Shadow project approach

• A special version of RC method

• Calculation of a cost of a supplementary project
that provide the lost services
• E.g.
1. Lost fishery provided by man made systems/
tanks
2. Provision of lost waste filtration functions of
wetlands by man made wetlands
3. Planting of corals in the ocean
 Limitations
• It is difficult to fully replace the lost services
• This method is more used to illustrate the huge
costs involved in the shadow project and to
prevent the damage in the first place.
• E.g. shadow project for a lost tropical forest
 Human capital approach/
Cost of illness approach/
Forgone earnings approach
• Humans are units of economic capital
• Bad environment impacts on human health
TWO costs are resulted
• Loss of earnings
• Resource costs of medical treatment and health care -
cost of medicine, doctors visits, hospital stays, other
incidental expenses
• These costs are reflecting the damage cost of poor env
quality
Evidence - health damages from air pollution
WORLD - Every year an estimated 800,000 people die
prematurely from illnesses (lung cancer,
cardiovascular and respiratory diseases) caused by
outdoor air pollution worldwide.
SOUTH ASIA - Approximately 150,000 of these deaths
are from South Asia alone. Air pollution has also
been associated with a variety of illnesses. (WHO)
EUROPE - Air pollution is estimated to cause 100
million sick days and 350 000 premature deaths in
Europe
Evidence - Incremental impact of coal
power plant Sri Lanka

Impact Number Per year

Mortality increment 33

Morbidity increment 1135

Karunarathne, 2016
Evidence - The slow killers
• 6481 people in Sri Lanka have died from kidney diseases between 2016 to 2018
• 2,135 deaths in 2016
• 2,159 deaths in 2017
• 2,187 deaths in 2018
• 17,503 kidney disease cases reported from hospitals while 787 people had
undergone kidney transplants.
• 22,000 people have died from CKD over the past 2 decades in the NCP

What is our response..?

• …how many deaths will it take 'til he knows
That too many people have died?
(Bob Dylan – Blowing in the wind – listen and feel this song)
To use this method…
• Direct cause and effect relationship should be present
• Illness should be short duration; not life threatening
• (loss of life will complicate the calculations)
• Economic cost of lost productive time and costs of
health care should be calculable
Examples
Cost of Unhealthy environments
 Water related pollution
 Air pollution costs
 Costs of unsanitary living conditions
 Costs of unsafe or unhealthy working conditions
Benefit of healthy environments
 Value of rural landscapes
 Forest benefits
The technique
1. Identify the feature in the environment which cause the illness
2. Determine its relationship with the incidence of the disease
3. Assess the population at risk
4. Calculate the loss in productive time and other resources used up
5. Place economic value
 Step 1 – identify the feature in the
environment that could cause illness

This is a job of the Medical professionals and pollution experts

Case histories
Lab experiments – animal testing
Available listings
WHO list of carcinogens
Proposition 65 – California
Chemicals known to cause cancer, birth defects or other reproductive
harm
Find the chemical list
Step 2 - Determine its precise relationship with the
incidence of disease
Dose-response function identifies relationship between level of
pollutant and degree of health effect (water quality and
diarrhoea)
e.g. x parts per 1000 , for y hours or z days per year causes p
number of cases.

Issues
Problems of precision of the relationships
Lack of this type of data in developing countries
Problems of use of relationships established in temperate contexts
Dose response function / Exposure response
Detailed information may be needed
Air pollution - not all pollutants are equally harmful.

Fine particulate matter (PM2.5), ammonia, sulfur

dioxide, and volatile organic compounds make up
only half of all emissions by weight, but cause almost
80 percent of total damages.
PM2.5, very tiny particles that can lodge in the lungs,
account for only 6 percent of total emissions by
weight, but cause 23 percent of total damages.
Nitrogen oxides and coarse particulates are responsible
for almost half of the total tonnage but only 20
percent of damages.
 Dose-response (DR) function…
 Y = fDR(X)
 relates the quantity X of a pollutant that affects a receptor
(e.g. population) to the physical impact Y on this receptor
(e.g. incremental number of hospitalizations)
 Theoretically, X should be the dose actually absorbed by a
receptor
 Practically, X represents the concentration of a pollutant in
the ambient air; in that case fDR(X) accounts implicitly for
the absorption of the pollutant from the air into the body.
 Classical air pollutants (NOx, SO2, O3, and particulates)
represent the latter - therefore exposure-response (ER)
function or concentration-response function are more
appropriate.
Step 3 – Assessing the population at risk

Defining the catchment area for the harmful agent

Modelling the dispersal pattern
Gas and water dispersion models
Gaussian plume model
Dispersion models…
 For most air pollutants (other than the globally
dispersing greenhouse gases,) atmospheric
dispersion is significant over hundreds to
thousands of km.
 For dispersion over the local range (< 50 km from
the source) Gaussian plume models
 At the regional scale need to account the chemical
reactions that lead to the transformation of
primary pollutants (i.e. the pollutants as they are
emitted) to secondary pollutants, eg, creation of
sulfates from SO2
Defining the population at risk
•Pregnant women
•Asthmatics
•Young children
•Old people
 Step 4 - Calculate the health care resource used
up and probable loss in productive time
Identifying Direct and indirect costs
Direct costs:
• Health care resources: staffing, consumables, overheads,
capital
• Other related services: community services; ambulance
services;
• Costs incurred by patients and their families
• inputs to treatments
• out-of-pocket expenses
Indirect Costs

• Indirect costs arise because health care may

result in lost production
• Value of indirect cost is the value of the lost
production
• Time lost from work (production effects)
• Production effects arise from working in the
labour force and housework
 Measurement of costs
 Health care resources Measurements
◦ staffing time (hours, minutes)
◦ consumables units/amounts consumed
◦ overheads units/amounts consumed
◦ capital units/amounts consumed

 How?  Medical records and patient surveys

 Important to report quantity of resource use

◦ Variations between countries/regions
 Capital items
• Examples - land, buildings and equipment

• The cost of capital occurs at a single point in time

• Although there is one initial outlay, the opportunity

cost is spread over time

• Calculate the equivalent annual cost (EAC)

 Value of time (productive time)
 Issues of valuing time

 Dividing the population as productive and non productive

 Depends on the alternative use of time

 Paid employment (average wage rate)

 Unpaid labour?
◦ Recommendations -54% of average wage rate

 Leisure time?
◦ Recommendations - 43% of average wage rate
• Step 5 – put economic values on time and
resource taken up by the illness

• Problems - similar environmental problems will

generate different costs in D’ ing and D’ed
countries
 Eg - cost of Malaria due to abandoned gem mines (Yapa and
Gunawardena, 2011)
Productivity losses per malaria episode, by age group (average
number of days)
Age group Households who ever
Had malaria confirmed
By a medical test
Adult Teens Children

Duration of illness 19 28 11

Patient’s lost work days 14 19 2

Gains in household productivity due to intra-household labour 3 2 1

substitution
Losses in household productivity because substitute labourer 9 6 7
does not do their own work

Days lost due to intra-household caretaking 9 6 7

Net number of work days lost due to an episode of malaria 15 17 8

 Description Value
Cost of illness due to Malaria Rs. 3,458,965.37

Contribution of gem pits for Malaria proliferation 60%

(Yapabandara et al., 2004)
Cost of illness of Malaria proliferation due to gem pits Rs. 2,075,379.20

Annual health Damage Cost of spreading of

Malaria from gem pits = Rs. 2,075,379.20
 Air pollution from heavy goods vehicles alone costs
EEA member countries € 43-46 billion per year,
making up almost half of the approximately € 100
billion cost of air pollution from road transport.
 Road charges for heavy goods vehicles (HGVs or
lorries) should reflect the varied health effects of
traffic pollution in different European countries.
 Air pollution from large industrial facilities cost
Europe € 102 – 169 billion in 2009en in lost life, poor
health, crop damage and other economic losses.
United States
 The major pollutants first regulated by the Clean Air Act are still causing
damages to human health.
 Ammonia and the five criteria pollutants - fine and coarse particulates,
sulfur dioxide, nitrogen dioxide, and volatile organic compounds -
currently cause damages that range from $75 - $280 billion annually.
CHINA
Economic burden of premature mortality and morbidity associated with air
pollution was 157.3 billion yuan in 2003, or 1.16 percent of GDP.
Applications of health damage costs

 Guidance for environmental regulations (for example, determining

the optimal level of the limit for the emission of a pollutant);
 Finding the socially optimal level of a pollution tax;
 Identifying technologies with the lowest social cost (for example,
coal, natural gas or nuclear for the production of electricity?);
Economic cost of Meethotamulla garbage dump
Item Value Rs million

Health damages 91.50

Cost of lost lives 102.9
Preventive expenditure to 2.77
mitigate impacts
Loss of productive time on 7.37
additional cleaning
Cost of methane emission 928.18
Total 1,115.74
per ton cost Rs. 3,596
Cost of garbage we create …
• This excludes the final collapse which killed 32 people
• Cost of lost lives - Rs million 1,194
• Based on Value of statistical life (VSL) (calculated using GDP per capita
- Rs. 533,420 ) and assuming 75 yrs of life expectancy
• Per ton cost - 7913
Change in productivity method/ Effect on
production method
Environmental change in a man made agriculture
system/natural production system

Changes in the out put level

Change the price does not change

the price

The resultant changes in welfare (given in producer and

consumer surpluses) is the value of the environmental
change
 Production Function Techniques

Environmental conditions affects production

Q = f (L, K, E)

Where: L = labour; K = capita, E = environmental

indicator
 Eg. change in fishery output per input following
mangrove conservation
STEP 1
Identify both on-site (expected outputs) and off-
site effects (environmental and economic
positive and negative externalities).
 Latter may require dose-response functions
(for example, the effect of salinity on crop loss).
STEP 2
Compare effects both with and without the
project to account for changes which would
have occurred anyway due to trends in other
factors
 Eg. soil productivity in a project site may be
changing anyway due to other factors.
STEP 3 - make assumptions about the appropriate
time period for measurement, the correct prices
to use, and future changes expected in relative
prices
Physical changes in production are valued at
market (or if necessary shadow) prices for inputs
and outputs.
CS and PS

Supply

Consumer
surplus
Equilibrium E
price
Producer
surplus

B Demand

C
0 Equilibrium Quantity
quantity
Example – Pollution in lake which affects fishery

The amount of white fish harvested from a lake

depends on white fish stocks
the whitefish stock depends on the quality of the
lake’s environment (water quality).
production/cost function:
Qw = f {R,Sw(E)}
Where, Qw – the quantity of whitefish harvested,
f – the function that relates environmental
quality to the quantity of whitefish harvested
R – the amount of resources devoted to
catching fish
Sw(E) – the stock of whitefish in the lake,
which itself depends on the quality of the lake’s
environment (E)
• Change in the quality of the lake’s environment ∆E.
• Due to pollution, water quality in the lake will deteriorate.
• Deterioration in water quality is sufficient to have an adverse
impact on whitefish stock.
• There are two possible consequences of ∆E, and the
subsequent decrease in whitefish stocks;
• If the operator wants to maintain current harvest rates (i.e.
Qw remained unchanged) then it will have to allocate more
resources to catch whitefish.
• That is, since whitefish are now less abundant in the lake, the
operator will have to try harder to maintain harvest rates e.g.,
buy an extra fishing vessel, fish for longer hours etc.
• If the operator does not increase the amount of resources it
allocates to catch fish (R remains unchanged) then we can
expect the quantity of whitefish harvested to decrease.
• Either way, the operator suffers an economic loss.
Under the latter scenario, the value of the reduced
output is lost.
In the former case, the operator’s costs increase as a
result of having to increase their level of fishing
effort.
This provides us with two measures of the cost of the
deterioration in environmental quality: the value
of the lost output or the cost of the additional
resource inputs.
The environmental quality can also improve, where
whitefish stocks in the lake increase.
The benefits of an improvement in water quality are given by either
the value of additional output or the cost savings associated with
using less resource inputs.
In terms of valuation, two situations must be distinguished from
each other.
Changes in quantity do not result in changes in price
Changes in quantity induce changes in price.
Changes in quantity do not result in changes in price
• If the change in the quantity of whitefish harvested
(∆Qw) is small relative to the current total quantity of
output available in the market place.
• In this case, the current price of the whitefish P0w
will not be affected. Given that the price of whitefish
remain static, the economic value (V) of the change
in output is given by
• V = ∆Qw × P0w = (Q1-Q0) × P0w
Q0 – the quantity of whitefish harvested before ∆E
and
Q1 – the quantity of whitefish harvested after ∆E
Changes in quantity induce changes in price.
• If the change in output is large relative to the current total
quantity of output available in the market place
• This may induce the price of the affected good/service to change.
• In such cases, we need to examine the relevant demand and
supply curve in order to value the change in the output.
• Consider the following figure. Before the change in water
CS0 = A + B + D
PS0 = C + E
• After the change in the water quality, and the subsequent change
in output and price
• CS1 = A and PS1 = B+C
 S2 S1

B
D

C
E

Q
• The cost of the deterioration in water quality is given
by
[CS1 – CS0] + {PS1 – PS0]
[A-(A + B + D)] + [B + C - (C + E)] -B –
D + B – E = -D – E
• Net loss of consumer surplus is equivalent to the area
D, while the net loss of producer surplus is equivalent
to the area E.
 Some Sri Lankan estimates
Costs on fisheries
Harvest some 8-10 yrs ago
• Lower estimate – 100 kg per day
• Upper estimate – 200 per day
• Common types of fish - Etawalla, Balaya, Hurulla, lobster, crabs,
Meewetiya
Harvest now
• Lower estimate – 10 kg per day
• Upper estimate – 15 per day
• Common types of fish - Etawalla, Balaya, Hurulla

Value of lost fishery

• Lower estimate – 1,047,000,000 per yr
• Upper estimate – 1,788,000,000 per yr
Reduced income due to changes of the seasonal
crops grown
• Coal dust has lead to a shift from high valued crops (chillie and
tobacco) to beet root and other crops

Lower Upper
estimate estimate

Loss per acre per yr 12,637,500

Total affected acres 30 50

Value LKR per year

379,125,000 631,875,000
Reduced income due to the reduction of
coconut yield of the existing coconut plants

• Yield reduction per tree per harvest – 20 nuts

• Affected acres for the sample -30
• Affected acres for the population - 50
• Economic value of a coconut - LKR 108
• Cost per year – 86,400,000
 Preventative Expenditure Method (Mitigative or
defensive expenditure approach
• Identifies the cost or benefit value of environmental
impacts by observing willingness to pay to fix or avoid
related forms of environmental damage
• Can measure demand for environmental protection -
indirectly measuring the costs of environmental damage
by looking at the amount of resources allocated to
avoiding them.
• A rational individual would pay mitigating costs if:
• Level of damage after Mitigation Expenditure < Original
level impacts
Example: purchase of (defensive) market good.
Value of each purchase represents implicit price for non-market
good or bad in question
Double-glazed windows to decrease exposure to road
traffic noise
• The decision context
• N - disutility due to noise
• The costs of a moving decision to a quieter area
• Consumer surplus, S, value over and above the market price
• Depreciation of property value created by noise , D
• The costs of moving R, transport and labour costs

• A rational house owner moves if

N>S+D+R
• He will stay and tolerate noise if
• N<S+D+R

• Sound insulation costs - G

• The residual noise – N’
• Owner who will stay, take no defensive measures,
and tolerate noise,
• S + D + R >N < G + N’
• Those who stay and decide to install noise
installation must obey the inequality
N > G + N’ < S + D + R
Heathrow air port neighbourhood – regression model

Number of rooms fitted with double glazing =

a + (b) Noise levels + (c) cost of insulating + distance to air port……………

Defensive expenditures typically partial or lower bound estimate of the value

of the impact of the non-market bad
• Double-glazing only decreases exposure to noise inside house
Behavioural response to risks
• Bresnahan et al. (1997): behaviour and changes in acute
health risks (caused by ground-level ozone)
• Survey of (non-smoking) Los Angeles residents living in areas
with relatively high concentrations of local air pollutants
• High proportion of individuals with compromised respiratory
functions
• Findings
• 40% of respondents re-arranged leisure activities or stayed indoors
bad air days
• 20% increased use of home AC units
Malaria prevention in The Gambia:
• 1700 households from the Farafenni region
• Expenditure on bed nets, treating and repairing bed
nets, aerosols, coils, indoor spraying, smoke and
other prevention strategies such as drinking herbs
and cleaning the outside environment.
• Every fortnight, households spent an average of 8.40
Dalasis (D) on coils, 4.20 D on indoor sprays, 3.09 D
on smoke and 3.06 D on aerosols, together making
up 81% of total fortnightly expenditure. Bed nets,
including treatment and repair, constituted only 10%
Cost of water pollution from oil, toxic pollutants
and other waste during the construction phase of
a run of river project

• Will affect all the activities related to water including

bathing, swimming and rafting in the downstream

Methodology - costs of mitigatory measures (Defensive

Expenditure)
• Per unit cost of the most appropriate mitigatory
measure 1,017,000.00
• Quantity of the mitigatory measure 36 months
• Total cost (Rs) 36,612,000.00
ECBA of Uma Oya Multipurpose
Development Project -
Impacts of power transmission lines –
Defensive expenditure
• Transmission lines would disturb the views of
Rawana Ella.
• Rs 700, 000, 000 will be needed to divert the
transmission lines
Meethotamulla example
OPPORTUNITY COST APPROACH
• Trade-offs - comparison of alternative net
benefits (economic welfare) given up if certain
options are chosen (highest-valued alternative
activity).
• Measures the cost of preserving environmental
resources by assessing the benefits/ revenue/
gains foregone by not putting the land to other
uses
• Compares alternative land uses and benefits of
environmental preservation (including unpriced
or non-marketed activities) compared to the
income or net benefits given up by preventing
alternative uses.

• Eg. Two options available for a tropical rain forest

• Clear cutting for timber
• Conservation of the forest
• Opportunity costs are compared for both options
• High opportunity cost is with clear cutting option and it need to be
avoided
Application of Opportunity cost of time
ECBA of Moragolla hydropower project
• Building a dam across Mahaweli river
• Both upstream and downstream of proposed dam are used for
bathing and washing by people in the area
• A total of 110 families are affected.
• The nearest alternative site is located about 1 – 1.5 km distance.
• It would take on average 50 minutes (40 min – 1 hr) if they were
to visit this alternative sites for bathing.
• The time value of money was estimated using the ongoing market
labour rates.
• Annual opportunity cost value Rs 1,787,500