supply of potable water and electricity
services. In certain circumstances, the contingent valuation method may be the only available
technique for benefit estimation, and can be applied to common property resources, to
amenity resources with scenic, ecological or other characteristics, or to other situations where
market information is not available. Caution should be exercised in seeking to place a value
on the more abstract benefits of environmental assets, such as existence or intrinsic value.

3.6.4 The Discount Rate Issue

After the physical effects of projects and policies have been determined and, where possible,
estimated in money terms, the next issue is the rate at which the cost and benefits streams are
to be discounted. This is a general issue in cost benefit analysis; but it is particularly important
with regard to environmental costs and benefits, since at least some of them are of long-term.

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In standard analysis, past costs and benefits are treated as "sunk" and are ignored in decisions
about the present and future. Future costs and benefits are discounted to their equivalent
present value and then compared. In theory, in a perfect market, the interest rate measures
both the subjective rate of time preference and the rate of productivity of capital. These rates
are equated at the martin by the market, so that the rate at which individuals are willing to
trade present for future values in just equal at the martin to the rate at which they are able to
transform present goods into future goods by capital investment.

Because of imperfect financial markets and government distortions introduced by taxation,

the rate of time preference and the rate of capital productivity are not equal. Also, individual
decisions differ from social decisions in that individuals are mortal and societies are quasi-
immortal. Thus one strong reason for individual preference for the present – the certainty of
death coupled with the uncertainty of when it will occur – is absent from the community's
point of view. So, the community has reason to discount the future less than individuals.

In order to favor environmental projects that have benefits accruing in the long run, it has
been suggested that lower discount rates by used. This has a drawback, however, in that not
only environmentally sound activities would pass the cost-benefit test more frequently but
also a larger number of projects generally would pass the test and thus lead to additional
environmental stress.

The main recommendations, therefore, are that:

(a) the standard opportunity cost of capital be used (e.g., 10 percent) for environmental
cost-benefit analysis, as it is for NPV calculations and for computing the IRR
comparator:
(b) short-and long-term costs and benefits be estimated as carefully as possible; and
(c) a rigorous analysis of non-monetary consequences (including those that might be
irreversible) be made to supplement standard cost-benefit analysis.

3.6.4 Issues of Risk and Uncertainty

Projects and policies alike involve risks and uncertainties. Risks are involved when
probabilities can be assigned to the likelihood of an event occurring, such as an industrial
accident. Uncertainty describes a situation where little is known about future impacts and

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where therefore no probabilities can be assigned to certain outcomes, or where even the
outcomes are so novel that they cannot be anticipated.

Risk can be insured against and treated as a cost, but uncertainty defies actuarial principles
because of novelty of outcomes. Uncertainty is especially important in environmental issues.
As projects grow larger in scale and introduce novel substances into the environment, the
category of risk becomes less relevant and the category of uncertain more relevant. The
proper response to risk is to count it as a cost in expected value formulations. The proper
response to uncertainty is likely a policy of general caution: if one cannot see very far ahead,
slow down.

Much work has been undertaken on the subject of risk and uncertainty in project appraisal. In
practice, the way risk and uncertainty are included in project appraisal work is through
sensitivity analysis, which determine how the IRR is dependent on different variables.
Analysis should also be undertaken that indicate how environmental features can affect the
IRR of a project and how the project might affect natural resources and the environment.

Check Your Progress Exercise

1. What is Environmental Assessment and why it is undertaken?
___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________
2. What are the four major steps involved in undertaking Environmental Impact
Assessment?
___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________
3. When does Environment Impact Assessment be undertaken?
___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________

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4. Is that necessary to participate the local community in Environmental Impact

Assessment? Why?
___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________
5. What are the different approaches for valuing the impact of environment in monetary
terms?
___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________
6. Write about the issue of risk and uncertainty in measuring environmental cost and
benefits?
___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________

3.7 SUMMARY

Incorporation of the effects of environmental degradation into public decision-making is an

essential step towards achieving economically efficient management of natural resources and
formulating a practical strategy for sustainable development. In particular, the economic
analysis of projects and policies can help a county make investments of scarce resources that
contribute most to its overall objectives. “External factors” have often been neglected in the
past, but these should not be internalized to the extent possible. In this regard, rough
qualitative assessments early in the project cycle can yield valuable returns by identifying
environmentally unsound alternatives and focusing on those that are more sound overall and
designing the latter to achieve sustainable development goals.

The principles discussed in this section have been applied to evaluating environmental costs
and benefits in only a limited number of actual situations. Therefore, more case study work is
necessary and perhaps could be carried out as part of project preparation. A major purpose in
such endeavor is to indicate orders of magnitude, rather than provide fine-tuned numbers. In

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this fashion, some alternatives could be ruled out, and the key estimates for decision-making
identified and focused on.

At this time, the best one can do is to used cost-benefit analysis to the extent possible- and
push it to its acceptable limits. In addition, risks and consequences that cannot be measured in
monetary terms should be identified and rigorously analyzed. These two approaches - and
good judgment- are at present the best strategies for sound decision-making.

3.8 ANSWER TO CHECK YOUR PROGRESS EXERCISE

1. Refer Section 3.1

2. Refer Section 3.2
3. Refer Section 3.3
4. Refer Section 3.4
5. Refer Section 3.6.2
6. Refer Section 3.6.4

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