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GUIDELINES ON THE ECONOMIC VALUATION

OF THE ENVIRONMENTAL IMPACTS


FOR EIA PROJECTS








DEPARTMENT OF ENVIRONMENT
MINISTRY OF NATURAL RESOURCES AND ENVIRONMENT
PUTRAJAYA



JUNE 2008
PREFACE

The Guidelines on the Economic Valuation of the Environmental Impacts for EIA
Projects Prescribed Activities contain advice and instructions to assist project
initiators in the identification, quantification, and where possible the monetization
of the environmental impacts of the project. Project initiators should appoint
registered consultants with the required expertise to implement these Guidelines
as such economic valuation of the environmental impacts of the project
constitutes a component of EIA reports per requirements of the Handbook of
Environmental Impact Assessment Guidelines

These Guidelines consist of eight chapters as follows:

Chapter 1 This chapter provides the rationale and objective, and describes the
content of these Guidelines;

Chapter 2 This chapter describes the concept of total economic value as this
concept provides the overarching framework guiding the economic
valuation of environmental projects;

Chapter 3 This chapter discusses issues which need to be addressed at the
outset of the economic valuation process and are common to all
economic valuation methodologies;

Chapter 4 This chapter presents an overview of the methodologies available
to undertake the economic valuation of environmental impacts

Chapter 5 This chapter discusses the principles and applications of the
change in productivity methodology;

Chapter 6 This chapter discusses the principles and applications of revealed
preferences methodologies which include the replacement cost
methodology, the defensive expenditure methodology, the cost of
illness methodology, the travel cost methodology, and the hedonic
pricing methodology;

Chapter 7 This chapter discusses the principles and applications of stated
preferences methodologies focusing on the contingent valuation
methodology;

Chapter 8 This chapter discusses the benefit-transfer methodology;

Chapter 9 This chapter provides a summary of the key recommendations
presented in these Guidelines.

ii
This is the first edition of the Guidelines on the Economic Valuation of the
Environmental Impacts for EIA Projects in Malaysia. As experience develops with
their implementation, this edition will be updated as and when deemed necessary
by the Director General of Environmental Quality.







Director General of the Department of Environment
Malaysia

iii
TABLE OF CONTENTS

Preface ii
Table of contents iv
List of Tables viii
List of Figures ix
List of Boxes x
List of Acronyms xi

Chapter 1 Introduction 1
1.1 Background 1
1.2 Applicability of the Guidelines 2
1.3 Objective of the Guidelines 2
1.4 Content of the Guidelines 2

PART A INTRODUCTION TO THE ECONOMIC VALUATION OF
ENVIRONMENTAL IMPACTS
4

Chapter 2 The concept of total economic value 5
2.1 Ecosystems and economic values 5
2.2 Total economic value and its components 7
2.3 Measuring changes in economic values 12
2.4 Identification, quantification, and economic valuation 15

Chapter 3 Approaching the economic valuation of environmental
impacts: Issues of common interest
16
3.1 Scope of analysis 16
3.1.1 Geographical scoping 16
3.1.2 Stakeholders scoping 18
3.2 Choice of scenario: With project versus without project 18
3.3 Dealing with price changes: Nominal versus real 21
3.4 Accounting for time: Discounting 22
3.4.1 Discounting and present value 22
3.4.2 The mechanics of discounting 22
3.4.3 Selecting a discount rate 25
3.5 Selecting a time horizon 26
3.6 Conducting sensitivity analysis 27
3.7 Summary of recommendations to project initiators 28
3.7.1 With respect to the scope of analysis 28
3.7.2 With respect to the scenario of reference 29
3.7.3 With respect to inflation 29
3.7.4 With respect to the discount rate 29
3.7.5 With respect to selecting the time horizon 30
3.7.6 With respect to the conduct of sensitivity analysis 30

iv

PART B METHODOLOGIES FOR THE ECONOMIC VALUATION OF
ENVIRONMENTAL IMPACTS
31

Chapter 4 Introduction to the methodologies for economic valuation 32
4.1 From environmental impacts to methodologies 32
4.2 Recommendations to project initiators 35

Chapter 5 Change of productivity methodology 36
5.1 When to use this methodology 36
5.2 How to use this methodology 37
5.2.1 Step 1: Quantify the impact on productivity 37
5.2.2 Step 2: Monetize the impact 38
5.3 Strengths and limitations of the methodology 39
5.3.1 Strengths 39
5.3.2 Limitations 39
5.4 Recommendations to project initiators 39
5.4.1 Quantify the impact on productivity 39
5.4.2 Monetize the impact 40

Chapter 6 Revealed preferences methodologies 42
6.1 Introduction to revealed preferences methodologies 42
6.2 The replacement cost methodology 44
6.2.1 When to use this methodology 44
6.2.2 How to use this methodology 47
6.2.3 Strengths and limitations of the methodology 47
(i) Strengths 47
(ii) Limitations 48
6.2.4 Recommendations to project initiators 48
6.3 Defensive expenditure methodology 49
6.3.1 When to use this methodology 49
6.3.2 How to use this methodology 50
6.3.3 Strengths and limitations of the methodology 50
(i) Strengths 50
(ii) Limitations 51
6.3.4 Recommendations to project initiators 51
6.4 Cost of illness methodology 52
6.4.1 When to use this methodology 52
6.4.2 How to use this methodology 52
6.4.3 Strengths and limitations of the methodology 55
(i) Strengths 55
(ii) Limitations 55
6.4.4 Recommendations to project initiators 56
6.5 Hedonic pricing methodology 57
6.5.1 When to use this methodology 57
6.5.2 How to use this methodology 58
v
6.5.3 Strengths and limitations of the methodology 60
(i) Strengths 60
(ii) Limitations 61
6.5.4 Recommendations to project initiators 61
6.6 Travel cost methodology 61
6.6.1 When to use this methodology 61
6.6.2 How to use this methodology 62
(i) The zonal travel cost approach 64
(ii) The individual travel cost approach 66
(iii) The random utility approach 66
6.6.3 Strengths and limitations of the methodology 67
(i) Strengths 67
(ii) Limitations 67
6.6.4 Recommendations to project initiators 68

Chapter 7 Stated preferences methodologies 69
7.1 Introduction to stated preferences methodologies 69
7.2 Contingent valuation methodology 69
7.2.1 When to use this methodology 69
7.2.2 How to use this methodology 70
(i) Steps in the application of the methodology 70
(ii) Characteristics of a good application of the CVM 71
7.2.3 Strengths and limitations of the methodology 73
(i) Strengths 73
(ii) Limitations 73
7.2.4 Recommendations to project initiators 73

Chapter 8 Benefits transfer methodology 75
8.1 When to use this methodology 75
8.2 How to use this methodology 75
8.2.1 Transfer without adjustment 76
8.2.2 Transfer with adjustment 77
8.2.3 Benefit function transfer 77
8.3 Strengths and limitations of this methodology 78
8.3.1 Strengths 78
8.3.2 Limitations 78
8.4 Recommendations to project initiators 78

PART C SUMMARY OF RECOMMENDATIONS 79

Chapter 9 Summary of recommendations 80

References 89
Additional references 90
Websites of interest 91
Glossary 92
vi
Annex 1 Penang National Park travel cost survey 95
Annex 2 Lake Sevan contingent valuation survey 107

vii
LIST OF TABLES

Table 3.1 Undiscounted stream of environmental costs and benefits 29
Table 3.2 Present value of environmental costs and benefits
calculated for different discount rates
30
Table 4.1 Environmental impacts and methodologies 34
Table 6.1 Application of revealed preferences methodologies 43
Table 9.1 Technical and economic expertise required 81
Table 9.2 Summary of recommendations 82























viii
LIST OF FIGURES

Figure 2.1 From ecosystems to economic values 5
Figure 2.2 Total economic value and its components 8
Figure 2.3 Direct use value 9
Figure 2.4 Use value 10
Figure 2.5 Non-use value 10
Figure 2.6 Total economic value 10
Figure 2.7 Measuring changes in economic values 13
Figure 2.8 Environmental effect, impact, and human well-being 14
Figure 2.9 Identification, quantification, economic valuation I 15
Figure 3.1 Geographical scoping of environmental impacts 17
Figure 3.2 With versus without project 20
Figure 3.3 The mechanics of compounding 23
Figure 3.4 The mechanics of discounting 23
Figure 3.5 Presentation of environmental costs and benefits 24
Figure 4.1 Economic values and methodologies 33
Figure 4.2 Identification, quantification and economic valuation II 35
Figure 6.1 Defensive expenditure and cost of illness methodologies 52
Figure 6.2 Components of the cost of illness 54
Figure 6.3 Defining zones 65







ix
LIST OF BOXES

Box 2.1 Example of the total economic value framework applied to
wetlands
11
Box 3.1 Example of with versus without project 21
Box 3.2 Discounting and inflation 26
Box 3.3 Discount rate and the indefinite future 27
Box 6.1 Sedimentation traps in Malaysia 42
Box 6.2 The costs of river sedimentation: The case of Beaufort
(Sabah)
45
Box 6.3 The Tenom Pangi hydropower plant in the Padas River
catchment (Sabah)
46
Box 6.4 Regression analysis with the hedonic pricing methodology 60














x
LIST OF ACRONYMS

CVM Contingent valuation methodology
DOE Department of Environment (Malaysia)
EIA Environmental impact assessment
NOAA National Oceanic and Atmospheric Administration
NTFPs Non-timber forest products
TCM Travel cost methodology
VSL Value of a statistical life

























xi
Chapter 1

Introduction

1.1 Background

In July 1987, Malaysias Department of Environment (DOE) published the first
edition of the Handbook of Environmental Impact Assessment Guidelines
(hereafter EIA Guidelines). The EIA Guidelines state that:

The aim of environmental impact assessment in Malaysia is to
assess the overall impact on the environment of development
projects proposed by the public and private sectors (Section 1.3.2)

To achieve this overall aim, the EIA Guidelines list the following five objectives of
environmental impact assessment:

To examine and select the best from the project options
available;

To identify and incorporate into the project plan appropriate
abatement and mitigating measures;

To predict residual environmental impacts;

To determine the significance of the residual environmental
impacts predicted; and

To identify the environmental costs and benefits of the project to
the community.

The last of the above five objectives clearly requires not only the identification of
the (physical) environmental impacts of the project, but further requires that these
impacts be monetized and transformed into environmental costs (negative
environmental impacts) and environmental benefits (positive environmental
impacts).

It is of importance to note that the above five objectives do not call for the
undertaking of a cost-benefit analysis of the project. While not denying the
importance of cost-benefit analysis in guiding the allocation of scarce private and
public sector resources, the focus of EIA lies in the identification, quantification,
and monetization (economic valuation) of the environmental impacts of the
project. Undoubtedly, such economic valuation would in most circumstances be a
component of a broader and more comprehensive cost-benefit analysis. But this
economic valuation in and by itself does not constitute a cost-benefit analysis.

1
1.2 Applicability of the Guidelines

The need for economic valuation must be determined during the scoping
exercise. The need shall be based on the projects expected impacts e.g on the
productivity of land (such as agricultural productivity) and water (such as fisheries
productivity). health and others. These impacts have to be clearly identified,
quantified, and transformed into environmental costs or benefits following the
procedures described in these Guidelines.

1.3 Objective of the Guidelines

The overall objective of these Guidelines on the Economic Valuation of the
Environmental Impacts of Prescribed Activities (henceforth Guidelines) is to
provide clear guidance as to the framework and methodologies allowing the
monetization of the environmental impacts of the project into environmental costs
and benefits. The Guidelines aim to provide practical advice to project initiators
and project assessors undertaking the economic valuation of environmental
impacts of projects.

These Guidelines aim to provide practical advice to project initiators on the topic
of economic valuation of a projects environmental impacts, with the
understanding that the expertise to undertake and review such economic
valuation is currently limited. It is foreseen that such capacity will increase with
experience, and that these Guidelines will be reviewed accordingly.

1.4 Content of the Guidelines

Part A first presents the general framework guiding the economic valuation of
environmental impacts (Chapter 2). Part A also discusses issues common to all
methodologies. In particular, it discusses issues pertaining to choice of scope of
analysis, both geographical and stakeholders. It also discusses the appropriate
scenario setting for the identification and quantification of the environmental
impacts of the project (with project versus without project). It describes the
techniques of discounting and shows how to consider changes in prices over
time. Finally, Part A discusses the necessity to undertake sensitivity analysis
(Chapter 3).

Part B presents the various methodologies available to undertake the economic
valuation of the environmental impacts of the project. An introduction to the
methodologies is presented in Chapter 4. Four types of methodologies are
described: the change of productivity methodology (Chapter 5), revealed
preferences methodologies (Chapter 6), stated preferences methodologies
(Chapter 7), and the benefit-transfer methodology (Chapter 8).

In each chapter of Part B, the methodologies are first described in details.
Second, specific recommendations are made to project initiators regarding the
2
presentation and discussion of the results of their economic valuation in their EIA
reports.

Concluding remarks and recommendations are presented in Chapter 9.

3















PART A

INTRODUCTION TO THE ECONOMIC VALUATION OF
ENVIRONMENTAL IMPACTS

4
Chapter 2

The concept of total economic value

2.1 Ecosystems and economic values

A general premise underlying the economic valuation of environmental impacts
of projects is that the environment (or ecosystems) produces multiple goods and
services of a large variety of nature which are valued by human beings as these
goods and services contribute to human welfare and well-being. To the extent of
this contribution to human welfare and well-being, the environment produces
economic values (Figure 2.1).

Figure 2.1
From ecosystems to economic values

Ecosystems
Processes
Structure















Goods and services





Economic values




5
Examples of services produced by ecosystems include:
1


Purification of air and water;
Mitigation of floods and droughts;
Generation and renewal of soil and soil fertility;
Pollination of crops and natural vegetation;
Control of agricultural pests;
Protection against the suns ultra-violet rays;
Stabilization of climate.

Similarly, surface waters provide a large number of goods and services,
including:
2

Drinking, cooking, washing, and other household uses;
Manufacturing and other industrial uses;
Power generation;
Irrigation of crops, parks, golf courses;
Aquaculture;
Transportation;
Recreational swimming and boating.

To the extent that the above goods and services contribute to human welfare and
well-being, they are said to be source of economic values.

A further premise is that changes in the flow of goods and services provided by
the environment impact the nature and extent of the economic values associated
with these goods and services. More specifically, adverse changes in this flow of
goods and services are associated with a reduction in economic values (and
therefore a reduction in human welfare), while positive changes in this flow are
associated with an increase in economic values (and therefore an increase in
human welfare). In other words, adverse changes are considered as costs (or
environmental costs), while positive changes are considered as benefits (or
environmental benefits).

Such changes in the flow of goods and services provided by the environment are
occasionally triggered by natural events. For example, tropical storms may
adversely impact the flow of agricultural outputs.

Such changes may also be triggered by human actions. Such is the case with
development projects which may positively or negatively impact the flow of goods
and services produced by the environment.
3
For example, a development project

1
Daily, G.C. (1997).
2
Postel, S.L, and S. Carpenter (1997).
3
Human action is not solely restricted to development projects (generally associated with
infrastructure projects). Human action also includes policies. However, given that these
6
may impair the ambient quality of surfaced waters which may then reduce the
possibility of using the water for crop irrigation.

In such circumstances, a key issue is to identify and quantify the changes in the
flow of goods and services produced by the environment which are impacted by
a development project, and then to monetize these changes into costs or
benefits.

If the environment produces a large number of goods and services which are
used in a multiplicity of different ways, then different types of economic values
will be associated with these good and services. As illustrated above, a body of
surfaced water may be used in many different ways and produce many different
types of goods and services each with its own economic value. The total
economic value of the environment is made of the aggregation of all these
different economic values.

2.2 Total economic value and its components

The concept of total economic value is now generally recognized as being the
most suitable framework guiding the economic valuation of environmental
impacts. As illustrated in Figure 2.2, the total economic value of the environment
is made of different types of economic values, each corresponding to the
different use that is made of the environment. We provide below a brief
description of each of these economic values



Guidelines are presented in the context of the EIA process in Malaysia, human action is here
understood to be development projects (or prescribed activities as defined by the Environmental
Quality Act).
7
Figure 2.2
Total economic value and its components
















Total economic value
Non-consumptive
direct use value
Consumptive
direct use value
Direct
use values
Indirect
use value
Use
values
Non-use
values
Bequest
value
Existence
value
Option
value

A distinction is made between use and non-use values.

Use values relate to the actual use of the good or service produced by the
environment. This actual use (such as a visit to a protected area, or the
extraction of non-timber forest products, or the transportation of goods by boats
on surfaced waters) may be current or may remain a possibility in the future.

Use values are sub-divided into direct use values, indirect use value, and option
value. Direct use values are further sub-divided into consumptive direct use value
and non-consumptive direct use value.

Consumptive direct use value is perhaps the most intuitive of all values. It
refers to the economic value of those goods and services produced by the
environment which are actually extracted for purpose of consumption. Examples
of consumptive direct use, among numerous others, include:

Harvesting of fish either for commercial or recreational purposes;

Extracting of timber or non-timber forest products;

Harvesting of fruits from fruit trees;

Abstracting surface water or groundwater for domestic, agricultural, or
industrial purposes.

Each of these activities generates economic values which are then referred as
the consumptive direct use value of the environment.
8
Non-consumptive direct use value refers to the economic value of those goods
and services produced by the environment without actual extraction or
abstraction taking place. Examples of non-consumptive direct use, among
numerous others, include:

Using surface waters for purpose of transportation;

Recreational swimming;

Bird watching in a protected area;

Hydro-power production (in cases where the water is not diverted).

In each of these examples, note that the resource (water or bird) is not extracted
or abstracted despite the direct use that is made of it. Each of these activities
generates economic values which are then referred as non-consumptive direct
use values.

The sum of consumptive and non-consumptive direct use values defines the
direct use value of the environment.

Figure 2.3
Direct use value

Direct
use value
Non-consumptive
direct use value
Consumptive
direct use value
+ =



Indirect use value results from the use of services provided by the environment
and ecosystems. Examples of indirect use (use of services), among numerous
others, include:

Storm and flooding protection services provided by mangrove swamps;

Water purification services provided by wetlands;

Watershed protection services provided by forest;

Ultra-violet protection services provided by the ozone layer;

Carbon sequestration services provided by forests.

In each of these examples, note that even though there may not be direct contact
with the resource, this resource (mangrove swamps, forest, or ozone layer in the
above examples) is producing a service which is actually use by human beings
9
and is therefore source of economic values which are then referred as indirect
use values.

Option value refers to the benefit of potentially using a resource at a later point
in the future. For example, protected areas may be set aside for conservation
purposes not only for the direct and indirect values they may currently generate,
but also for keeping the option possible (in the future) to conduct these or other
activities.

The sum of direct, indirect, and option values defines the use value of the
environment.

Figure 2.4
Use value




Direct
use value
Indirect
use value
Option
value
Use
value
= + +


Non-use values refer to the fact that some individuals in our societies obtain
satisfaction (welfare) simply from knowing that the existing flow of goods and
services produced by the environment is maintained as it currently is even if
there is no current or potential use of these goods and services by themselves
(existence value), or is maintained to keep the option opened for use by future
generations (bequest value).

Figure 2.5
Non-use value


Bequest
value
Existence
value
Non-use
value
= +


The sum of use and non-use values defines the total economic value of the good
and services produced (delivered) by the environment.

Figure 2.6
Total economic value

Total economic
value
=
Use
value
Non-use
value
+



10
Box 2.1 presents an example of the total economic value framework applied to
wetlands. A key issue pertains to the actual estimation of the economic values
presented in this chapter. Part B is devoted to the presentation of methodologies
to do so. But before doing so, Chapter 3 discusses issues of interest to all
valuation methodologies.


Box 2.1
Example of the total economic value framework applied to wetlands


































Adapted from Turner et al. (2000)


11
2.3 Measuring changes in economic values

Before proceeding with slightly more technical issues, it is of great importance to
note that the economic valuation of environmental impacts does not involve
giving a value to the environment.

The purpose when undertaking the economic valuation of environmental impacts
is to assess in monetary terms changes in the flow of goods and services
provided by the environment.

For example (as illustrated in Figure 2.7), an increase in the discharge of
pollution into surfaced waters (from a new industrial project for example), will
bring upon changes in the physical, chemical, and biological characteristics of
water quality. These changes in turn will bring upon changes in the flow of goods
and services produced by the water which are of use (direct, indirect, etc.) to
human beings. It is those changes that must be identified, quantified, and
measured in monetary terms to estimate the environmental costs of the increase
in the discharge of pollution.














12
Figure 2.7
Measuring changes in economic values
(adapted from Freeman, 2003)







































Increase in the discharge of industrial
pollution into surfaced waters
Changes in the physical and
chemical characteristics of water
quality
Dissolved oxygen;
Temperature;
Turbidity;
Odor;
Nutrients;
pH;
Etc.
Changes in the biological
characteristics of water quality
Fish population;
Algae;
Zooplankton;
Bacteria;
Etc.



Changes in use that human
beings make of the surface
water:
Domestic water supply;
Fisheries;
Recreation;
Crop irrigation;
Aesthetics;
Etc.
Changes in non-use
Future use of surfaced waters
Changes in use and non-use
measured in monetary terms
(Changes in economic values)




13
Note that it is not changes in the environment that is of interest, but instead
changes in the use that human beings makes of the goods and services
produced by the environment.

This last point is clear when noting the definition of environmental effect and
environmental impact presented in the existing EIA Guidelines (Glossary of
Terms)

ENVIRONMENTAL EFFECT
A process such as soil erosion, accumulation of pollutants, or
relocation of people that is modified by mans actions.

ENVIRONMENTAL IMPACT
The net change (good or bad) in mans health or well-being,
including the ecosystems on which mans well-being depends, that
results from an ENVIRONMENTAL EFFECT. Environmental impact
should take into account the change in environmental quality that
would have occurred naturally, without mans action.

Figure 2.8
Environmental effect, impact, and human well-being




















ENVIRONMENTAL EFFECT:
Soil erosion;
Land conversion;
Reduction of air quality;
Reduction of water quality;
Pollution of groundwater;
Increase in noise level;
Etc.
ENVIRONMENTAL IMPACT:
Reduction in agricultural yield;
Reduction in fisheries yield;
Increase in the number of asthma
attacks;
Increase in the number of gastro-
intestinal diseases;
Etc.
CHANGE IN HUMAN
WELL-BEING





14
2.4 Identification, quantification, and economic valuation

It is appropriate in the context of the above discussion to conclude this chapter
with the following important warning.

The examples presented in Figure 2.7 and Figure 2.8 make very clear that before
proceeding with the monetization of the environmental impacts of the project
(economic valuation), these impacts must first be identified (e.g. adverse impact
in water quality will lead to a reduction in nearby fisheries), and then quantified
(e.g. quantity of fisheries yield lost). Environmental impacts which have not been
identified cannot be, by definition, monetized. Similarly, any errors in the
quantification of the impacts will necessarily lead to errors in the economic
valuation of these impacts.

The key point is that the economic valuation of the projects environmental
impacts can only be so good as the identification and quantification of these
impacts. Hence, the request to proceed with the economic valuation of the
projects environmental impacts (as specified in the EIA Guidelines) does not
relieve project initiators from the needs of identifying and quantifying these
impacts (as is currently the case in the EIA process), but in fact makes these
needs even more important and should induce project initiators to pay even more
attention to this identification and quantification process.


Figure 2.9
Identification, quantification, economic valuation I

STEP 1
IDENTIFICATION OF
ENVIRONMENTAL IMPACTS
STEP 2
QUANTIFICATION OF
ENVIRONMENTAL IMPACTS
STEP 3
ECONOMIC VALUATION OF
ENVIRONMENTAL IMPACTS



















15
Chapter 3

Approaching the economic valuation of
environmental impacts: Issues of common interest

This chapter discusses issues which must be addressed at the outset of the
economic valuation process and are common to all economic valuation
methodologies.

3.1 Scope of analysis

As indicated in Chapter 1, the EIA Guidelines specifies that one of the objectives
of environmental impact analysis in Malaysia is:

To identify the environmental costs and benefits of the project to
the community.

A key issue pertains to the identification of the community, or in other words of
who to include (whose impacts to include; whose environmental costs and
environmental benefits to include) in the analysis.

As indicated in the Glossary of Terms of the EIA Guidelines, the word
community is understood to stand (most often) as an abbreviation of Human
Community, where Human Community is defined as:

Any diverse group of people sharing the environment. The
community may be local as in village or international as for example
the Straits of Malacca. The community may be homogeneous
(same race, same religion, same socio-economic position) or
heterogeneous.

When considering the appropriate scope of analysis (who to include), both
geographical scoping, and stakeholder scoping must be made very clear.

3.1.1 Geographical scoping

While environmental impacts may occasionally be limited to a narrow
geographical area in the vicinity of the project, in other circumstances these
impacts may extend well beyond a narrowly defined area to cover an entire
watershed, airshed, state, country, or even be global. Misspecifying the
geographical scope of the EIA (most often by limiting unduly the geographical
area of interest) can lead to significant under-estimates of the environmental
costs and environmental benefits of the project.

Unfortunately, there is no easy rule to guide the selection of the appropriate
geographical scope of the EIA. While local governments may wish to limit the
16
assessment of the environmental impacts solely to their local constituencies, the
federal government should typically want to address all environmental impacts of
the project at least nationwide, irrespective of local jurisdictions or state
boundaries.

Of utmost importance is that the choice of geographical scope not be guided by
strategic considerations leading to under-estimating the nature and extent of the
possible adverse environmental impacts of the project, or over-estimating the
nature and extent of the possible favorable environmental impacts of the project.

To better inform the discussion pertaining to the identification, quantification, and
economic valuation of environmental impacts:

Group the environmental impacts (both positive and negative) into those
occurring: (1) Within the local community where the project is located; (2)
On other local communities within the state where the project is located;
and (3) On other states of Malaysia (Figure 3.1);

Select the same geographical scoping for the identification of both the
positive and negative environmental impacts.

Figure 3.1
Geographical scoping of environmental impacts






17
3.1.2 Stakeholder scoping

An equally sensitive issue pertains to selecting whose costs and benefits to
account for in the economic valuation. While the issue of stakeholder scoping
may occasionally coincide with the issue pertaining to geographical scoping, it is
different in that the environmental impacts of a project may impact different
groups of people or households within a given geographical area.

This is of particular relevance when the environmental impacts of projects (such
as for example road improvement projects, bridge projects, coastal land
reclamation projects among others) may have adverse or positive effects on the
well-being of non-nationals who may only temporarily reside within the
geographical area of interest (such as temporary workers or visitors).

As for the selection of the appropriate geographical scope, there is no easy rule
guiding the selection of the appropriate stakeholder scoping. Project initiators
should however clearly identify the groups of individuals or households who are
included into the process of identifying, quantifying, and monetizing the
environmental impacts of the project, and those who are excluded.

3.2 Choice of scenario: With project versus without project

Recall the definition of Environmental impact presented in the EIA Guidelines:

ENVIRONMENTAL IMPACT
The net change (good or bad) in mans health or well-being,
including the ecosystems on which mans well-being depends, that
results from an ENVIRONMENTAL EFFECT. Environmental impact
should take into account the change in environmental quality that
would have occurred naturally, without mans action.

The last sentence of the above definition is of great importance. It points out that
in order to identify the environmental impacts of the project, one must compare
what is likely to happen to the environment (and the resulting impacts on human
well-being) with the project relative to what is likely to happen if there were to be
no project. In order words, one must look into the future and ask (for the selected
group of stakeholders within the selected geographical scope): what is the future
going to look like without the project versus with the project.

18
Note that in most circumstances, this is unlikely to be before and after the
project. The before and after comparison:

ignores or fails to account for future changes in environmental quality
which may happen even in the absence of the project; and

implicitly assumes that the environment in the future is going to remain the
same as it is today.

Suppose a road or bridge project aims to reduce traffic congestion between two
cities of Peninsular Malaysia. Suppose further that this reduction in traffic
congestion is expected to have a positive impact on ambient air quality by
reducing vehicular emissions of pollution. A key issue pertains to quantifying this
improvement in ambient air quality. For this purpose, a reference scenario must
be established.

As illustrated in Figure 3.2, without the project it may be unlikely that air pollution
concentration would remain at existing levels. In fact, one may reasonably expect
that without the project, traffic congestion would get worse, and that air pollution
concentration would concurrently get worse as well. In such situations, the
scenario of reference is not the existing levels of pollution, but is instead the
expected level of pollution if there were to be no project.

Note in Figure 3.2 that even if pollution concentration were to be higher with the
project, one would not conclude that the project resulted in an increase of
pollution concentration. In the example presented in Figure 3.2, the project would
still reduce pollution concentration when compared to a scenario where there
were to be no project.

19
Figure 3.2
With project versus without project





















Expected pollution
concentration with
project
Expected pollution
concentration
without project
Existing
pollution
concentration

Today
Impact of
the project

In order to identify and quantify the environmental impacts of projects, project
initiators should clearly specify the:

Expected changes in environmental quality and the associated
environmental impacts if there were to be no project (without project
scenario);

And then compare the above scenario with the:

Expected changes in environmental quality and the associated
environmental impacts if there were to be a project (with project scenario).


20
Box 3.1
Example of with versus without project

In a detailed EIA report submitted to DOE, one read the following:

The project site is mainly under agriculture and secondary forest. At
lowers slopes, durian trees were planted (some still in production) and at
a later stage other fruit trees as well as other agricultural cash crops were
added.

There is expected to be a loss in terms of agricultural productivity as a
result of development in the area. Durian and other fruit crops will be
removed in the process of development but it is expected that this loss is
insignificant as the area has not been maintained and the crops that are
present are old and near the end of their peak productivity.

While one may argue or disagree with the conclusion that this loss is
insignificant, the approach used to identify the potential loss of agricultural
productivity is correct. Assuming indeed that the best use of this land is its
existing land use, then the study aimed to identify what is likely to happen to
agricultural productivity in the future without the project (the crops are old and
near the end of their peak productivity) versus with the project.



3.3 Dealing with price changes: Nominal versus real

The market price of a specific commodity may vary for two different reasons.

First, it may vary simply because of changes in the general price level and in
more or less the same proportion as these changes in the general price level
(when this change in the general price level is upward, it is referred as inflation).
Such changes are referred as changes in nominal prices.

Second, it may vary because of changes in the supply and/or demand for the
commodity. Such changes are referred as changes in real prices.
4


Since inflation impacts all prices in more or less the same manner, there is no
need to incorporate inflation in the process of undertaking the economic valuation
of the environmental impacts of the project. As such, there is no need to attempt

4
For example, the significant increase in the price of oil observed over the period 2006-2008
does not result from inflationary pressure but mostly from an increase in the demand for oil. This
change in the price of oil is not a change in nominal price but is a change in real price. Note that
the expressions real price and constant price are often used interchangeably. They should not
be. As the case of the price of oil shows clearly, there is no reason to expect that real prices are
constant.

21
forecasting future inflation rates or future changes in prices, except for those
changes in real prices. Specific recommendations are:

Conduct the economic valuation of the projects environmental impacts in
terms of real prices;

Do not incorporate in the economic valuation of the projects
environmental impacts changes in prices solely caused by inflation;

As a level of reference, use the level of prices as observed at the time of
preparing the EIA report.

3.4 Accounting for time: Discounting

In this section we address issues which arise from the fact that environmental
costs and environmental benefits may arise at different points in time, some in
the near future, and others in a more distant future. These issues arise from
observing that RM 1 million of environmental costs or benefits today is not the
same as RM 1 million of environmental costs or benefits in 1 or 2 or 10 years
from now.

3.4.1 Discounting and present value

Discounting is simply a technique which allows to measure in a common unit of
measurement (todays dollars) costs or benefits which are taking place at
different points in time. The value today of future environmental costs and
benefits is known at the present value of these environmental costs and benefits.

3.4.2 The mechanics of discounting

Discounting is simply compound interest in reverse. The mechanics of
compounding is presented in Figure 3.3. RM 100 earning 10% per year will be
worth RM 110 in one year from now, 121 in two years from now, and more
generally will be worth RM 100(1.1)
t
in t years from now. With compounding, one
estimates the future value of RM 100 received today.

22
Figure 3.3
The mechanics of compounding












Year 0 Year 1 Year 2 Year 3 Year 4
100 100(1+r) 100(1+r)(1+r)
100(1+r)
2
100(1+r)
2
(1+r)
100(1+r)
3
100(1+r)(1+r)(1+r)
100(1+r)
2
(1+r)(1+r)
100(1+r)
3
(1+r)
100(1+r)(1+r)(1+r)(1+r)
100(1+r)
4

Discounting simply works in reverse as shown in Figure 3.4. Using a discount
rate of 10%, RM 100 received in 1 year from now is worth today RM 91 (100/1.1).
Similarly, the present value of RM 100 received 4 years from now is RM 68.3
(100/(1.1)
4
); RM 100 received t years from now is worth today (has a present
value of) 100/(1.1)
t
. More generally, using a discount rate of r, RM 100 received
t years from now is worth today 100/(1+r)
t
.

Figure 3.4
The mechanics of discounting














Year 0 Year 1 Year 2 Year 3 Year 4
100
100 / (1+r)
100
100 / (1+r)
2
100 / (1+r)
3
100 100
100 / (1+r)
4
100

In the above discussion:

r is referred as the discount rate;

1 / (1+r) is refered as the discount factor.


23
Denote by C
t
the economic value of the potential adverse environmental impacts
of the project in period t (environmental costs). Denote by B
t
the economic value
of the potential positive environmental impacts of the project in period t
(environmental benefits).

Where appropriate, these environmental costs and benefits must be presented
clearly in a manner similar to Figure 3.5 (the selection of T is discussed in
section 3.5 below).

Figure 3.5
Presentation of environmental costs and benefits








Year 0 Year 1 Year 2 Year 3 Year T
C
0
C
2
C
3
C
T C
1


B
0
B
2
B
3
B
T B
1


Once environmental costs and environmental benefits are presented in a manner
similar to Figure 3.5, then the present value of these environmental costs and
benefits can be calculated as:
5


Present value of
environmental costs
T
T
r
C
r
C
r
C
r
C
C
) 1 ( ) 1 ( ) 1 ( ) 1 (
3
3
2
2 1
0
+
+ +
+
+
+
+
+
+ =

=
+
=
T
t
t
r
C
0
0
) 1 (



Present value of
environmental benefits
T
T
r
B
r
B
r
B
r
B
B
) 1 ( ) 1 ( ) 1 ( ) 1 (
3
3
2
2 1
0
+
+ +
+
+
+
+
+
+ =

=
+
=
T
t
t
r
B
0
0
) 1 (






5
The function NPV in Excel Spreadsheet performs this calculation.
24
3.4.3 Selecting a discount rate

The mechanics of discounting is relatively simple. However, choosing an
appropriate discount rate remains a contentious and controversial issue as it
appears to raise issues pertaining to inter-generational fairness or equity. Indeed,
suppose for example that a project potentially involves a cost of RM 1 billion in
50 years from now (e.g. decommissioning of a large infrastructure facility). At a
5% discount rate, the present value of this cost is RM 87.2 million; at a discount
rate of 8%, the present value becomes only RM 21.3 million. Many
environmentalists have thus argued that discounting is inconsistent with the
principle of sustainable development since future environmental costs, once
discounted to their present values, are unlikely to significantly impact the
decision-making process.

On the other hand, not discounting (which in practice implies using a discount
rate of 0%) as some would propose may not be an appropriate approach.
Indeed, using a 0% discount rate implies that a cost (or a benefit) of RM 100 in
10, 50, 500 or 5000 years from now is worth exactly the same as if it were to
happen today. Furthermore, as the discount rate is reduced towards zero, it
implies that future generations consumption is worth more and more in present
value terms. This in turn implies that the current generation should reduce its
consumption, and further increase its saving and investment as the discount rate
is reduced towards zero. This raises its own ethical problem as in fact this implies
that the current generation sacrifices more and more consumption today for the
sake of increasing the consumption of unknown future generations.
6


There is thus a discussion as to what should be the correct discount rate to use
when calculating the present value of future environmental costs and
environmental benefits. Hence, in practice, it is generally appropriate to calculate
the present value using a range of discount rate as opposed to a single discount
rate.

Based on existing practice in studies undertaken in Malaysia and abroad,
discount rates ranging from 3% to 8% are appropriate. Note that this discount
rate is a discount rate in real terms, not in nominal terms. In other words, since
environmental costs and environmental benefits are measured in real terms (see
Section 3.3 above), the discount rate must also be measured in real terms, and
does not account for or include inflation (Box 3.2).


6
Some economists have argued for the use of a time declining discount rate. Weitzman (1998)
and Gollier (2002) provide a rationale for the use of such discount rate.
25

Box 3.2
Discounting and inflation

Suppose that the real discount rate is noted by r, while the nominal discount rate
is noted by m. Suppose further that prices are expected to rise at a constant
rate g in future years (g is the expected inflation rate).

Then, if conducting the analysis in nominal terms, the present value of a flow of
benefits from t = 0 to t = T is:

T
T
T
m
g B
m
g B
m
g B
m
g B
B PV
) 1 (
) 1 (
) 1 (
) 1 (
) 1 (
) 1 (
) 1 (
) 1 (
3
3
3
2
2
2 1
0
+
+
+ +
+
+
+
+
+
+
+
+
+ =

According to Fishers Law, ) 1 )( 1 ( ) 1 ( g r m + + = + . Substituting this expression into
the above equation yields:

T T
T
T
g r
g B
g r
g B
g r
g B
g r
g B
B PV
) 1 ( ) 1 (
) 1 (
) 1 ( ) 1 (
) 1 (
) 1 ( ) 1 (
) 1 (
) 1 )( 1 (
) 1 (
3 3
3
3
2 2
2
2 1
0
+ +
+
+ +
+ +
+
+
+ +
+
+
+ +
+
+ =

Which is the same as:

T
T
r
B
r
B
r
B
r
B
B PV
) 1 ( ) 1 ( ) 1 ( ) 1 (
3
3
2
2 1
0
+
+ +
+
+
+
+
+
+ =

Hence, doing the analysis in real terms (using prices and discount rate measured
in real terms) yields the same outcome as using nominal prices (without inflation)
and a nominal discount rate. Doing the analysis in real terms has the advantage
that one does not need to forecast inflation rates in the distant future.



3.5 Selecting a time horizon

The formulas presented above to calculate the present value of a flow of
environmental costs and environmental benefits spread over time assumed an
unspecified length of time of T years. An important issue (albeit not necessarily a
key issue) pertains to the selection of the time horizon (T) for the purpose of the
economic valuation of the environmental impacts.

In principle, all environmental costs and environmental benefits of the project
should be accounted for, even when they extend in the indefinite future. Note
however that as the discount rate increases (from 3% to 8%), costs and benefits
in the indefinite future counts less and less today as their present value
becomes smaller and smaller (Box 3.3).
26

Box 3.3
Discount rate and the indefinite future

Suppose that a project involves an environmental cost or benefit of RM 100
millions in 100 years from now. The present value of this cost or benefit will not
be very large for any discount rate between 3% and 8%, and would be
decreasing significantly as the discount rate increases from 3% to 8% as shown
below.

Present value of RM 100 millions received
in 100 years from now

Discount rate Present value (RM)
3% 5,203,283
4% 1,980,004
5% 760,004
6% 294,722
7% 115,245
8% 45,459



A key issue is to recognize that though a project may be completed from an
engineering point of view (for example, the construction of the road or bridge is
completed), environmental costs and benefits may continue to arise for many
more years beyond the construction phase.

To this extent, the appropriate time horizon to select should coincide with the
expected duration (in time) of the environmental impacts of the project.

If some environmental impacts are expected to be of a temporary nature (for
example, during the construction phase of the project), then for these impacts the
appropriate time horizon to select is the number of years these impacts are
expected to last. If some environmental impacts are expected to be permanent,
then using a time horizon of between 30 to 50 years is generally sufficient to
provide an adequate estimate of the present value of these impacts.

3.6 Conducting sensitivity analysis

Each of the steps leading to the estimation of the environmental costs and
benefits of the project (identification, quantification, and monetization) is
undertaken in a context of uncertainty as well as with incomplete and sometimes
unreliable information. For this reason, it is always prudent to estimate costs and
benefits under a series of different assumptions as to what may be the
environmental impacts of the project.
27
The purpose of conducting a sensitivity analysis is to identify the variables which
influence most the present value of environmental costs and environmental
benefits, and to quantify the impact of changes in these variables on the present
value of these costs and benefits.

There are two relatively straightforward ways of conducting sensitivity analysis.

One way, most often conducted in such analysis, is to assume that the impacts
of the project (or the most important impacts of the project) are slightly higher or
lower than those expected, and for each new assumption or scenario to
recompute the present value of environmental costs and benefits.

An alternative way is to assume a worst case or a best case scenario.
Establishing a worst case scenario is especially useful when the project has
adverse environmental impacts on the environment. For example, if a project
were to have adverse impact on nearby fisheries or agricultural activities, a
worse case scenario would estimate the environmental costs assuming that all
fisheries or all agricultural activities were to disappear forever.

After conducting the sensitivity analysis, the estimated present value of
environmental costs or environmental benefits will not be a point estimate (for
example, RM 100 million), but will be a range of values (for example, between
RM 75 and RM 130 million). Such range will provide more useful information
pertaining to the likely impacts of the project on the environment.

3.7 Summary of recommendations to project initiators

Project initiators are not formally required to follow any specific format or
instructions when undertaking and presenting the economic valuation of the
projects environmental impacts in their EIA reports. However, in order to
facilitate the understanding of this economic valuation and discussions with DOE,
the following recommendations are presented.

3.7.1 With respect to the scope of analysis

Aim first to identify the environmental impacts of the project, not to select
the geographical scoping of the project;

Group the environmental impacts (both positive and negative) into those
occurring: (1) Within the local community where the project is located; (2)
On other local communities within the state where the project is located;
and (3) On other states of Malaysia. On the basis of this information,
define the appropriate geographical scoping of the project for purpose of
the EIA process;


28
Identify clearly the groups of individuals or households who are included
and those who may be excluded from the process of identifying,
quantifying, and monetizing the environmental impacts of the project.

3.7.2 With respect to the scenario of reference

In order to identify and quantify the extent of the projects environmental
impacts, project initiators should clearly specify and compare the following
two scenarios:

Scenario 1: Expected changes in environmental quality and the
associated environmental impacts if there were to be no project
(without project scenario)

Scenario 2: Expected changes in environmental quality and the
associated environmental impacts if there were to be a project (with
project scenario)

Present the undiscounted stream of environmental costs and
environmental benefits of the project, in each of the period in these the
costs and benefits are taking place (as in Table 3.1 below);

Table 3.1
Undiscounted stream of environmental costs and benefits

Year 0 Year 1 Year 2 Year 3 Year 4 Year T
Environmental
Costs
C
0
C
1
C
2
C
3
C
4
C
T

Environmental
Benefits
B
0
B
1
B
2
B
3
B
4
B
T


3.7.3 With respect to inflation

Conduct the economic evaluation of the projects environmental impacts in
terms of real prices;

Do not incorporate in the economic valuation of the projects
environmental impacts changes in prices solely caused by inflation;

As a level of reference, use the level of prices as observed at the time of
preparing the EIA report.

29
3.7.4 With respect to the discount rate

Discount rates ranging from 3% to 8% should be used to calculate the
present value of the environmental costs and of the environmental
benefits.

Calculate and display the present value of the environmental costs and
environmental benefits using a discount rate ranging from 3% to 8% (as in
Table 3.2 below);

Table 3.2
Present value of environmental costs and benefits calculated for different
discount rates

Discount rate
3% 4% 5% 6% 7% 8%
PV of Environmental
Costs


PV of Environmental
Benefits


As indicated in Chapter 1, the economic valuation of environmental
impacts is not a cost-benefit analysis. As such, the calculation of the net
present value (present value of benefits minus present value of costs) is
not of direct relevance to this analysis.

3.7.5 With respect to the selection of time horizon

The appropriate time horizon to select should coincide with the expected
duration (in time) of the environmental impacts of the project.

If some environmental impacts are expected to be of a temporary nature
(for example, during the construction phase of the project), then for these
impacts the appropriate time horizon to select is the number of years
these impacts are expected to last.

If some environmental impacts are expected to be permanent, then using
a time horizon of between 30 to 50 years is generally sufficient to provide
an adequate estimate of the present value of these impacts.

3.7.6 With respect to the conduct of sensitivity analysis

Provide a range for the present value of environmental costs and the
present value of environmental benefits depending on different
assumptions as to the impact of the project on the environment.

30















PART B

METHODOLOGIES FOR THE ECONOMIC VALUATION OF
ENVIRONMENTAL IMPACTS



31
Chapter 4

Introduction to the methodologies for economic valuation

4.1 From environmental impacts to methodologies

In this second part of these Guidelines, the purpose is to describe methodologies
typically used to undertake the economic valuation of environmental impacts.
The following methodologies are presented and discussed:

Change of productivity methodology (Chapter 5);

Revealed preferences methodologies (Chapter 6);

Stated preferences methodologies (Chapter 7); and

Benefit-transfer methodology (Chapter 8).

Before discussing the details of these approaches, it is of importance to note that
the choice of an economic valuation methodology depends on the nature of the
environmental impacts one seeks to monetize. Recall that Figure 2.2 presented
the concept of total economic value and of its components (use and non-use
values, direct use, indirect use, etc.). Different economic valuation methodologies
are thus used to estimate different economic values as shown in Figure 4.1:

Changes in consumptive direct use values are typically estimated using
the change in productivity methodology;

Changes in non-consumptive direct use as well as indirect use values are
typically estimated using revealed preferences methodologies. However,
the change of productivity and stated preferences methodologies may
occasionally be used for this purpose as well depending on the nature of
the environmental impacts;

Changes in non-use values can only be estimated using stated
preferences methodologies.

32
Figure 4.1
Economic values and methodologies


























Use value
Direct use
value
Indirect use
value
Non-use
value
Bequest
value
Existence
value
Consumptive
direct use value
Non-consumptive
direct use value
Change of
productivity
Change of
productivity
Revealed
preferences and
stated preferences
methodologies
Stated preferences
methodologies












Hence, the choice of an economic valuation methodology depends on the nature
of the environmental impacts one seeks to monetize (Table 4.1). It is the nature
of the environmental impacts which determines which methodology to use. There
may occasionally be more than one methodology possible to undertake the
economic valuation of a particular impact (Table 4.1). In such situations, the
availability (or lack) of data is more likely to determine which specific
methodology can be implemented.









33
Table 4.1
Environmental impacts and methodologies

Environmental
effects
Examples of
environmental impacts
Economic valuation
methodologies
Air pollution Health impact Cost of illness
Averting behavior
Contingent valuation
Infrastructure damages

Cost of replacement
Hedonic prices
Amenity impacts Contingent valuation
Water pollution Health impact Cost of illness
Averting behavior
Contingent valuation
Water resources
depletion
Agricultural losses Change of productivity
Cost of replacement
Soil erosion / degradation Agricultural losses Change of productivity
Cost of replacement
Increase vulnerability to
disasters
Averting behavior
Hedonic prices
Noise pollution Health impacts and
discomfort
Hedonic prices
Averting behavior
Loss of forested areas Degraded forests Change of productivity
Replacement costs
Travel cost
Contingent valuation
Loss of coastal
ecosystems
Degraded ecosystems Change of productivity
Travel cost
Contingent valuation
Adapted from Bolt et al. (2005).

As shown in Figure 4.2, the process of identifying, quantifying, and monetizing
the environmental impacts of a project cannot be the sole task of the economist.
In particular, technical and scientific experts are best positioned to identify the
possible nature of the environmental impacts of the project, and then to quantify
such impacts. The key role and expertise of the economist is at the stage of
monetization. This process is thus undertaken by a team of experts among which
the economist plays a significant but not the only role.



34
Figure 4.2
Identification, quantification and economic valuation II

Identification of the
environmental impacts
Quantification of the
environmental impacts
Monetization of the
environmental impacts
Task of technical / scientific
experts and economist
Task of economist
Task of technical / scientific
experts
4.2 Recommendations to project initiators

Identify all environmental impacts of the project and assess which data is
currently available in order to quantify the environmental impacts (changes
in physical terms);

Given the nature of the available data, determine which methodology is
best to use to undertake the economic valuation of the environmental
impacts, and depending on the selected methodology, proceed with
(additional) data collection if necessary;

Ensure that the team of experts is appropriate to the task at hand and that
the economist is a member of the team from the very outset of the EIA
process to ensure that the data necessary for purpose of economic
valuation is indeed collected.





35
Chapter 5

Change of productivity methodology

5.1 When to use this methodology

In a number of instances, changes in environmental quality lead to changes in
the quantity (or quality) of goods or services produced by the environment. In
other instances, one may think of environmental quality as an input (along with
other inputs such as capital and labor) into the production of goods and services,
such as in agriculture for example. In such instances, changes in environmental
quality may impact the flow (quantity or quality) of the goods and services
produced by the environment or may impact the productivity (yield) of the goods
produced with the support of the environmental input. In such instances, the
change of productivity methodology may be used to transform the adverse
changes in environmental quality into environmental costs, and the positive
changes in environmental quality into environmental benefits.
7


Examples when the application of the change of productivity methodology is
appropriate include:

Water pollution and water resources depletion. The quantity and
quality of water diverted for irrigation purposes affects the agricultural
productivity (yield) of irrigated land. Hence, changes in water quality or
quantity is likely to have an impact on agricultural productivity or on the
cost of conducting agricultural production;

Water pollution. The quality of water impacts fisheries productivity (yield).
Hence, changes in water quality is likely to have an impact on fisheries
productivity or on the cost of conducting fisheries activities;

Water resources depletion. In a number of instances, the depletion (or
pollution) of the water resources impacts the productivity (quantity of
energy produced) of hydro-power dams. Such use of the water resources
is generally referred as an indirect use of the resource and produces
indirect use value. The economic value of the lost energy production is a
cost to society;

Soil erosion (on-site impact). The quantity and quality of soil affects
agricultural productivity. Hence, the loss of soil (erosion) is likely to have
an impact on agricultural productivity or on the cost of conducting
agricultural production;

7
In order to avoid unduly burdening the text with both adverse and positive environmental
impacts, most of the text will directly address adverse environmental impacts as these may be
more appropriate given the context in which these Guidelines are going to be used.
36
Soil erosion (off-site impact). Soil erosion in a watershed often leads to
river sedimentation downstream. This in turn may have impact on the
productivity of fisheries downstream (as a result of the sedimentation), on
the productivity of agricultural production (for example as a result of an
increase in the incidence of flooding), and on the productivity of hydro-
power dams (to the extent that reservoirs may have to be dredged or the
productive lifetime of the dam be shortened);

Air pollution. Some types of air pollutants (such as ground-level ozone
resulting from the emissions of air pollution by road transport) are known
to have impact on agricultural productivity. Hence, changes in the ambient
concentration of such pollutants may impact agricultural productivity in the
air shed;

Salinity. Increases in the salinity of croplands (resulting, for example, from
rising groundwater levels) may adversely impact agricultural productivity
or the costs of conducting agricultural production;

Coastal resource depletion. Mangroves serve as ecological support and
habitat to fish populations. Depletion (clearance) of the mangrove
resource may thus have an adverse impact on fish populations and on
fisheries;

Deforestation. Forests provide habitat to a large number of non-timber
forest products (NTFPs) such as fruits, mushrooms, wildlife, etc some of
which being harvested and sold (legally) on markets. Deforestation
generally has an adverse impact on the flow (quantity) of these products.

In all of the above examples, note that the goods or services produced by the
environment are used (with other inputs such as labor and capital for example) to
produce goods which are commercially transacted (rice, fruits, fish, electricity,
etc.) and for which there exists market prices. One way (but not the only way) to
provide an economic valuation of the environmental impact is to assess the net
economic value of the lost output (net economic value of the fisheries lost; net
value of the agricultural production lost; net value of the hydro-power lost, etc.).
8
I

5.2 How to use this methodology

The implementation of this methodology takes place in two steps.

5.2.1 Step 1: Quantify the impact on productivity

In order to apply the change in productivity methodology, the very first step is to
measure the impact of the change in environmental quality or quantity on the

8
An alternative way is discussed later in Chapter 6.
37
productivity of the resource. This may be the most difficult step when
implementing this methodology. It consists in asking and attempting to answer
questions such as (for example):

How much agricultural yield would be lost (in quantity terms) if ambient
water quality were to degrade as a result of wastewater discharges from
the proposed project?

How much fisheries would be lost (in quantity terms) if ambient water
quality were to degrade as a result of wastewater discharges from the
proposed project?

How much agricultural yield would be lost (in quantity terms) if the project
were to increase soil erosion?

How much energy from the downstream hydro power dam would be lost if
the project were to increase soil erosion upstream?

In technical terms, this amounts to establishing a dose-response function
(sometimes also called a exposure-response function) between the change in
environmental quality (dose) and the resulting impact on productivity (response).

In some instances, estimating the lost productivity may be relatively simple (for
example, if a project were to convert existing agricultural land, then the lost of
productivity could be simply estimated as the difference between the existing
productivity and zero a complete loss).
9


In other instances, this may be relatively difficult (for example, if a project has an
adverse but temporary impact on water quality, assessing the impact on fisheries
productivity may be relatively difficult). This explains the need to conduct
comprehensive sensitivity analysis.

5.2.2 Step 2: Monetize the impact

Once the environmental impacts have been quantified in physical terms, these
impacts then need to be monetized.

In a number of cases, market prices (as they are simply observed on the
markets) are used to estimate the net economic value (revenues minus
production costs) of the change in productivity.

However, in a number of instances, market prices may be somewhat misleading
market prices may also reflect the presence of taxes, subsidies, import
restrictions, etc. Hence, before using market prices, it is important to adjust these

9
Under the assumption that future land productivity were to be equal to the existing level of
productivity.
38
prices to remove the impacts of such policies. In circumstances where the
commodity is transacted internationally, world prices may serve as a good
estimate of the economic value of the commodity.

5.3 Strengths and limitations of the methodology

5.3.1 Strengths

Of all the economic valuation methodologies available, the change of productivity
methodology is perhaps the least demanding in terms of data analysis and the
required economic expertise.

The results from applying the change of productivity methodology are also of
immediate use in the context of the EIA process as the estimated change in
economic value often translates in lost or increased income to those exploiting
the resources (fishermen, farmers, etc.). To this extent, the assessment of
environmental costs which results from applying the change of productivity
methodology is often better explained and better understood by stakeholders and
decision-makers.

5.3.2 Limitations

The key difficulty when applying the change of productivity methodology is to
assess the impact of the change in environmental quality or quantity on the
quantity (or quality) of the goods produced with the help of the environment. In a
number of instances, the dose-response functions are not well-known or will
provide a wide range of possible productivity impacts resulting from the change
in environmental quality or quantity. The technical (or scientific) expertise
required may be relatively significant.

It is also important to note that the change in productivity methodology provides
the economic value of the goods and services produced by the environment only
as these goods and services are used to produce marketed products. To the
extent that the goods and services produced by the environment are also used in
many other ways, the economic value estimated from applying the change in
productivity methodology will under-estimate the total economic value of these
goods and services.

5.4 Recommendations to project initiators

5.4.1 Quantify the impact on productivity

In almost all cases, estimating the effect of the environmental impacts on
productivity will involve the following:

39
Estimate the existing annual level (on average) of productivity (by means
of time series data over the last 5 years approximately);

Establish what may be expected to happen to the future level of
productivity if there were to be no project (one possible scenario
(hypothesis) is that the future level of productivity would be equal on
average to the recently observed level of productivity). This is the without
project scenario;

Establish what may be expected to happen to the future level of
productivity if there were to be a project. This is the with project scenario;

Indicate clearly if the impacts are expected to be temporary (for example
occurring only during the construction phase of the project) or permanent.
If temporary, indicate clearly for how many years the impacts are expected
to occur, and how productivity (in quantitative terms) is expected to
recover over time to the level that is expected to exist without project;

Estimate the impact on productivity by calculating the difference between
the without project and with project scenarios;

Construct alternative scenarios including a worst case scenario (where
appropriate) to give a possible range of the impact of the project on
productivity (sensitivity analysis).

5.4.2 Step 2: Monetize the impact

In almost all cases, monetizing the estimated change in productivity will involve
the following:

Collect information about recent and existing market prices for the
commodity whose productivity is impacted, as well as for the inputs
necessary to the production of this commodity (e.g. labor, machinery,
etc.);

Before using market prices, adjust these prices at least for the presence of
taxes, and if possible of subsidies and any other policies which may
impact market prices;

Calculate the net economic value of the change (decrease or increase) in
productivity per unit of output (for example, per kilogram or ton of product;
or per hectares of lost agricultural land);

Multiply the net economic value per unit of output by the total estimated
quantity of lost (or gained) output in any given year;

40
Calculate the present value of the change in productivity using a discount
rate ranging between 3% and 8%;

Given the outcome of the sensitivity analysis, give a possible range for the
estimated economic value of the change in productivity.

The examples presented in Appendix 1 and 2 are illustrative of the application of
the change of productivity methodology.


41
Chapter 6

Revealed preferences methodologies

6.1 Introduction to revealed preferences methodologies

In a number of circumstances, instead of letting the change in environmental
quality or quantity impact the productivity of their resource, individuals (such as
farmers for example) may seek to undertake activities (such as, for example,
using additional quantities of fertilizers, or working longer hours) to offset
(partially or totally) this potential impact (Box 6.1)


Box 6.1
Sedimentation ponds in Malaysia

In a large number of instances in Peninsular and Eastern Malaysia, farmers must
remove large quantities of sediments from surface waters before using the water
to irrigate their field. For this purpose, farmers generally use sedimentation ponds
in which water lies still for a period of time sufficiently long to let the sediments
fall at the bottom of the pond (which is most often simply a large hole dug in the
ground). This represents one type of activity undertaken by farmers to offset the
presence of large quantities of sediments in surface waters.


Moreover, unlike the types of situations covered in Chapter 5, in a number of
circumstances the change in environmental quality may not have a direct impact
on the productivity of a resource such as land (e.g. agricultural yield) or water
(e.g. fisheries). For example:

Individuals may seek to offset adverse changes in water quality by treating
the water (e.g. boiling) before its consumption;

Increases in air or noise pollution may adversely impact the market value
of surrounding properties;

An increase in water pollution or deforestation may adversely impact
recreational opportunities on a beach or forest.

In each of the above examples, one observes individuals changing their behavior
as a result of the change in environmental quality. The economic costs
associated with this change in behavior may reveal the extent to which
individuals wish to avoid the negative change in environmental quality.

42
Five methodologies are generally considered to fall within the group of revealed
preferences methodologies. These are:

Replacement cost methodology;

Defensive expenditure methodology;

Cost of illness methodology;

Hedonic pricing methodology;

Travel cost methodology.

In principle, there may not be significant methodological differences between the
replacement cost methodology and the defensive expenditure methodology. In
both cases, individuals are undertaking activities to offset the potential impact of
an adverse change in environmental quality. Both methodologies rely on
assessing the costs of undertaking these activities. However, it has become
customary to apply the replacement cost methodology when changes in
environmental quality have an impact on the productivity of the resources, and to
apply the defensive expenditure methodology when changes in environmental
quality have an impact on health.

As explained previously, the choice of the methodology depends on the nature of
the environmental impact, as illustrated in Table 6.1.

Table 6.1
Application of revealed preferences methodologies

Types of application Revealed behavior Methodology
Health: Morbidity

Cost of treating illness Cost of illness
Health: Morbidity and
mortality

Cost of avoiding illness Defensive expenditure
Resource productivity
(agricultural, fisheries)

Cost of avoiding
reduction in productivity
Replacement cost
Property value Changes in property
values

Hedonic pricing
Recreational sites Participation in
recreational activity at the
site
Travel cost


43
We discuss in some details each of these methodologies below.

6.2 Replacement cost methodology

6.2.1 When to use this methodology

In a number of instances, producers (such as farmers, fishermen, hydropower
operators, water supply providers, etc), may seek to offset (compensate) for the
loss of environmental quality or quantity by undertaking activities which aim to
keep production (or production costs) more or less constant, despite the adverse
change in environmental quality.

In such instances, it may be possible and of interest to attempt estimating:

(1) the costs (for the farmers, fishermen, hydropower operators, or water
supply providers) of undertaking these activities which they would not
need to undertake if environmental quality were not to deteriorate; or

(2) the benefits (for the farmers, fishermen, hydropower operators, or water
supply providers) of not undertaking these activities anymore if
environmental quality were to improve.

Examples when the application of the change of productivity methodology is
appropriate include:

Wetlands degradation. It is well known that wetlands provide a large
number of ecological services including water purification services (see
Box 2.1 in Chapter 2). It may be possible to estimate the economic value
of this particular service provided by wetlands by estimating the cost of
providing clean water with alternative purifying methods such as filtering
and chemical treatment. If the wetlands were to be degraded or to
disappear (as a result of urban expansion for example), and if the same
level of water quality were to be desired, then society would have to invest
this additional cost to obtain purified water from alternative means instead
of being freely provided by wetlands;

Deforestation - Sedimentation. Poorly managed logging practices often
leads to river sedimentation of river catchments. As a result, water supply
providers in the effected catchments may have to incur additional
operational costs directly associated with the presence of sediments in the
source of water supply. Alternatively, the costs of undertaking these
additional activities may be a measure of the benefits of implementing
logging practices which would prevent such sedimentation (Box 6.2);



44
Box 6.2
The costs of river sedimentation:
The case of Beaufort (Sabah)

Beaufort is located downstream the Padas River catchment in Sabah. As a result
of numerous activities including logging upstream the catchment, the Padas
River experiences high levels of sedimentation. In order to remove the sediments
from the water before it be provided to its customer, the Beaufort Water Supply
Company must use large quantities of alum and lime. Over the period 2001-2005
the following expenditures have been incurred:

Alum and lime expenditures in Beaufort

Alum Lime
Quantity
(kg)
Expenditures
(RM)
Quantity
(kg)
Expenditures
(RM)
2001 549,000 424,267 177,025 84,264
2002 593,950 459,004 189,750 90,321
2003 782,100 600,736 250,475 119,226
2004 782,100 604,406 307,675 146,453
2005 786,400 607,729 389,675 185,485
Total quantity 3,493,550 1,314,600
Average annual
expenditures
539,228 125,150

In addition to the above costs, the water intake must be cleaned as sludge
accumulates and reduces the water flow. Over the period 2001 2005,
desludging took place 8 times for an annual average cost of approximately
RM8,800. Finally, during periods of shutdowns (for desludging purposes), the
company is under the obligation of providing water to its domestic customers. It
does so by trucking water to households. Over the period 2001 2005, the
annual average cost of this activity reached RM375,040.

On the basis of the above estimates, the presence of high concentration of
sediments in the Padas River costs the Beaufort Water Supply Company
approximately RM1.05 million per year. This economic cost is a part (and in all
likelihood not the only component) of the total cost of river sedimentation in the
Padas Catchment. It may also be interpreted as the potential benefit of a project
(or policy) which would aim to reduce river sedimentation in the Padas River.


Water pollution. As a result of the significant presence of debris in
surfaced waters, hydropower dams may have to shut down on a regular
basis to allow for the removal of the debris. In addition to the direct costs
of debris removal activities, energy production may either be lost (change
in productivity) or may have to be produced by alternative means of
production. The costs of replacing hydropower with power produced from
45
these alternative means of production may serve as an estimate of the
costs of debris in surfaced waters (Box 6.3).


Box 6.3
The Tenom Pangi hydropower plant in the
Padas River Catchment (Sabah)

The hydro power station at Tenom Pangi is the largest hydro power station in
Sabah. It is a run-of-river plant commissioned in 1984. It is situated on the bank
of the Padas River on the outskirts of Tenom City. It has an installed capacity of
66 MW made of 3 turbines of 22 MW each.

Since its commissioning, the power station has experienced significant difficulties
resulting from the presence of large quantities of debris and silt which, when in
sufficient quantity, blocks the stations water intake. Over the period 2001 2005,
the Tenom Pangi station has experienced a total of 115 shutdowns, ranging from
10 in 2003 up to 40 shutdowns in 2005. Over this five-year period, a total of
19,686 MWh were lost as a result of these shutdowns.

The thermal replacement value has been estimated at RM400 per MWh by the
managers of the Tenom Pangi hydro station. According to these estimates, the
total replacement cost would have reached approximately RM1.6 million on an
annual basis.



Coastal degradation. Coastal wetlands and mangroves provide a large
number of ecological services including storm protection services. The
degradation of these coastal resources may significantly impede their
capacity to deliver these important services. In the event of such
degradation, additional or alternative investments (such as building
retaining walls) may have to be undertaken in order to provide storm
protection services. The costs of building retaining walls may thus serve
as an estimate of the storm protection services provided by coastal
wetlands and mangroves.

It is of importance to note that the replacement cost methodology does not truly
provide an assessment of the economic value of purified water, or electricity, or
storm protection services. It simply provides an assessment of the economic cost
(or benefit) of producing the same services (which may or may not be desired)
with alternative means of production. To the extent that the services is desired
and that the least-cost alternative means of producing this service is examined,
this cost may provide a minimum economic value of these services (since society
would be willing to invest at least this amount to continue providing the service).
46
6.2.2 How to use this methodology

The replacement cost methodology is relatively simple to implement from both a
technical point of view, and economic point of view.

There are essentially three steps involved.

Step 1:
The fist step is of a technical or scientific nature and consists in undertaking an
ecological assessment of the nature and extent of the services provided by the
impacted resource. For example:

How much storm protection services is actually provided by the coastal
resources; or

What is the physical impact of river sedimentation on the activities of
downstream water supply utilities?

Once these services or impacts are clearly understood, then one may proceed to
the second step.

Step 2:
Identify the alternative means by which the same services as those produced by
the environment (in terms of both quantity and quality) could be provided.

Step 3:
Estimate the costs of these alternative means by which the services could be
produced. The least costly alternative means to produce the same service (and
assuming that the service is indeed desired by society) provide an estimate of
the economic value of the ecological services.

6.2.3 Strengths and limitations of the methodology

(i) Strengths

The strengths of the replacement cost methodology are:

In a number of instances, it may be easier to estimate the least cost
alternative means of producing the ecological services instead of
attempting to measure the economic benefits of the services. To the
extent that society does indeed value the ecological service, this
assessment will provide a lower bound value to the ecological services
since society would be willing to invest at least this amount in order to
continue consuming this service;

47
The methodology is relatively simple to implement and does not require
high degree of technical or economic expertise.

(ii) Limitations

However, this methodology (as well as the defensive expenditure methodology
and the cost of illness methodology described below) suffers from a number of
limitations, including:

The methodology is a valid approach to the economic valuation of the
goods or services produced by the environment only to the extent that
society does value and indeed is willing-to-pay the cost for the continued
provision of these same goods or services by alternative means of
production if the environment were to cease (because of it being degraded
by the project for example) the production of these goods or services. If
society is not willing to pay this cost, then one could not say that this cost
provides an assessment of the economic value of the goods or services
produced by the environment;

Even if society were willing to pay for providing the goods or services by
alternative means of production, one could not say that this estimated cost
provides a measure of the economic value of the goods or services. In
other words, costs are normally not a measure of the benefits (e.g. the
cost of consuming meat generally does not provide a measure of the
benefits of consuming meat). However, in appropriate circumstances, it
may be said that the estimated cost provides a lower bound estimate of
the economic value of the goods or services produced by the
environment;
10

In some situations, it may be difficult or impossible to find alternative
means which would produce the goods or services in exactly the same
quantity and quality as produced by the environment. In such
circumstances, it may not be possible to say that the estimated cost of
producing this alternative service represents a lower bound value of the
goods or services produced by the environment since in fact these goods
or services are not exactly the same.

6.2.4 Recommendations to project initiators

Implement the replacement cost methodology to assess the economic
value of the goods and services produced by the environment only when
there is sufficient evidence that society does value and would be willing-to-

10
For example, many would argue that the consumption of fish raised in hatcheries is not the
same as the consumption of wild fish whose production could be adversely impacted by
fisheries. If this were to be the case, then the cost of producing fish in hatcheries would not be an
appropriate estimate of the economic value of wild fish.

48
pay for the continued provision of these goods and services by alternative
means of production;

When identifying alternative means of production, ensure that exactly the
same good or service is going to be produced by this alternative means of
production as is currently produced by the environment;

Assess the least cost of providing the same goods or services as currently
produced by the environment.

6.3 Defensive expenditure methodology

6.3.1 When to use this methodology

As indicated earlier, there are not significant methodological differences between
the replacement cost methodology and the defensive expenditure methodology.
In both cases, the methodologies rely on assessing the costs of undertaking
activities aimed at offsetting changes in environmental quality. However, while
the replacement cost methodology is applied in situation when changes in
environmental quality have an impact on productivity, the defensive expenditure
methodology is applied when these changes in environmental quality have an
impact on health.

Examples when the application of the defensive expenditure methodology is
appropriate include:

Air pollution. As a result of an increase in air pollution, individuals may
undertake activities to avoid exposure to the degraded ambient air quality.
For example, individuals may buy face masks of various nature to filter the
air or buy air purifying units or simply spend more time indoors to avoid
exposure to the pollution;

Noise pollution or smell. Individuals may avoid opening their windows to
avoid exposure to smell or install double-glazed windows to avoid
exposure to noise from industrial facilities, road traffic or airports for
example;

Water pollution. In order to avoid risk of sickness from exposure to
polluted water, it is often observed that individuals buy bottled water
and/or boil water or in some other ways treat the water before its
consumption.

In the above examples, it is observed that individuals are undertaking costly
activities to avoid exposure to the degraded environment in order to reduce
(partly or totally) the risk of falling ill.

49
The defensive expenditure methodology consists in attempting to measure the
costs of undertaking these activities.

6.3.2 How to use this methodology

The defensive expenditure methodology does not require a high degree of
technical or economic expertise.

There are essentially four steps involved.

Step 1:
The fist step is of a technical or scientific nature and consists in identifying the
nature of the environmental impact, or in other words the expected change in
environmental quality which may result from the project. For example:

What is the expected change in noise level which may happen as a
result of the project? or

What is the expected change in air quality or water quality which may
happen as a result of the project?

Once these changes are clearly identified, then one may proceed to the second
step.

Step 2:
Since the expected change in environmental quality is assumed to impact
peoples behavior, an important and key step is to identify the population which
may be exposed to the expected change in environmental quality. This relates to
the issue of geographical and stakeholder scoping. In the case of air pollution,
the exposed population may be considerably removed from the project site itself.

Step 3:
Observe (essentially by means of surveys) the actions and activities that
individuals are doing in order to avoid exposure to the degraded environmental
quality.

Step 4:
Measure the costs for the individuals of undertaking these actions of activities.

6.3.3 Strengths and limitations of the methodology

Given the methodological similarities of this methodology with the replacement
cost methodology, it shares a similar set of strengths and weaknesses.

(i) Strengths

50
The strengths of the defensive expenditure methodology are:

The methodology is relatively simple to implement and does not require
high degree of technical or economic expertise;

Since it is based on actual behavior undertaken by individuals, it may have
more credibility at times of discussion between stakeholders.

(ii) Limitations

A key limitation of this methodology (as for the replacement cost methodology) is
the following:

Even if individuals are willing to pay to protect (or defend) themselves
against exposure to degraded environmental quality, one cannot say that
this estimated expenditure provides a true measure of the benefits of the
protection undertaken or of the true cost of the degraded environmental
quality. In other words, once again, costs are normally not a measure of
the benefits. However, in appropriate circumstances, it may be said that
the estimated expenditure provides a lower bound estimate of the true
economic cost of the degraded environmental quality (and therefore of the
benefit of the defensive activities).

6.3.4 Recommendations to project initiators

Implement the defensive expenditure methodology in cases where there is
evidence that individuals may undertake defensive activities to protect
themselves against the adverse health impacts of changes in
environmental quality;

Identify as precisely as possible the change in environmental quality which
may result from the project during both its construction phase and
operation phase;

Identify in terms of both area and numbers, the population which may
experience the change in environmental quality;

Identify the nature of the activities which may be undertaken by individuals
to avoid exposure to the degraded environmental quality, and the costs of
undertaking these measures. Such assessment may be undertaken for
the entire population being exposed, or it may be assessed on the basis of
a representative sample, and then extrapolated to the entire exposed
population.


51
6.4 Cost of illness methodology

6.4.1 When to use this methodology

Changes in environmental quality may have impacts on health and the types and
frequency of various diseases that individuals may experiment. While the
defensive expenditure methodology relies on estimating expenditures undertaken
to avoid exposure and falling sick, the cost of illness methodology simply relies
on estimating expenditure associated with treating the illness (Figure 6.1).

For the most part, examples when the application of the cost of illness
methodology is appropriate are similar to those presented earlier for the
application of the defensive expenditure methodology. A key difference however
is when illness involves mortality instead of morbidity. We discuss this issue
below.

Figure 6.1
Defensive expenditure and cost of illness methodologies


Pollution Exposure Exposure Illness
Defensive
expenditure
methodology
Cost of
illness
methodology









6.4.2 How to use this methodology

The cost of illness methodology is relatively simple to implement. It consists
simply at estimating the both the direct and indirect costs associated with
treating or experiencing a particular illness.

There are essentially five steps involved.

Step 1:
The fist step is of a technical or scientific nature and consists in identifying the
nature of the environmental impact, or in other words the expected change in
environmental quality which may result from the project. For example:

What is the expected change in noise level which may happen as a
result of the project? or

52
What is the expected change in air quality or water quality which may
happen as a result of the project?

Once these changes are clearly identified, then one may proceed to the second
step.

Step 2:
The second step is to identify the impacts that these changes in environmental
quality may have on health or the types of illnesses which may be experienced.
For example, a change in air pollution such as ground-level ozone which may
result from a road project may have an impact on the incidence of asthma while a
change in water pollution may have an impact on various types of gastro-
intestinal diseases.

Step 3:
As for the defensive expenditure methodology, since the expected change in
environmental quality is assumed to impact peoples behavior (that is, treating
illness), an important and key step is to identify the population which may be
exposed to the expected change in environmental quality. This relates to the
issue of geographical and stakeholder scoping.

Step 4:
Observe (essentially by means of surveys) the actions and activities that
individuals are doing in order to treat illnesses.

Step 5:
Measure the costs for the individuals of undertaking these actions of activities.

As indicated in Figure 6.2, it is important to recognize that the cost of illness is
made of different components. First, individuals must incur a direct cost to seek
treatment for the illness. This is made of both medical and non-medical cost.
Second, there may be an indirect cost associated with the illness in that
individuals may be losing valuable productive time while treating the illness. This
cost must also be included in the cost of illness.

A further important issue must be considered. The Government of Malaysia
provides extensive subsidies to the health sector. For example, government clinic
consultation fees were maintained at RM1 in 2007. While the direct cost paid by
patients visiting these clinics is thus capped at RM1, the actual cost (for society)
of providing such services is higher than RM1.
11
The cost of illness measured
under the cost of illness methodology must capture both the cost (direct and

11
It was recently asserted that the cost of each medical consultation in government hospitals cost
between RM20 and RM30 (Sunday Star, February 17, 2008, quoting the Women, Family and
Community Development Minister).

53
indirect) incurred by those experiencing the illness and the extent of the subsidy
provide by the state to treat such illnesses.

Figure 6.2
Components of the cost of illness





























Cost of illness
Direct medical
costs
Direct non
medical costs
Cost of seeking
treatment, diagnosis
of illness, and
treating illness
Cost of resource lost
because of illness
Direct cost Indirect cost
Time lost while
treating illness
Transportation to
seek medical
services
Hospital inpatient
Physician inpatient
Physician outpatient
Emergency outpatient
Medical supplies
Diagnostic tests
Drugs and medicines

In some circumstances, changes in environmental quality have impacts not on
the probability of illness, but on the probability of death. When this occurs, a key
issue pertains to providing an economic valuation of such impact.

For this purpose, the concept of Value of a statistical life (VSL) has been
developed to assess the economic value of changes in such probability. It is
important to note that this is not the value of life, nor the value of the life of a
specific individual (that is the value of changing the risk of mortality from one to
zero for a specific individual). The VSL represents what a society would be willing
to pay to reduce the probability of dying which would result in saving one life.

54
Numerous studies in developed countries and a smaller number in developing
countries have been conducted to measure VSL. In the United States, these
measures range between USD 3 and 7 millions (mostly depending on the type of
methodology used to undertake such assessment and the risk context for
example occupational risk versus road traffic risks). In Canada and the United
Kingdom, studies reveal a VSL ranging from USD 1 to 4 millions. Studies
conducted in India, Hong Kong, Taiwan and South Korea reveals a VSL ranging
between USD 0.2 and 3 millions. Of course, since the VSL is a measure of a
societys willingness-to-pay to reduce the probability of dying in its population,
this willingness-to-pay will partly depend on the level of income of the population.

We are currently not aware of specific studies attempting to measure VSL in
Malaysia. However, based on existing studies in both developed and developing
countries, one could estimate a VSL in Malaysia ranging between USD 0.5 and
1.5 millions once differences in per capita income are considered.

Such procedure (using VSL calculated in other countries to estimate VSL in
Malaysia while controlling solely for differences in per capita income) is a crude
application of the benefit-transfer methodology which will be discussed in
Chapter 8 below. It has two important drawbacks. First, it implicitly assumes that
preferences for health in Malaysia are similar to preferences for health where
VSL studies have been conducted. There is no reason to believe that this is
necessarily so. Second, it implicitly assumes that the income elasticity for
improved health is equal to 1.0.

In the absence of original studies in Malaysia, we recommend that a value
ranging between USD 0.5 and 1.5 millions be used to assess VSL in Malaysia
and to apply these values where and when appropriate.

6.4.3 Strengths and limitations of the methodology

Given the methodological similarities of this methodology with the defensive
expenditure methodology, it shares a similar set of strengths and weaknesses.

(i) Strengths

The strengths of the cost of illness methodology are:

The methodology is relatively simple to implement and does not require
high degree of technical or economic expertise;

Since it is based on actual behavior undertaken by individuals (seeking
treatment), it may have more credibility at times of discussion between
stakeholders.

(ii) Limitations
55

A key limitation of this methodology (as for the replacement cost methodology
and the defensive expenditure methodology) is the following:

Even if individuals are willing to pay to treat an illness following exposure
to degraded environmental quality, one cannot say that this estimated
expenditure provides a true measure of the benefits of treating the illness
or the true cost of the degraded environmental quality. In other words,
once again, costs are normally not a measure of the benefits. However, in
appropriate circumstances, it may be said that the estimated expenditure
provides a lower bound estimate of the true economic cost of the
degraded environmental quality (and therefore of the benefit of the
defensive activities).

6.4.4 Recommendations to project initiators

Implement the cost of illness methodology in cases where there is
evidence that individuals seek treatment for illnesses directly associated
with changes in environmental quality such as air pollution, water
pollution, exposure to toxic compounds, etc.;

Identify as precisely as possible the change in environmental quality which
may result from the project during both its construction phase and
operation phase;

Identify in terms of both area and numbers, the population which may
experience the change in environmental quality;

Identify the nature of the activities which may be undertaken by individuals
to treat illnesses if they were exposed to the degraded environmental
quality, and the costs of undertaking these measures. Such assessment
may be undertaken for the entire population being exposed, or it may be
assessed on the basis of a representative sample, and then extrapolated
to the entire exposed population;

Remember that the cost of illness methodology requires that subsidies
paid by the government for the treatment of illnesses also be included in
the calculation of the cost of illness

56
6.5 Hedonic pricing methodology

6.5.1 When to use this methodology

Goods or services bought by consumers are made of a number of
characteristics. For example, when buying a watch, consumers may not be
interested in the watch per se but in its features such as material, shape, color,
easiness to read, etc. Similarly, when buying a car, consumers may not be
interested in the car per se but in its characteristics such as size, comfort, color,
maximum speed, fuel consumption, etc.

The hedonic pricing methodology is based on the assumption that when
individuals buy a good or a service, the price they are willing to pay for this good
or service is based on a package of characteristics contained in the good or
service. The methodology seeks to isolate the contribution of each of these
individual characteristics to the market price of the good or service.

In a number of situations, environmental quality may be one of these
characteristics which impact the market price of the transacted commodity. For
example, when renting a night at the hotel, consumers may not be interested
only in the size, color, comfort and other physical characteristics of the room itself
but may also be interested in whether the room has a nice view or not (such as
ocean view for example).

Similarly, the market price of a real estate property (apartment or house) will in all
likelihood depend on a number of characteristics such as: size, number of rooms,
construction material, age, proximity to school or working place, etc. It may also
depend on the level of noise or smell (from a nearby landfill for example) or air
pollution in the area. It may also depend on the proximity of recreational areas.
More generally, the market price of such real estate property may also depend
on the level of environmental quality.

The hedonic pricing methodology is then used to isolate the value of
environmental quality as it contributes to explain the market price of properties.
Having isolated such value, it is then possible to estimate the impact of changes
in environmental quality (increased or decreased environmental quality) on
market prices.
Most (albeit not all) applications of the hedonic pricing methodology use
residential housing prices to estimate the value of environmental amenities.

Examples when the application of the hedonic pricing methodology is appropriate
include:

57
Air pollution (including noise or smell). Individuals may be willing to
pay less for residential properties impacted by an adverse change in air
pollution. Typical examples would include: proximity to a landfill, industrial
facility, road traffic, and airport;

Water pollution. The market value of residential properties may be
impacted adversely by adverse changes in the water quality of a nearby
beach;

Green areas. The market value of residential properties may be impacted
by the presence of green areas (such as public parks) in the neighborhood
or vicinity. Changes in the extent or quality of these green areas may thus
impact the market price of residential properties.

Open views. The market value of residential properties may be impacted
by the quality of the open views it may offer. Changes in the quality of the
views may thus impact market prices of such properties.

Note that the interest here is not in market prices per se, but in the fact that such
changes in prices resulting from changes in environmental quality indicate reveal
individual preferences for environmental quality. This is why this methodology
falls under the category of revealed preferences methodology.

6.5.2 How to use this methodology

While the hedonic pricing methodology is intuitively easy to understand, its
application requires considerable statistical expertise. It is not the intent of these
Guidelines to provide technical details pertaining to the implementation of the
methodology. Project assessors requested to implement this methodology
(where appropriate) will in most likelihood be able to access such expertise. The
key steps involved in using this methodology are discussed below in non-
technical terms.

Step 1:
The first step to undertake when implementing the hedonic pricing methodology
is to specify the possible relationship between the market prices of properties
and the characteristics which may impact those prices. This is known as a
hedonic price function.

For example, if the project were to be a landfill, it may be thought that the market
value of properties may be impacted depending on their location (distance)
relative to the landfill. In such circumstances, the hedonic price function may be
as:

House price depends on (is a function of; is determined by):

58
Size of the house;
Number of rooms;
Construction material;
Other physical house characteristics;
Neighborhood characteristics such as quality of schools in the area, crime
rate, etc; and
Distance (km) from the landfill.

Step 2:
The second step has to with data collection. The nature of the hedonic price
function determines which data should be collected. For each observation (or
market transaction), one would collect the price of the house as well as
information about each characteristic specified in the hedonic price function. In
order to be reliable, the dataset must contain a few hundreds of such
observations collected by means of surveys.

Step 3:
Once the data has been collected, the third step consists in analyzing the data.
Statistical (econometric) expertise is required to undertake this particular step.
This is normally done by using regression analysis. Regression analysis
measures the portion of the property price which is attributable to each
characteristic impacting house values. From this regression analysis, the analyst
will calculate the value (or hedonic price) of the distance from landfill.

Step 4:
Finally, using the estimated hedonic price, the analyst needs to measure the
demand curve for environmental quality in which the hedonic price depends on
household income, other household characteristics, and of course in the context
of the above example, distance from the landfill.


59
Box 6.4
Regression analysis with the hedonic pricing methodology

Suppose that the hedonic price function is simply stated as:

P = f(Size, Rooms, Mat, DKM)

where P is the price of the house; Size is the square footage of the house;
Rooms is the number of bathrooms; Mat is the nature of the construction
material; and DKM is the distance from a landfill.

The analyst may then specify the following hedonic price model:



e DKM Mat Rooms Size P
4 3 2 1
0
=

In order to estimate the above equation, it is usually appropriate to take the
natural logarithms on both sides to obtain:

+ + + + + = DKM Mat Rooms Size P ln ln ln ln ln ln
4 3 2 1 0


The purpose of the regression analysis is to estimate the value of the
i
. In the
above equation,
3
is the variable of interest.

In the context of the above equation, the hedonic price will be measured as:

DKM
P
3



6.5.3 Strengths and limitations of the methodology

(i) Strengths

The main strength of this methodology is that it is based on actual
decisions and choices made by individuals, and as these choices are
reflected in actual market prices of a transacted commodity. It thus
benefits from a high level of credibility;

The methodology can be readily be implemented when data on property
sales and characteristics are available.

60
(ii) Limitations

The method is relatively complex to implement and interpret, and requires
a high degree of statistical expertise;

If the data is not readily available, data collection may be a time
consuming and resource intensive activity;

6.5.4 Recommendations to project initiators

Identify as precisely as possible the change in environmental quality which
may result from the project during both its construction phase and
operation phase;

Identify in terms of both area and numbers, the population which may
experience the change in environmental quality and the types of
properties where this population in which this population is currently living;

Assess the potential changes in market values which on average each of
these properties could experience as a result of the change in
environmental quality, and on this basis assess the potential aggregate
change in market value on impacted property;

Conduct sensitivity analysis.

6.6 Travel cost methodology

6.6.1 When to use this methodology

The travel cost methodology (TCM) attempts to estimate the economic value of
sites which are essentially used for recreation purposes (such as beaches, coral
reefs, or protected areas). It does so by assuming that the economic value
(willingness to pay) to visit a recreational site must be at least as much as the
cost incurred by individuals to visit the site.

This methodology should therefore be used only when a change in
environmental quality (negative or positive) brought upon by a project has the
potential to impact the quantity of trips to a recreational site, or the enjoyment
experienced at a recreational site.

The travel cost method can be used to estimate the economic benefits or costs
resulting from:

elimination of an existing recreational site;

addition of a new recreational site;
61

changes in environmental quality at a recreational site.

6.6.2 How to use this methodology

As for the hedonic pricing methodology, the TCM is intuitively easy to
understand. However, its application also requires considerable statistical
expertise. In addition, it proceeds by means of surveying potential or actual
visitors to the recreational site of interest. The surveying process involves the
preparation of a survey template, the training of a surveyor team, the data
collection itself with potential or actual visitors, and then the data processing.

The methodology recognizes that the frequency at which individuals visit a
recreation site (such as a national park for example) depends on a number of
household characteristics (such as income, number of children, etc), as well as
the costs incurred to visit to the site: all other things being equal, the higher the
cost, the smaller the visitation rate. A key insight of the methodology is that it
recognizes that this cost is not only made of the entrance fee (if any), but also
includes the monetary costs of traveling to the site (bus/train/air fares; petrol
expenses; vehicle wear and tear), and of the value of the time spent traveling to
the site. By means of statistical analysis, it is this relationship between the
frequency of visit (visitation rate) and the travel costs that one seeks to estimate,
resulting in a demand function for visitation at the site.

There are several ways to approach the problem. These include:

A zonal travel cost approach which uses mostly data collected from actual
visitors at the site itself;

An individual travel cost approach which can use data collected from
visitors at the site itself, or can use data from using a more detailed survey
of potential visitors in a given population;

A random utility approach using surveys as well as other existing data.

Regardless of the approach selected (one of the 3 approaches referred to
above), the TCM generally requires that the following information be collected:

number of visits from each origin zone or from a given population;

demographic information about people from each zone or from a given
population;

travel costs from each zone;

the value of time spent traveling.
62
Better applications of the TCM may also collect information about:

exact distance that each individual traveled to the site;

exact travel expenses;

the length of the trip;

the amount of time spent at the site;

other locations visited during the same trip, and amount of time spent at
each;

substitute sites that the person might visit instead of this site, and the
travel distance to each;

other reasons for the trip (is the trip only to visit the site, or for several
purposes);

quality of the recreational experience at the site, and at other similar sites
(e.g., fishing success);

perceptions of environmental quality at the site;

characteristics of the site and other, substitute, sites.

This data can be collected either on-site or through general population surveys.
Each survey type has its own advantages and disadvantages.

For example, while general population surveys (individual travel cost approach)
have the potential to be more broadly representative of a population, they may
suffer from biases such as respondent recall bias if the site in question is
infrequently visited or disproportionately zero visits if a large proportion of the
survey sample is not visiting the site at all. Furthermore, general population
surveys are typically more demanding in terms of data collection.

On the other hand, on-site surveys (zonal travel cost approach) have the
advantage of precision regarding the time, date and certainty of visit. Moreover,
they are based on the response of actual visitors to the site. However, they run
the risk of over-sampling only those in the population who are avid users of the
site while not sampling other visitors of the site who happen not to visit the site at
the time of the survey, or other potential visitors should constraints to the
participation decision be relaxed.

It is not the intent of these Guidelines to provide technical details pertaining to the
implementation of the methodology. Project assessors requested to implement
63
this methodology (where appropriate) will in most likelihood be able to access
such expertise. The key steps involved in using this methodology are discussed
below in non-technical terms.

(i) Zonal travel cost approach

The zonal travel cost method is the simplest and least expensive travel cost
approach. It will estimate a value for recreational services of the site as a whole,
and therefore can be used if an entire recreational site were to disappear or be
created as a result of a project.

It cannot easily be used to assess the economic benefit or the economic cost of a
positive or negative change in quality of recreation for a site.

The zonal travel cost method is applied simply by collecting information on the
number of visits to the recreational site from groups of individuals (zones)
traveling different distances to the access the site. Because the travel and time
costs will increase with distance, this information allows calculating the number of
visits at different travel costs (prices). This information is used to construct the
demand function, and estimate the economic benefits, for the recreational
services of the site.

The zonal travel costs approach was recently used in a recent application of the
TCM in Taman Negara Pulau Pinang. The survey is attached in Annex 1.

Step 1:
The first step is to define a set of zones surrounding the site. The precise ways of
defining these zones may depend on the location of the site relative to population
centres. For example, in the case of a recreational area located inland, these
zones may be defined by concentric circles around the site; in the case of a
beach, these zones may be defined by semi-squares around the beach (Figure
6.3).

Note that the zones need not be limited to a particular local community, state, or
country. These zones may even include foreign points of origin. This issue refers
again to the scoping issues.
12

The key issue in defining these zones is that the travel cost to the recreational
site should be relatively the same for all people within each zone.

Step 2:
The second step is to collect information from visitors to the site. It is generally
impossible to survey all visitors to a particular recreational site. Hence, a key

12
For example, a large number of visitors to Johor national parks originate from Singapore while
a significant proportion of visitors to Taman Negara Pulau Penang originate from Australia,
Western Europe and the Middle East.
64
issue in this data collection process is to ensure that the sample of visitors who
are surveyed is representative of the entire population of visitors. The number of
visitors interviewed thus needs to capture the characteristics of the population of
visitors, and need to be sufficiently large to produce results which are statistically
significant (in general, this would imply surveying at least 400 visitors).

Step 3:
Once the data has been collected, then the data needs to be analyzed in order to
assess the nature of the relationship between the travel cost and the visitation
rate, while all other possible variables which may impact visitation rates (such as
income, age, education level, etc.) are accounted for. This step will yield a trip
generating function. This step is done by regression analysis.

Figure 6.3
Defining zones





Site
Zone 1
Zone 2
Zone 3





















Zone 1
Beach
Zone 2
Zone 3







65
Step 4:
Using the results of the regression analysis, the fourth step is to construct the
demand function for visits to the site. This demand function establishes the
relationship between the visitation rate and the travel costs. The slope of this
demand function will indicate by how much the visitation rate would fall if travel
cost were to increase by RM1; or by how much the visitation rate would increase
if travel cost were to fall by RM1.

Step 5:
Finally, the last step is to calculate the total economic benefit of the site to visitors
by calculating the consumer surplus, or the area under the demand curve.

(ii) Individual travel cost approach

The individual travel cost approach is similar to the zonal approach, but uses
survey data from individual visitors in the statistical analysis, rather than data
from each zone. This method thus requires more data collection and slightly
more complicated analysis, but will give more precise results. The steps are
similar to Step 2 to 5 presented in the zonal travel cost approach. The difference
is that one does not define a zone but base the analysis on individual rather than
zonal data.

(iii) Random utility approach

The random utility approach models the choice of a recreation site from among a
set of alternative sites as a utility-maximizing decision. In other words, it assumes
that individuals have the choice between different sites and make trade-offs
between site quality and the cost of travel to the site. A key difference between
this approach and the previous two approaches is that the random utility
approach requires information not only on the site which may be impacted by a
project, but on all possible sites that a visitor may have selected.

As such, the random utility approach is the most complicated approach to
estimate the economic value of a recreational site. But it is also the best
approach unless it is assumed that no other sites could be substitutes to the site
of interest.

The random utility approach is the best approach to estimate the impact of
change in site quality on recreation demand. The outcome is a set of probabilities
of the likelihood of visiting a particular site and changes in these probabilities as
site quality changes.

66
6.6.3 Strengths and limitations of the methodology

(i) Strengths

The TCM is based on actual (as opposed to hypothetical) behavior. For
this reason, it gains some sense of credibility. Because it is based on
actually behavior, the results are relatively easy to explain and
understand.

(ii) Limitations

In many instances, a visit to a specific recreational area may be one of
many other purposes of a trip (this for example would typically be the case
for international tourists). It is then necessary to apportion the travel costs
(such as the international airfare for example) among the various
purposes;

The methodology implicitly assumes that the time spent traveling is a cost.
However, for some individuals, the journey itself may have value, and not
be cost. In such cases, the trip should be considered as multi-purpose;

Defining and measuring the value of time spent traveling is typically
difficult;
.
In order to estimate the demand function, there needs to be sufficient
variations in travel costs incurred by visitors (for example, if all visitors to a
site face the same travel cost, then it will not be possible to estimate how
changes in travel cost impact the visitation rate). This implies that the
methodology is generally not very well suited for a site near a major
population center since it may then be expected that most visitors to the
site will originate from this population center and will incur more or less the
same travel cost;

When individuals have choice between different recreational sites, the
zonal and individual travel cost approaches will not provide a correct
measure of the economic value of the recreational site. In such situations,
the random utility approach needs to be implemented;

The zonal and individual travel cost approaches (though easier to use
than the random utility approaches) are not well suited to measure the
impact of changes in environmental quality. In such circumstances, the
random utility approach (or the contingent valuation approach described in
the next chapter) is better suited;


67
6.6.4 Recommendations to project initiators
Identify as precisely as possible the change in environmental quality which
may result from the project during both its construction phase and
operation phase;

Identify whether or not a recreational site may be impacted as a result of
the project;

If use of the site may be severely impaired by the project, use the zonal or
individual travel cost approach; if changes in environmental quality will
impact enjoyment of the site, use the random utility approach;

Document in a careful manner the existing use of the recreational site, and
the characteristics of the existing population of visitors;

In all cases, ensure that the sample of actual or potential visitors to the
site is truly representative of the population of visitors;

Survey formats should be developed and pre-tested before full
implementation;

A team of surveyors should be put in place with appropriate training in the
survey conduct;

Present the results of the analysis in a detailed and clear manner.







68
Chapter 7

Stated preferences methodologies

7.1 Introduction to stated preferences methodologies

Stated preferences methodologies elicit peoples willingness-to-pay for changes
in the quantity or quality of the goods and services provided by the environment.
It seeks to estimate economic values by directly asking individuals to state such
willingness-to-pay. This explains that these methodologies are often referred as
willingness-to-pay study.

States preferences methodologies can be applied to estimate any components of
the total economic value of the goods and services produced by the environment
(direct, indirect, use, and non-use). However, only stated preferences
methodologies can be sued to assess non-use economic values (the change of
productivity methodology and revealed preferences methodologies cannot be
used to assess non-use values).

There are two types of stated preferences methodologies: the contingent
valuation methodology and the choice modeling methodology. However, the
choice modeling methodology has thus far received only limited applications in
the field of the environment.
13
The contingent valuation methodology has by far
received the most attention. For this reason, in this chapter we focus on the
contingent valuation methodology (CVM).
14

7.2 The contingent valuation methodology

7.2.1 When to use this methodology

As indicated above, CVM can be used to estimate both use and non-use values.
It is also occasionally combined with revealed preferences methodologies (such
as the travel cost methodology) in the context of a single data collection effort.

CVM has been used in a very large number of different applications including
issues pertaining to water quality, air quality, outdoor recreation, biodiversity,
health impacts, natural resources damages, sanitation improvements, etc.
15




13
It is however considerably used by marketing consultancies when developing new products or
the advertising of new products.
14
Readers interested in the application of the choice modeling methodology may refer to the list
of references.
15
The website http://envirovaluation.org/ records hundreds and hundreds of empirical studies
using CVM.

69
7.2.2 How to use this methodology

Applying CVM involves directly asking people, in a survey, how much they would
be willing to pay for specific environmental goods or services in a specific, but
hypothetical situation where changes would occur to these goods or services.
The word contingent is used because of the hypothetical nature of the scenarios
presented to the respondents. This hypothetical nature of the scenarios is in fact
perhaps the most significant critique made of CVM.

CVM is often equated to willingness-to-pay studies. As such it wrongly conveys
the impression that using CVM consists simply in asking a few people 4 or 5
questions including how much they would be willing to pay for this or that. In fact,
a serious and credible application of CVM is extremely demanding, and must
follow some specific steps and protocols for it to produce any credible results.
We review these below.

(i) Steps in the application of the methodology

Step 1:
The first step is to define and set-up the hypothetical situation to which the
respondent will be asked to consider. This hypothetical situation has to be
defined very clearly and very precisely. Furthermore, the respondent to the
survey must clearly understand the nature of the change in environmental quality
that will be suggested.

Step 2:
The second step, as for all survey exercises (such as the travel cost
methodology and to a certain extent the hedonic pricing methodology presented
earlier), consists in the nature and size of the sample. Key is that the sample be
representative of the entire population of interest, and that it be of sufficient to
yield results which are statistically significant.

Step 3:
The third step is to determine the method by which the survey is going to be
conducted. Options include: by mail, phone or in person interviews. The choice
among these options may depend on the budget available to conduct the survey
and also on whether or not support material or visual aid (such as photographs
for example) will be used to in the course of the survey.

Mail surveys are generally the least expensive, and can be sent to thousands of
potential respondents. However, they typically suffer from low response rates.
Telephone surveys may be less expensive, but do not allow using of visual aid.

In-person interviews are generally the most effective for complex questions,
because it is often easier to explain the required background information to
70
respondents in person, and people are more likely to complete a long survey. On
the other hand, in-person interviews are more expensive to conduct.

Step 4:
The fourth step is the actual survey design. This is the most important and
difficult part of the process, and itself is made is several steps.

It will generally start with focus group discussions in order to ensure whether
potential respondents will fully understand the issues presented to them, and to
test the wording of the various questions to eliminate possibilities that the
questions be misunderstood. These discussions will lead to the development of a
first complete draft of the survey which will be pre-tested and then finalized.

A key issue in the context of the survey design pertains to what is referred as the
elicitation method, or how precisely will the willingness-to-pay question be
presented to the respondent. There are essentially 3 ways of presenting this
question to the respondent (there may be some variations around these 3
methods):

Open-ended. The respondent is asked to state his/her highest
willingness-to-pay. No numbers are presented or suggested to the
respondent;

Close-ended. The respondent is presented with a specific number (RM)
and is asked whether or not (Yes or No) he/she would be willing to pay
this amount (this method is occasionally referred as dichotomous choice);

Payment card. The respondent is presented with a sequence of potential
payments (RM) and is asked to circle the highest number he/she would be
willing to pay on the card.

An example of survey design recently used in Armenia is presented in Annex 2.

Step 5:
The final step is to compile, analyze and report the results. The data must be
entered and analyzed using statistical techniques appropriate for the type of
question.

(ii) Characteristics of a good application of the CVM

As indicated earlier, CVM (or willingness-to-pay study) is not simply about asking
a few hundred individuals how much they would be willing-to-pay to have access
to a cleaner beach, or less polluted air. It is generally a complicated, lengthy, and
expensive process. In order to collect useful data and provide results which are
reliable and can effectively be used in the policy arena, the sample of
respondents must be properly selected, and the survey must be properly
71
designed, pre-tested, and implemented. The survey questions must focus on
changes in specific environmental goods or services, and these changes (against
a no-change scenario have to be clearly defined and understood by survey
respondents. If respondents do not clearly understand what is it that they are
asked hypothetically to pay for, then the stated willingness-to-pay will not be
a reliable measure of the environmental costs and benefits.

A panel of economic experts provided the U.S. National Oceanic and
Atmospheric Administration (NOAA) a series of guidelines (or recommendations)
concerning the proper execution of the contingent valuation survey. The six most
important guidelines are summarized below:

1. CVM should rely on in-person interviews rather than telephone interviews,
or mail surveys. If (mainly because of the high costs of conducting in-
person interviews) it is not possible to conduct in-person interviews, then
telephone interviews are generally preferable to mail surveys;

2. CVM should elicit the respondents willingness-to-pay to prevent a future
degradation of environmental quality;

3. CVM should use a close-ended (dichotomous choice) elicitation format, in
which the responded is asked to say Yes or No to a particular suggested
payment. The close-ended elicitation format is less vulnerable to strategic
behavior by the respondent;

4. CVM should contain an accurate and understandable description of the
project under consideration and the associated changes in environmental
quality in each of the two scenarios, i.e., with and without the project. This
generally requires Interdisciplinary work with other experts in the field of
environment;

5. CVM should include reminders of the substitutes for the commodity in
question as well as its budget. The respondent should be reminded that
his/her (hypothetical) contribution would reduce the amount of money that
he/she has available to spend on other things. It is crucial that the
valuation exercise be as close as possible to a real market transaction;

6. CVM experiments should include a follow-up section at the end of the
questionnaire to be sure if the respondents understood (or not) the choice
that they were asked to make.

72
7.2.3 Strengths and limitations of the CVM

(i) Strengths

As indicated earlier, CVM is a very flexible methodology and has been
used in a very large number of applications throughout the world;

In order to estimate non-use value (bequest value and existence value),
CVM is the only methodology which can be used;

Unlike the concept of consumer surplus, results obtained from CVM are
relatively easy to understand since they can be presented as average
willingness-to-pay per person or per household, and then aggregated over
a population.

(ii) Limitations

When conducted properly, a CVM study can be very expensive and time-
consuming, because of the extensive pre-testing and survey work. A
proper CVM must be conducted by individuals who are experts in the
conduct of such surveys;

A key perceived limitation of CVM is the hypothetical nature of the
scenarios presented to the respondent. Respondents may fail to take
questions seriously because they will not actually be required to pay the
stated amount. Responses may also provide unrealistically high
willingness-to-pay if they believe their answer may in fact be used in
decisions to undertake the project while they dont yet have to pay for it.
The hypothetical nature of the scenarios is often used in policy scenario to
discredit the results obtained from a CVM study;
.
7.2.4 Recommendations to project initiators

Identify as precisely as possible the change in environmental quality which
may result from the project during both its construction phase and
operation phase;

Conduct focus group discussions with appropriate stakeholders to
understand in greater details how people understand the nature of the
goods or services which may be impacted by a change in environmental
quality;

Determine both the appropriate nature of the sample, as well as the
sample size large enough to yield credible and significant results.
Simultaneously, determine whether to conduct in-person interviews,
telephone surveys, or mail surveys. If resources allow, in-person
73
interviews are preferable to telephone or mail surveys. If resources do not
allow, then telephone surveys are generally preferred (if there is no need
for visual aid while conducting the survey);

Prepare a draft of the survey and conduct comprehensive pre-testing of
the survey to ensure that respondents understand all questions. The
survey must be clear, and the respondents must fully understand the
nature of the problem they are asked to consider. When appropriate, this
may be done using photographs, videos, or other multi-media techniques,
as well as written and verbal descriptions;

In general, when actually eliciting the willingness-to-pay, it is preferable to
use the close-ended approach in which respondents are asked whether or
not (Yes or No) they would be willing a specified amount for the
environmental change;

The CVM survey must clearly specify by which mechanism this payment
will be made (for example, it could be a one-time donation to a fund; or it
could be a surcharge in monthly utility bills);

The survey must create confidence that the stated payment will in fact be
used for the purpose described in the survey. If respondents do not
believe their contribution will be used for the stated purpose, they may
under-state their true willingness-to-pay;

The survey should include validation questions to verify comprehension
and acceptance of the scenario, and to elicit socioeconomic and attitudinal
characteristics of respondents, in order to better interpret variation in
responses across respondents;

Survey design, survey implementation, and the analysis of survey results
must be conducted by individuals with expertise in conducting CVM study.





74
Chapter 8

Benefits transfer methodology

8.1 When to use this methodology

In a large number of circumstances, it is argued that there is not enough time or
resources to proceed with a full-scale study to measure the economic value of
the environmental impacts of the project. A key question is then asked: Would it
not be possible to use estimated economic values from some other existing
studies and apply these estimated values to our case?

The benefit transfer methodology is used to estimate economic values of
environmental goods or services by transferring available information from
studies already completed in other sites and using these values to the problem
under examination.

The benefits transfer methodology is often used when it is too expensive or there
is too little time available to conduct an original valuation study, yet some
measure of benefits is needed.

8.2 How to use this methodology

The benefits transfer methodology will never yield better estimates than original
(primary) studies. However, it may quickly provide some estimates which may be
sufficient to make some decisions. A key objective should therefore be to
increase the reliability of the estimated environmental costs and benefits based
on numbers from studies done elsewhere, and at a previous time.

Step 1:
Identify as precisely as possible the change in environmental quality which may
result from the project during both its construction phase and operation phase.
The nature of this expected change in environmental quality and its potential
impact on the delivery of environmental goods and services which will guide the
research of similar studies which may already have been done elsewhere.

Step 2:
Once the changes in environmental quality have been clearly identified, the
second step is to identify existing studies or values which have already been
conducted on similar types of changes in environmental quality, or to measure
similar economic values.

For this purpose, existing database of economic valuation studies may be of
great use. Two such extensive electronic databases can currently be used:


75
http://www.evri.ca

The Environmental Valuation Reference Inventory (EVRI) is a searchable
database of empirical studies on the economic value of environmental benefits
and human health effects.
16
It has been developed specifically for the purpose of
using the benefits transfer methodology. It contains in excess of 1,500 studies.
Each study is summarized by topic, by area, by method, and by results. It is
however accessible only to subscribers.

http://envirovaluation.org/

This website, entitled Environmental valuation and cost-benefit news, is
perhaps the most extensive source of information on the web on empirical
economic valuation studies and cost-benefit analysis. It covers thousands of
economic valuation and cost-benefit studies throughout the world. It does not
however attempt to summarize and compile these studies specifically for the
purpose of conducting benefits transfer as does the EVRI database.

Step 3:
Once relevant studies have been identified, the third step is to decide whether or
not the economic values found in those studies can reliably be used and
transferred to the site of interest. A key issue is whether or not the impacted site
by the project shares a sufficient number of characteristics with the sites found in
existing studies.

Step 4:
The final step is to proceed with the transfer of values. Three approaches may be
used to do so.

8.2.1 Transfer without adjustment

The easiest and quickest way to proceed is to take the estimated economic
values in other studies and to apply them without any forms of adjustment to the
site under study. Needless to say, such benefits transfer may yield substantial
errors since one may expect economic values to be different as a result of at
least different impacted population (different level of income, different level of
education, age, etc.), ad well as different site characteristics.



16
EVRI is the outcome of a collaboration between Environment Canada, the United States
Environmental Protection Agency, the United Kingdom Department of Environment, Food, and
Rural Affairs, the New South Wales Department of Environment & Climate Change, and the
France Ministere de lEcologie, du Developpement et de lAmenagement Durables.
76
8.2.2 Transfer with income adjustment

Since estimates of economic values are known to depend on level of income,
then it is occasionally possible to proceed with transfer while adjusting for
possible differences in the levels of income. The proper way to perform this
adjustment is:

B
P
= B
E
(Y
P
/ Y
E
)
e

where B
P
stands for the estimated benefit for the site impacted by the project; B
E

is the estimated benefits in existing studies; Y
P
and Y
E
are income per capita for
the population impacted by the project and the population in existing studies
respectively, and e is the income elasticity of the benefits. If it is assumed that
income elasticity is equal to 1, then the adjustment in the economic values is
simply in proportion of the differences in per capita income.

8.2.3 Benefit function transfer

In a number of circumstances, it may be possible to adjust the economic values
not only for differences in income, but also for differences in other variables such
as the different levels of education between the populations, and the different
levels of age (for example). Since more variables are taken into consideration,
the benefit function transfer approach is likely to yield better results in terms of
estimating economic values for the site of interest based on other studies.

In order to do so, the proper approach is to estimate the determinants of the
environmental costs or benefits in existing studies. Such analysis should
normally be provided in these existing studies. Suppose for example that in
existing studies it is found that:

B
E
=
0
+
1
INCOME
E
+
2
AGE
E
+
3
EDUCATION
E

In this equation, the value of the coefficients indicate by how much B
E
changes
when INCOME or AGE or EDUCATION changes by 1 unit.

Then upon knowing the level of income, age, and education of the population
impacted by the project, one can estimate B
P
using the coefficients estimated
from the existing studies.

77
8.3 Strengths and limitations

8.3.1 Strengths

Benefit transfer is generally less costly and less time-consuming than
other economic valuation methodologies;

The method can be used to obtain gross approximations of what could be
the possible extent of the environmental costs or benefits and may be
used to indicate whether or not it could be worthy to proceed with an
original study;

8.3.2 Limitations

The benefit transfer methodology may not yield accurate benefits of the
environmental costs and environmental benefits since the site under study
will never be exactly the same as the sites from which benefit or cost
numbers are being transferred from;

If the original studies from which benefit or cost numbers are being
transferred from are not good or reliable, then the methodology will not
yield reliable estimates of the environmental costs and benefits for the site
under study;

8.4 Recommendations to project initiators

Identify as precisely as possible the change in environmental quality which
may result from the project during both its construction phase and
operation phase;

Identify existing studies which have already been conducted on similar
types of changes in environmental quality, or to measure similar economic
values;

Discuss clearly the similarities and differences between the sites found in
existing studies and the site impacted by the project;

Proceed with benefits transfer and discuss clearly whether the actual
economic values may be higher or lower than the values thus estimated.




78















PART C

SUMMARY OF RECOMMENDATIONS





















79
Chapter 9

Summary of recommendations

In these Guidelines on the Economic Valuation of the Environmental Impacts of
Prescribed Activities, the conceptual framework as well as specific
methodologies were presented to undertake the economic valuation of the
environmental impacts of projects, or in other words to estimate the
environmental costs and environmental benefits of the project. As indicated in the
Handbook of Environmental Impact Assessment Guidelines, such economic
valuation remains a key objective of the EIA process in Malaysia.

As pointed out, the choice of which methodology to use when undertaking the
economic valuation of environmental impacts is dictated by the nature of the
expected impacts and its resulting effect on the ways by which human beings
use the goods and services produced by the environment.

As indicated at the outset, these Guidelines aim to provide practical advice to
project initiators on the topic of economic valuation of a projects environmental
impacts. In doing so, it is understood that the expertise to undertake and review
such economic valuation is currently limited but is expected to increase with
experience. It is also understood that in some circumstances, the lack of time or
resources may impede the undertaking of the economic valuation of
environmental impacts. Finally, it is also understood that the economic valuation
methodologies presented in these Guidelines vary considerably in terms of the
required technical and economic expertise for their proper implementation. As
indicated in Table 9.1, while some economic valuation methodologies may be
relatively easy to implement, others require a significant degree of expertise.

80
81
Table 9.1
Technical and economic expertise required

Required economic expertise
Required
scientific or
technical
expertise
Low Medium High
Low

Cost of illness

Hedonic pricing Travel cost
Contingent
valuation
Medium Replacement
cost methodology
Averting and
mitigating
expenditure
Benefit-transfer
High

Change of
productivity



Along with project initiators, DOE must therefore assess in each specific case,
the extent to which efforts must be undertaken to proceed with the economic
valuation of the projects environmental impacts. At the outset, methodologies
requiring low economic and technical expertise will be a clear requirement.

Table 9.2 presents a summary of all recommendations made in these Guidelines.











Table 9.2
Summary of recommendations

Recommendations to Project Initiators
Chapter 3: Approaching the economic valuation of environmental impacts: Issues of common interest
The scope of analysis Aim first to identify the environmental impacts of the project, not to select the geographical
scoping of the project;

Group the environmental impacts (both positive and negative) into those occurring: (1) Within the
local community where the project is located; (2) On other local communities within the state
where the project is located; and (3) On other states of Malaysia;

Identify clearly the groups of individuals who may be excluded from the process of identifying,
quantifying, and monetizing the environmental impacts of the project.
The scenario of
reference
In order to identify and quantify the extent of the projects environmental impacts, project
initiators should clearly specify and compare the following two scenarios:

Scenario 1: Expected changes in environmental quality and the associated environmental
impacts if there were to be no project (without project scenario)

Scenario 2: Expected changes in environmental quality and the associated environmental
impacts if there were to be a project (with project scenario)
Inflation Conduct the economic evaluation of the projects environmental impacts in terms of real prices;

Do not incorporate in the economic valuation of the projects environmental impacts changes in
prices solely caused by inflation;

As a level of reference, use the level of prices as observed at the time of preparing the EIA
report.
The discount rate Present the undiscounted stream of environmental costs and environmental benefits of the
project, in each of the period in these the costs and benefits are taking place (Table 3.1);

82
Discount rates ranging from 3% to 8% should be used to calculate the present value of the
environmental costs and of the environmental benefits.

Calculate and display the present value of the environmental costs and environmental benefits
using a discount rate ranging from 3% to 8% (Table 3.2);

The economic valuation of environmental impacts does not a cost-benefit analysis. As such, the
calculation of the net present value (present value of benefits minus present value of costs) is
not of direct relevance to this analysis.
The selection of the
time horizon
The appropriate time horizon to select should coincide with the expected duration (in time) of the
environmental impacts of the project;

If some environmental impacts are expected to be of a temporary nature (for example, during the
construction phase of the project), then for these impacts the appropriate time horizon to select
is the number of years these impacts are expected to last;

If some environmental impacts are expected to be permanent, then using a time horizon of
between 30 to 50 years is generally sufficient to provide an adequate estimate of the present
value of these impacts.
Sensitivity analysis Provide a range for the present value of environmental costs and the present value of
environmental benefits depending on different assumptions as to the impact of the project on the
environment.
Chapter 4: Introduction to the methodologies for economic valuation
Identify all environmental impacts of the project;

Assess which data is currently available in order to quantify the environmental impacts (changes in physical terms);

Given the nature of the available data, determine which methodology is best to use to undertake the economic valuation of the
environmental impacts;

Depending on the selected methodology, proceed with (additional) data collection if necessary.

Ensure that the team of experts is appropriate to the task at hand and that the economist is a member of the team from the very
83
outset of the EIA process to ensure that the data necessary for purpose of economic valuation is indeed collected.
Chapter 5: Change of productivity methodology
Estimate the existing annual level (on average) of productivity (by means of time series data over the last 5 years
approximately);

Establish what may be expected to happen to the future level of productivity if there were to be no project (one possible scenario
(hypothesis) is that the future level of productivity would be equal on average to the recently observed level of productivity). This
is the without project scenario;

Establish what may be expected to happen to the future level of productivity if there were to be a project. This is the with project
scenario;

Indicate clearly if the impacts are expected to be temporary (for example occurring only during the construction phase of the
project) or permanent. If temporary, indicate clearly for how many years the impacts are expected to occur, and how productivity
(in quantitative terms) is expected to recover over time to the level that is expected to exist without project;

Estimate the impact on productivity by calculating the difference between the without project and with project scenarios;

Construct alternative scenarios including a worst case scenario (where appropriate) to give a possible range of the impact of the
project on productivity (sensitivity analysis).

Collect information about recent and existing market prices for the commodity whose productivity is impacted, as well as for the
inputs necessary to the production of this commodity (e.g. labor, machinery, etc.);

Before using market prices, adjust these prices at least for the presence of taxes, and if possible of subsidies and any other
policies which may impact market prices;

Calculate the net economic value of the change (decrease or increase) in productivity per unit of output (for example, per
kilogram or ton of product; or per hectares of lost agricultural land);

Multiply the net economic value per unit of output by the total estimated quantity of lost (or gained) output in any given year;

Calculate the present value of the change in productivity using a discount rate ranging between 3% and 8%;
84

Given the outcome of the sensitivity analysis, give a possible range for the estimated economic value of the change in
productivity.
Chapter 6: The replacement cost methodology
Implement the replacement cost methodology to assess the economic value of the goods and services produced by the
environment only when there is sufficient evidence that society does value and would be willing-to-pay for the continued
provision of these goods and services by alternative means of production;

When identifying alternative means of production, ensure that exactly the same good or service is going to be produced by this
alternative means of production as is currently produced by the environment;

Assess the least cost of providing the same goods or services as currently produced by the environment.
Chapter 6: The defensive expenditure methodology
Implement the defensive expenditure methodology in cases where there is evidence that individuals may undertake defensive
activities to protect themselves against the adverse health impacts of changes in environmental quality;

Identify as precisely as possible the change in environmental quality which may result from the project during both its
construction phase and operation phase;

Identify in terms of both area and numbers, the population which may experience the change in environmental quality;

Identify the nature of the activities which may be undertaken by individuals to avoid exposure to the degraded environmental
quality, and the costs of undertaking these measures. Such assessment may be undertaken for the entire population being
exposed, or it may be assessed on the basis of a representative sample, and then extrapolated to the entire exposed
population.
Chapter 6: Cost of illness methodology
Implement the cost of illness methodology in cases where there is evidence that individuals seek treatment for illnesses directly
associated with changes in environmental quality such as air pollution, water pollution, exposure to toxic compounds, etc.;

Identify as precisely as possible the change in environmental quality which may result from the project during both its
construction phase and operation phase;

85
Identify in terms of both area and numbers, the population which may experience the change in environmental quality;

Identify the nature of the activities which may be undertaken by individuals to treat illnesses if they were exposed to the
degraded environmental quality, and the costs of undertaking these measures. Such assessment may be undertaken for the
entire population being exposed, or it may be assessed on the basis of a representative sample, and then extrapolated to the
entire exposed population;

Remember that the cost of illness methodology requires that subsidies paid by the government for the treatment of illnesses
also be included in the calculation of the cost of illness
Chapter 6: Hedonic pricing methodology
Identify as precisely as possible the change in environmental quality which may result from the project during both its
construction phase and operation phase;

Identify in terms of both area and numbers, the population which may experience the change in environmental quality and the
types of properties where this population in which this population is currently living;

Assess the potential changes in market values which on average each of these properties could experience as a result of the
change in environmental quality, and on this basis assess the potential aggregate change in market value on impacted property;

Conduct sensitivity analysis.
Chapter 6: Travel cost methodology
Identify as precisely as possible the change in environmental quality which may result from the project during both its
construction phase and operation phase;

Identify whether or not a recreational site may be impacted as a result of the project;

If use of the site may be severely impaired by the project, use the zonal or individual travel cost approach; if changes in
environmental quality will impact enjoyment of the site, use the random utility approach;

Document in a careful manner the existing use of the recreational site, and the characteristics of the existing population of
visitors;

In all cases, ensure that the sample of actual or potential visitors to the site is truly representative of the population of visitors;
86

Survey formats should be developed and pre-tested before full implementation;

A team of surveyors should be put in place with appropriate training in the survey conduct;

Present the results of the analysis in a detailed and clear manner.
Chapter 7: The contingent valuation methodology
Identify as precisely as possible the change in environmental quality which may result from the project during both its
construction phase and operation phase;

Conduct focus group discussions with appropriate stakeholders to understand in greater details how people understand the
nature of the goods or services which may be impacted by a change in environmental quality;

Determine both the appropriate nature of the sample, as well as the sample size large enough to yield credible and significant
results. Simultaneously, determine whether to conduct in-person interviews, telephone surveys, or mail surveys. If resources
allow, in-person interviews are preferable to telephone or mail surveys. If resources do not allow, then telephone surveys are
generally preferred (if there is no need for visual aid while conducting the survey);

Prepare a draft of the survey and conduct comprehensive pre-testing of the survey to ensure that respondents understand all
questions. The survey must be clear, and the respondents must fully understand the nature of the problem they are asked to
consider. When appropriate, this may be done using photographs, videos, or other multi-media techniques, as well as written
and verbal descriptions;

In general, when actually eliciting the willingness-to-pay, it is preferable to use the close-ended approach in which respondents
are asked whether or not (Yes or No) they would be willing a specified amount for the environmental change;

The CVM survey must clearly specify by which mechanism this payment will be made (for example, it could be a one-time
donation to a fund; or it could be a surcharge in monthly utility bills);

The survey must create confidence that the stated payment will in fact be used for the purpose described in the survey. If
respondents do not believe their contribution will be used for the stated purpose, they may under-state their true willingness-to-
pay;

87
The survey should include validation questions to verify comprehension and acceptance of the scenario, and to elicit
socioeconomic and attitudinal characteristics of respondents, in order to better interpret variation in responses across
respondents;

Survey design, survey implementation, and the analysis of survey results must be conducted by individuals with expertise in
conducting CVM study.
Chapter 8: The benefit transfer methodology
Identify as precisely as possible the change in environmental quality which may result from the project during both its
construction phase and operation phase;

Identify existing studies which have already been conducted on similar types of changes in environmental quality, or to measure
similar economic values;

Discuss clearly the similarities and differences between the sites found in existing studies and the site impacted by the project;

Proceed with benefits transfer and discuss clearly whether the actual economic values may be higher or lower than the values
thus estimated.
88









References cited in these Guidelines

Bolt, K., Ruta, G., and M. Sarraf (2005), Estimating the Cost of Environmental
Degradation, Environment Department Papers, The World Bank, Washington,
D.C.

Daily, G.C. (1997), Introduction: What are ecosystem services? In G.C. Daily
(eds) Natures Services: Societal Dependence on Natural Ecosystems, Island
Press, Washington, D.C.

Freeman, M. A. III (2003), The Measurements of Environmental and Resource
Values: Theory and Methods, Resources for the Future, Washington, D.C.

Gollier, C. (2002), Discounting an uncertain future, Journal of Public
Economics, 85, 149-166.

Postel, S.L, and S. Carpenter (1997), Freshwater ecosystem services. In G.C.
Daily (eds) Natures Services: Societal Dependence on Natural Ecosystems,
Island Press, Washington, D.C.

Turner, R.K. van den Bergh, J.C.M., Sodenqvist, T. Barendregt, A., van der
Straaten, J., Maltby, E., and E.C. van Ierland (2000), Ecological-economic
analysis of wetlands: Scientific integration for management and policy,
Ecological Economics, 35, 7-23.

Weitzman, M. L. (1998), Why the far distant future should be discounted at its
lowest possible rate, Journal of Environmental Economics and Management,
36, 201-208.

89
Additional References

There exist a very large number of documents on the economic valuation of
environmental impacts. We provide below a short list of references which the
interested reader may wish to consult for further and more detailed information.

Dixon, J.A., Scura, L.F., Carpenter, R.A., and P.B. Sherman (1995), Economic
Analysis of Environmental Impacts, Earthscan Publications Ltd, London.

Hutton, G, and L. Haller (2004), Evaluation of the Costs and Benefits of Water
and Sanitation Improvements at the Global Level, World Health Organization,
Geneva.

McNally, R., and M.S. Othman (2002), Environmental Economics: A Practical
Guide, WWF, United Kingdom.

National Research Council (2005), Valuing Ecosystem Services: Toward Better
Environmental Decision-Making, National Academy of Sciences, National
Academies Press, Washington, D.C.

Pearce, D., Atkinson, G., and S. Mourato (2006), Cost-Benefit Analysis and the
Environment: Recent Developments, Organisation for Economic Co-
Operation and Development, Paris.

United Nations Environment Program (2000), Environmental Valuation: A
Worldwide Compendium of Case Studies, J. Rietbergen-McCracken and H.
Abaze (eds), Earthscan Publications Ltd, London.


90
Websites of interest

http://envirovaluation.org/

This website, entitled Environmental valuation and cost-benefit news, is
perhaps the most extensive source of information on the web on empirical
economic valuation studies and cost-benefit analysis. It covers thousands of
economic valuation and cost-benefit studies throughout the world.


http://www.evri.ca

The Environmental Valuation Reference Inventory (EVRI) is a searchable
database of empirical studies on the economic value of environmental benefits
and human health effects. It has been developed specifically for the purpose of
using the benefits transfer methodology. It contains in excess of 1,500 studies.
Each study is summarized by topic, by area, by method, and by results. It is
however accessible only to subscribers.


http://yosemite.epa.gov/ee/epa/eed.nsf/webpages/homepage

This is the website of the National Center for Environmental Economics of the
U.S. Environmental Protection Agency.


http://noep.mbari.org/nonmarket/

This is the website of the U.S. National Ocean Economics Program. It reviews
applications of economic valuation methodologies to ocean activities, in particular
recreational activities.


http://www.csc.noaa.gov/coastal/economics/envvaluation.htm

This is the website of the Coastal Services Centre of the National Oceanic and
Atmospheric Administration. It provides good general readings on environmental
valuation.



91
Glossary

Benefits transfer methodology
The benefits transfer methodology estimates economic values by transferring
existing benefit estimates from studies already completed for another location
or issue.

Bequest value
The value that people place on knowing that future generations will have the
option to enjoy something.

Consumer surplus
The difference between the price actually paid for a good, and the maximum
amount that an individual is willing to pay for it.

Contingent valuation methodology (CVM)
A method, usually in the form of a survey questionnaire, of eliciting values for
environmental goods and services based upon hypothetical situations. CVM
may be the only means of estimating the passive or non-use values for
environmental goods/services.

Defensive expenditures methodology
The defensive expenditures methodology uses the calculation of defensive
expenditures to prevent the degradation of an environmental good/service or
the quality of that good/service in order to determine the value of a particular
environmental good or service such as air or water quality.

Demand curve
The graphical representation of the demand function.

Demand function
The mathematical function that relates price and quantity demanded for goods
or services. It tells how many units of a good will be purchased at different
prices. The market demand function is calculated by adding together all of the
individual consumers demand functions.

Discount rate
The rate used to reduce future benefits and costs to their present time
equivalent.

Existence value
The value that people place on simply knowing that something exists, even if
they will never see it or use it.

92
Hedonic pricing methodology
The hedonic pricing methodology assesses the value of an environmental
feature (clean air, clean water, serenity, view) by examining actual markets
where the feature contributes to the price of a marketed good. For example,
using the hedonic pricing method one could determine the contribution of an
ocean view, by looking at the contribution of ocean views to property values.
The contribution of the environmental good is usually determined by a
regression of the price of the marketed good on attributes of the good, including
the environmental attribute in question.

Non-use values
Values that are not associated with actual use, or even the option to use a good
or service.

Opportunity cost
The value of the best alternative to a given choice, or the value of resources in
their next best use. In regard to time, the opportunity cost of time spent on one
activity is the value of the best alternative activity that the person might engage
in at that time.

Option value
The value that people place on having the option to enjoy something in the
future, although they may not currently use it.

Producer surplus
The difference between the total amount earned from a good (price times
quantity sold) and the production costs.

Random utility model (RUM)
RUM is a model of consumer choice in which the consumer is assumed to have
perfect discrimination capability between goods or activities in order to
maximize their 'utility'. It is generally used in the context of the travel cost
methodology.

Revealed preferences
Revealed preferences is an approach that is used to identify the underlying
preferences, and thus demands of individuals, based upon the choices each
reveals in their consumption.

Regression analysis
A statistical process for fitting a line through a set of data points. It gives the
intercept and slope(s) of the best fitting line. Thus it tells how much one
variable (the dependent variable) will change when other variables (the
independent, or explanatory, variables) change.


93
Stated preferences
Stated preferences methodologies use discrete choice methods to model
stated preferences for alternative goods or environmental scenarios. Stated
and revealed preference methods may be combined.

Supply curve
The graphical representation of the supply function.

Supply function
The mathematical function that relates price and quantity supplied for goods or
services. The supply function tells how many units of a good that producers
are willing to produce and sell at a given price.

Total economic value the sum of all types of use and non-use values for a
good or service.

Travel cost methodology
The travel cost methodology estimates economic values associated with
ecosystems or sites that are used for recreation. It assumes that the value of a
site can be deduced from how much people are willing to pay to travel to visit
the site.

Use value
Value derived from actual use of a good or service. Uses may include indirect
uses. For example, enjoying a television show about whales provides an
indirect use value for the whales.

Willingness to pay
The amountmeasured in goods, services, or dollarsthat a person is willing
to give up to get a particular good or service.

94
Annex 1
Penang National Park travel cost survey

Survey ID Number: ____________________

Name of the Enumerator: ____________________

Date: Day:_______; Month: _______

Start Time: ___:___



Verbal Agreement
Tourist Survey for Penang National Park


Good morning [afternoon].

My name is [_____].

As you may know, Penang National Park was created in 2003, and it is the most recent national
park created in Malaysia. The Park authorities are currently in the process of finalizing the Parks
development plan, and it is in this context that we would welcome your comments and
suggestions. I am working with a team of researchers and our purpose is to get a better
understanding of the profile of the visitors coming to Penang National Park.

We are interviewing both national and international visitors to the Penang National Park, and you
have been selected just by chance. If you wish to stop the interview or do not wish to answer a
specific question, this is entirely up to you.

All the information you provide will be strictly confidential. Your name or address will
never be requested in the course of this survey.

The interview will take about 20 minutes.

Would you be willing to be interviewed? (If no, sorry. stop the interview)





95
Section 1: Trip Origin and Frequency

Question 1 What is your citizenship?

Malaysia: _____ Other: __________________________

Question 2 Where do you currently live?

2A: If Malaysia, which state of Malaysia? ____________________

2B: If not Malaysia, which country? ____________________

Question 3 Are you currently visiting Penang or do you have a residence in Penang?

Visitor: _____ Resident: _____

If visitor, go to Question 4. If resident, go to Question 5.

Question 4 How many times have you visited Penang?

1 time:_____ More than 1 time: _____

4A: If more than 1 time: How many times in the last 3 years: _____

Question 5 How many times have you visited Penang National Park?

1 time:_____ More than 1 time: _____

5A: If more than 1 time: How many times in the last 3 years: _____


If visitor to Penang, go to Section 2.

If resident of Penang, go to Section 3.


96
Section 2: Trip duration and Travel costs

This section shall be completed only for visitors to Penang


Question 6 In the course of this trip, are you visiting Penang only or are you also visiting
other parts of Malaysia or are you also visiting other countries of South East
Asia?

Penang only: _____

Malaysia only: _____ Also other parts of South East Asia: _____

If also visiting other parts of South East Asia, go to Section 2A.

If visiting Malaysia only, go to Section 2B.

If visiting Penang only, go to Section 2C.


Section 2A: Also visit other parts of South East Asia

Question 7

7A What is the point of origin of your current trip to South East Asia?
________________

7B Which other parts of SE Asia are you visiting?
______________________________

7C What is the duration of your entire trip to SE Asia (number of days)?
______________

7D In Malaysia, in addition to Penang, are your visiting other parts of Malaysia?
______

If yes, go to Question 8. If no, go to Question 9.

Question 8

8A Which other parts of Malaysia are you visiting? _________________________

8B How many days are you spending in total in Malaysia, including Penang?
_________

Question 9 How many days are you spending in Penang? __________


Question 10 For this trip to South East Asia, did you buy a package tour including airfare and
accommodations, or did you buy airfare separately from accommodations?
97
____________________

If airfare separate from accomodations, go to Question 11.
If package tour, go to Question 14.

Question 11

11A What is the total airfare for this trip to South East Asia (note currency)?
__________

11B From which city did you travel to Penang? _____________________

11C How did you come from [ city mentioned above ] to Penang?
_____________________

If by plane go to Question 12. If other means of transport go to Question 13.

Question 12

12A Was the airfare from [city mentioned above] to Penang included in the overall
airfare of your trip to South East Asia? _____

If included, do you know by how much your airfare increased because of your
trip to Penang?

Dont know: _____; If know, write down the amount: ________

If not included, what was the airfare from [city mentioned above] to Penang?
__________

Question 13

13A What was the total cost of transport from [city mentioned above] to Penang?
__________

13B How much time did it take to perform this trip? ___________


Question 14

14A What does the package tour include?

Airfare: _____; Accommodation: ____; Food: _____; Other (list):
__________________

14B What is the total cost of the package tour (note currency)? ______________

14C Do you know by how much the cost of your package tour increased because of
your trip to Penang?

Dont know: _____; If know, write down the amount: ________
98
Go to Section 3


Section 2B: Visit Malaysia only

Question 15

15A What is the point of origin of your current trip to Malaysia? ________________

15B In addition to Penang, which other parts of Malaysia are you visiting?
__________________________________________

15C What is the duration of your entire trip to Malaysia (number of days)?
______________

15D How many days are you spending in Penang? ___________________

Question 16 For this trip to Malaysia, did you buy a package tour including airfare and
accommodations, or did you buy airfare separately from accommodations?
____________________

If airfare separate from accomodations, go to Question 17.
If package tour, go to Question 20.

Question 17

11A What is the total airfare for this trip to Malaysia (note currency)? __________

11B From which city did you travel to Penang? _____________________

11C How did you come from [ city mentioned above ] to Penang?
_____________________

If by plane go to Question 18. If other means of transport go to Question 19.

Question 18

18A Was the airfare from [city mentioned above] to Penang included in the overall
airfare of your trip to Malaysia? _____

If included, do you know by how much your airfare increased because of your
trip to Penang?

Dont know: _____; If know, write down the amount: ________

If not included, what was the airfare from [city mentioned above] to Penang?
__________

Question 19

99
19A What was the total cost of transport from [city mentioned above] to Penang?
__________

19B How much time did it take to perform this trip? ___________


Question 20

20A What does the package tour include?

Airfare: _____; Accommodation: ____; Food: _____; Other (list):
__________________

20B What is the total cost of the package tour (note currency)? ______________

20C Do you know by how much the cost of your package tour increased because of
your trip to Penang?

Dont know: _____; If know, write down the amount: ________


Go to Section 3


Section 2C: Visit Penang only

Question 21 How many days are you spending in Penang? _________________

Question 22

22A From which city did you travel to Penang? ______________________

22B How did you travel to Penang? ________________________________

22C How many hours did it take to travel to Penang? __________________

Question 23 For this trip to Penang, did you buy a package tour including transport and
accommodations, or did you buy transport separately from accommodations?
____________________

If transport separate from accomodations, go to Question 24.
If package tour, go to Question 25.

Question 24

24A What is the total transport cost for this trip to Penang (note currency)?
__________

24B What is the total cost of accomodations for this trip to Penang (note currency)?
________
100

24C Does the total cost of accomodations include meals? ________

24D If no, what would be your best estimates of the total cost of meals while in
Penang? ______________

Question 25

25A What does the package tour include?

Airfare: _____; Accommodation: ____; Food: _____; Other (list):
__________________

25B What is the total cost of the package tour (note currency)? ______________

25C If the package tour does not include meals, what would be your best estimates of
the total cost of meals while in Penang?
___________________


Section 3: Current trip to the Penang National Park

Question 26 Where are you currently staying in Penang? _____________________________

Name of accomodations: ____________________________________________

Question 27

27A Are you coming alone today to visit Penang NP? ____________

27B If no, how many people in your group, including yourself? ___________

Question 28 How long do you intend to spend at the National Park?

One day: _____; Half day: _____; More than one day: _____

If more than one day, how many days: _____

Question 29 What activities do you want to undertake in Penang NP?

Enjoying natural beauty and climate: _____; Swimming / Beaching: _____;
Boating / Paddle boating: _____; Picnicking / BBQ: _____; Fishing: _____

Other (specify) ____________________________________________

Question 30 Is this trip to Penang NP organized by you or is it a part of a travel package
organized by a travel company or by your hotel? ________________________

If organized by travel company or hotel, go to Question 31.

101
If organized by tourist themselves, go to Question 32.

Question 31

31A What was the total cost of the package (note currency)? ____________

For how many people? ____________

31B. What was included in the package?

Transportation: _____; Accommodations in the park: _____; Meals /Beverages:
_____;
Boating / paddle boating: _____; Other (specify) _____________________

Question 32

32A What means of transportation did you use to get to this Park?
_________________

32B What is the cost of transportation? _________________

32C How long did it take to travel from your starting point to Penang NP?
____________

32D Did you buy some beverage or meals for your trip?________

32E If yes, how much did you spend on meals and beverage? __________


Section 4: Entrance fees

Question 33 In general, do you believe that national parks and other protected areas should be
allowed to request visitors to pay entrance fees to recover some of the costs of
maintaining the quality of the park?

No: _____; Yes: _____

Question 34 In addition to entrance fees, do you believe that national parks and other
protected areas should be allowed to request visitors to pay additional fees for
special activities such as boating, or camping?

No: _____; Yes: _____

Question 35 Would you find it surprising if there were no entrance fee to visit Penang NP?

No: _____; Yes: _____

102
Question 36 Assume that there was an entrance fee to use the Penang NP. This fee would not
include fees for boating or camping. It would simply give you the right to walk,
picnic, take pictures, and generally enjoy the natural beauty of the park. The
entrance fee would be per person, valid for one day.

I am going to list to you entrance fees. Please tell me if: (1) you would enter the
Park for sure; (2) you would probably enter the park; (3) you would probably not
enter the park; or (4) you would surely not enter the park.

Entrance fee
Per person (RM)
Will enter
for sure
Will
probably
enter
Will
probably not
enter
Will not
enter for
sure
0
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
25
30
40
50
75
100
150
200
400
600
800
1000



103
Section 5: Socio-economic Characteristics

Question 37

37A Gender of respondent: Male: _____ Female: _____

37B What is your age? Under 20: _____; 20 30: _____; 30 40: _____; 40 50:
_____;
Above 50 60: _____; Above 60: _____

37C Are you married? _____

37D How many people comprise your current household (including yourself)? ______

37E What is the highest level of education that you have completed? (Please
check one)
1. None: _____
2. Incomplete secondary school: _____
3. Completed secondary school: _____
4. Professional technical education: _____
5. Institute / University: _____
6. Postgraduate: _____

37F What kind of job(s) do you have? (List & check all that apply)
1. Management: _____
2. Large business owner: _____
3. Small business owner/ Retail sales: _____
4. Specialist /Professional: _____
5. Clerical: _____
6. Factory worker: _____
7. Farmer/Agricultural worker: _____
8. Unemployed: _____
9. Dont work (pensioner, student, housewife etc.): _____
10. Other (specify) ______________

Question 38

38A What would be the level of your household income?

RM per month
(if Malaysian)
USD
(per _______)
0 1000 0 1000
1000 2000 1000 2000
2000 3000 2000 3000
4000 5000 4000 5000
5000 7500 5000 7500
7500 10000 7500 10000
10000 15000 10000 15000
15000 20000 15000 20000
20000 30000 20000 30000
104
30000 40000 30000 40000
40000 50000 40000 50000
50000 75000 50000 75000
75000 100000 75000 100000
Greater than 100000 Greater than
100000






Section 6: Evaluation of the Site

Evaluation of Facilities:

Not satisfied
at all
Not satisfied Satisfied Very satisfied
Information centre
Parking area
Walking area
Hiking trails
Resting place (chairs,
tables)

Garbage bins
Signboards
Toilets
Camping
Cleanliness
Staff services


105
Section 7. Interviewer Debriefing Questions

1. Was the person who answered the questions irritated or nervous during the interview?
C Yes C No

2. Do you think that it was easy for the respondent to answer the questions concerning
number of visits regarding entrance fees and National Park level changes?
C Yes C No C NA/Missing

3. Was the person who answered the questions looking bored or tired during the interview?
C Yes C No

4. Are you certain that the interviewee was answering to the questions honestly and truly?

1 2 3 4 5
Very Moderately Neutral Moderately Very
Uncertain Uncertain Certain Certain

5. Who else was listening while you conducted this interview with the respondent? (Check
all that apply)
C No one
C Spouse
C Other adult family members
C Other adults
C Children
Other (specify) ________________________



Time finished: ____ : ____

Data entry operator ______________






106
Annex 2
Lake Sevan contingent valuation survey

Verbal Agreement


Enumerator Survey for Lake Sevan Economic Valuation Project



(Read) My name is _____, and I am working with a team of researchers investigating the
environmental, cultural and historical benefits of Lake Sevan. We are interested in understanding
how people feel about Lake Sevan.
We are interviewing many different households in Yerevan, the Lake Sevan area and in other
areas of Armenia. We are also planning to survey those of the Diaspora in USA and France.
Your household was selected just by chance.
If you wish to stop the interview or do not wish to answer a specific question, this is entirely up to
you. All the information you provide will be strictly confidential.
The interview will take about 30-40 minutes.


Are you willing to be interviewed? (If no, sorry. stop the interview)


Can you make decision on your household expenditures? (If no, sorry. stop the interview)















107
ID#
________________
Name of the Enumerator: ____________________ Date: ___/___/___
Location: ____________________ Cluster: _______ Start Time: ___:___


Introduction

As you may know, the quality of Lake Sevan is deteriorating. Lake Sevan and its resources are
currently deteriorating from an environmental and recreational perspective. In the last 50 years,
the level of the lake dropped by 18 m. Its' surface area has decreased significantly and the volume
of water in Lake Sevan fell by more than 40%, and there is a possibility that the level of water
will continue to decline in the coming years.

1. Were you aware that the level of water in Lake Sevan has decreased so much in
the past? C Yes C No 99. I am not sure

A key research issue to us is understanding exactly how much Lake Sevan means to the
Armenian people from a historical, cultural and recreational perspective, and how much Armenia
people support for protecting the lake.

In the following, we would like to ask you questions about your views on Lake Sevan protection
and your willingness to support for a Lake Sevan Protection Plan. For our analyses, we also
would like to have some information about your household as well as your recreational use of
Lake Sevan in the past and in the future.


I. Environmental Attitudes and Perceptions

2. The next question is about your views on Armenian priorities. Suppose the
Government of Armenia got enough money to help with three of the following
problems: (Show the list)

(1) Stabilizing the economy
(2) Unemployment
(3) Social protection programs
(4) Health care
(5) Education
(6) Water supply
(7) Roads / Public transportation
(8) New housing / Housing maintenance
(9) Environmental Issues
(10) Problems of Lake Sevan
(11) Other (specify) ________________________________

2.1. Which of these problems is the most important to solve first? # ______ 99.
Dont know
108
2.2. Which of these problems is the most important to solve second? # ______99.
Dont know
2.3. Which of these problems is the most important to solve third? # ______ 99.
Dont know

3. Have you ever heard about any environmental issues in Armenia on TV, the
radio, newspapers, magazines, or by community groups in the past 12 months?
C Yes
C No (Skip to question 6)
99. I am not sure (Skip to question 6)

4. If YES, how often (Please list & check one):

C __ A few times (1-5) C __ More than 20 times
C __ Several times (6-10) 99. __ I dont know
C __ Many times (11-20)

5. If YES, what were the issues you recall being most often discussed?
__________________________________________________________________
__________________________________________________________________
____________

6. Which three of the environmental issues listed below do you consider to be the
most significant in your area?

C __ Water pollution and lack of treatment of wastewater
C __ Loss of forests and wildlife
C __ Solid waste disposal and poor garbage collection
C __ Air pollution caused by cars
C __ Air pollution caused by factories
__ Nuclear radiation
C __ Soil contamination
__ Toxic waste
__ Other (specify) ____________________________

6.1. First? # ______ 99. Dont know
6.2. Second? # ______99. Dont know
6.3. Third? # ______ 99. Dont know

(Read) For each of the following statements, please indicate your opinion on a scale of
'strongly agree' to 'strongly disagree'. (Please circle one)

109
7. If harming the environment, any Armenian economic or social development
programs should be pursued only if the program has a detailed mitigation plan for
environmental impacts.

1 2 3 4 5 99
Strongly
disagree
Disagree Neutral Agree Strongly
agree
Dont
Know

8. No matter what the environmental damages may be, Armenia needs to exploit its
natural resource base such as forests, water and land to increase jobs and incomes.

1 2 3 4 5 99
Strongly
disagree
Disagree Neutral Agree Strongly
agree
Dont
Know

9. We, as Armenians, should sacrifice some of our income and standard of living so
that the next generation may benefit from a better environment.

1 2 3 4 5 99
Strongly
disagree
Disagree Neutral Agree Strongly
agree
Dont
Know

10. If I were asked to contribute money or time to environmental protection programs
in Armenia, I would.

1 2 3 4 5 99
Strongly
disagree
Disagree Neutral Agree Strongly
agree
Dont
Know

11. I believe it is up to the Government of Armenia to solve environmental problems
in Armenia.

1 2 3 4 5 99
Strongly
disagree
Disagree Neutral Agree Strongly
agree
Dont
Know

12. Endangered or threatened species have a right to exist even though they may be of
no use to mankind.

1 2 3 4 5 99
Strongly
disagree
Disagree Neutral Agree Strongly
agree
Dont
Know


110
II. Lake Sevan Action Plan

While dealing with its severe economic situation, the government of the Republic of Armenia
recently expressed the interest to adopt a restoration plan using a number of actions to protect
Lake Sevan from further, and perhaps irreversible, degradation and to make an attempt at
improving the quality.

The plans actions currently under discussion include:
a. Limiting annual water releases to stabilize the level of the lake;
b. construction of the Vorotan Tunnel;
c. completion of the Yeghvard reservoir;
d. combinations of the above.

With different combinations of these actions, two targets which may be achieved are: 1)
stabilizing the level of the lake and preventing any further lowering of the water level; and 2)
raising the level of the lake by 3 meters in the next 15 years.
Without any action, the water level of the lake is predicted to drop by 2 meters more in the next
10 years.

13. Are you aware of this Plan?

1. Yes, I know a lot about the plan
2. I have heard about some issues, but dont know the details of the
proposal
3. No, I am not aware of this proposal

14. Do you think that, without any action, the value of Lake Sevan as an important
cultural heritage site for the people of Armenia would be significantly damaged?

1. Yes, very significantly
2. Yes, slightly
3. No, the value would not be damaged even with further water level
decrease 99. I am not sure

15. In your opinion, has the environmental condition of Lake Sevan been getting
better, getting worse, or staying the same, over the past five years?
1. Getting worse
2. Staying the same
3. Getting better
99. I dont know

16. Do you think that, if the water level of Lake Sevan is to be protected, there will be
less water for irrigation purposes today, but may be more water in the future?
C Yes C No 99. I am not sure

17. Do you think that, if the water level of Lake Sevan is to be protected, there will be
less water to produce energy along the Hrazdan river today, but may be more
water in the future?
111
C Yes C No 99. I am not sure

18. How often have you heard about environmental problems with Lake Sevan on
TV, the radio, newspapers, magazines, or by community groups in the last 12
months?
C __ Never
C __ A few times (1-5)
C __ Several times (6-10)
C __ Many times (11-20)
C __ More than 20 times
99. __ I dont know

19. Do you generate any income from the lake such as fishing or providing services to
tourists, etc.? C Yes C No 99. I dont know

20. Do you feel that protecting Lake Sevan is very important to you?

C Yes, very important
C Yes, important
C No, not very important (Skip to question 22)
C No, not important at all (Skip to question 22)

21. If YES, please tell me why. Please choose three answers from the following list.

C To use Lake Sevan for recreational purposes for my family
C Others to be able to use the lake for recreation
C To preserve the historical and cultural value of Lake Sevan
C To protect fish and animal habitats that rely on the lakes health
C To protect human health by the improvement of water quality
To stabilize water quantity for farm irrigation and hydroelectric use
C To protect Lake Sevan for future generations
Other reasons (specify): _______________________________
99. I dont know

21.1. First? # ______ 99. Dont know
21.2. Second? # ______99. Dont know
21.3. Third? # ______ 99. Dont know

22. If NO, please indicate below the statement that most closely reflects your
thinking.
C __ I do not think that the water quantity and quality issues are important
C __ I think that there are other more important problems that should be
addressed first
(specify):_________________________________________________
C __ Other reasons for saying no (specify):
______________________________
112

____________________________________________________________
99. __ I dont know

23. As for deciding on which action plan should be adopted, do you think its a good
idea to use a public referendum in Armenia?
C Yes C No 99. I am not sure


III. Contingent Valuation Questions: Willingness to Pay for Environmental
Improvements to Lake Sevan

Consequences of the Lake Sevan Protection Action Plan

We would like to know how strongly you may support a Lake Sevan Action Plan which
may introduce some cost to your household. Lets focus on the possible plan that targets
raising the water level of the lake by 3 meters in 15 years. To meet the target, actions may
include: 1. Limiting annual water releases in such a way so as to prevent a further
lowering of the lake, and 2. Constructing the Vorotan Tunnel.

I think you would like to know what are the consequences of a water level increase by 3 meters
before you make decision on whether to support such an action plan. The economy and the
ecosystem of the lake are too complex, however, to predict precisely the effects such a plan
would have.

(Show graph and picture)

Presented here is a general description of the possible consequences. A summary of the impacts
include:

A. There would be no further water level decrease
B. Water quality in the lake would be improved, benefiting fish and bird populations
C. The ecosystem of the lake would be improved and thus it would be better for recreational and
tourist activities
D. The commercial fishery could also be increased
E. More water is available after the increase of the lake level for agricultural irrigation and in
times of drought, and therefore agricultural output could be better protected
F. In the future, when necessary, the stock of water could be used for more energy generation

Costs of the Action Plan

Of course there would be a cost to Armenians in implementing this Lake Sevan Restoration
Action Plan. Some Armenians may be negatively affected by the two action options - limiting
water releases from Lake Sevan and constructing the Vorotan Tunnel. Financial support from
different groups of Armenians, such as households like yours, would be necessary. The
Armenian Diaspora outside Armenia would also be asked for financing this plan by making
donations.

113
Plan Implementation:

To implement such a plan, a Lake Sevan Trust Fund would be established. Citizens in Armenia
would be asked to pay a separate monthly bill (like telephone bill) for 3 years that would go
into the Trust Fund. The Fund's sole purpose would be to finance the efforts of the action plan
and would contribute all of the proceeds to the plan.

The Fund would be managed and administered by a Board of Governors comprising various
interest groups so as to minimize any possible bias and to create an atmosphere of trust. Although
this list is not exhaustive, the Board would at the very least consist of people form the Ministry of
Nature Protection, environmental and community groups from the USA, France and Armenia as
well as local residents of the Sevan basin area. Each member of the Board would have an equal
vote and there would not be any overriding veto power by any one individual in the Board, thus
there would be no overruling Chairman present in the Board. The activities of the Board would be
completely transparent and all the activities supported by the Fund would have to be approved by
a unanimous decision of the Board. You could thus have complete trust in the allocation of the
money toward protecting and restoring Lake Sevan.

[Do you have any questions? About any of the impacts, the costs, the Board of Governors etc.?]
114
Current situation Action Plan: No Action:
& No Change 3 meters Increase in 15 years 2 meters Decrease in 10 year

+ 1
0
- 1
Current status
- 1
Change (m)
Change (m)
0 0
+ 1 + 1
- 1
+ 3
+ 2
- 2
- 3
+ 2
+ 3
- 2
- 3
+ 2
+ 3
- 2
- 3
Expected impacts

Fish: Slight increase in
general catch, but endemic
trout still endangered

Birds: No further loss of
bird species



Plants: Increased number
and variety of aquatic
plants

Water quality: a little
bit better

Power generation:
small decrease today,
some increase in the
future

Agriculture irrigation:
less water use today,
but greater
availability in the
Expected impacts

Fish: Decrease in general
catch, and endemic trout
become extinct

Birds: Continued decrease
in bird species due to
wetlands habitat
destruction

Plants: Decreased numb
and variety of aquatic
plants

Water quality: a lot
worse

Power generation:
small decrease
er
today,
larger decrease in the
future

Agriculture irrigation:
less water use today
and even less
availability in the
+ 4
+ 5
+ 6
+ 4
+ 5
+ 6
+ 4
+ 5
+ 6



























115
Willingness-to-Pay Question (Closed-ended)

(Read) Considering your current income, as well as your expenses for housing, food, utilities,
clothing, entertainment, savings, etc., please think about how much you would be willing to pay
to support such an action plan. Assume that your monthly payment would be collected by a group
of people delegated by the Trust Fund management.

I want you to suppose that the people of Armenia had an opportunity to vote for such a plan with
a certain cost to Armenian people. If the majority of people voted for the plan, the plan would go
into effect and every household would have to pay. If the majority of people voted against the
plan, no one would have to pay and the level of water in Lake Sevan would continue to decrease.
Remember that the sum collected would be used entirely for implementing this plan.

24. Would you vote in favor of this plan IF it did not cost your household anything?
(Please check one)

C Yes C No (Go to 28) 99. I don't know (Go to 28)

25. If your household was asked to pay a monthly bill of [..................] AMD for 3
years to the Lake Sevan Trust Fund, would you vote for increasing the water level
by 3 meters in 15 years?

C Yes C No 99. I don't know

26. What then would be the maximum amount you are willing to pay monthly for 3
years for the water level increase by 3 meters in 15 years? ___________ AMD / $
99. I don't know

27. How certain or sure are you of your stated willingness to pay in question 26?
(Please circle one)

1 2 3 4 5
Very Moderately Neutral Moderately Very
Uncertain Uncertain Certain Certain

(Read) Some people have told us they would support the plan because the restoration of
Lake Sevan is a high priority for them. Others say they would not support the plan
because they have so many other things to spend their money on, and the restoration plan
will have to wait until the Armenian economy is stronger. Some people have told us that
they would not support the plan because they are not convinced that the money would be
used for improvements in the lake.

28. If the cost of the plan to Armenians in Armenia were zero, how strong do you
think the public support in Armenia would be for increasing the level of the lake
by 3 meters?

1 2 3 4 5 99
116
Very Moderately Neutral Moderately Very Dont
Weak Weak Strong Strong Know

29. Are there any direct negative impacts of limiting water releases from the lake and
constructing Vorotan Tunnel on your household income?

1. Yes
2. No
99. Dont know /Not sure

30. Do you think there would be an increase in your future household expenditure associated
with this Lake Sevan Action Plan (excluding payment to trust fund; for example electricity
price increases or a price for irrigation water)?

1. Yes
2. No
99. Dont know /Not sure.

31. The target of this action plan is to increase the water level by 3 meters in 15 years.
How easy or difficult do you think this target can be met by implementing this
plan?

1 2 3 4 5 99
Very Easy Not easy Difficult Very Dont
Easy Not difficult Difficult Know

32. How would you project the change of the historical, cultural and symbolic value of
the lake with the increase of water level by 3 meters?

1 2 3 4 5 99
A lot
Worse
A little
Worse
No change A little
improvement
A large
improvement
Dont
Know

33. How would you project the change of the quality of the water with the increase of
water level by 3 meters?

1 2 3 4 5 99
A lot
Worse
A little
Worse
No change A little
improvement
A large
improvement
Dont
Know

34. How would you project the change of the quality of the ecosystem, including fish,
birds and grass, etc., of the lake associated with the increase of water level by 3
meters?

1 2 3 4 5 99
A lot
Worse
A little
Worse
No change A little
improvement
A large
improvement
Dont
Know
117

35. How would you project the change of the quality of the lake for recreational use
that may be associated with the increase of water level by 3 meters?

1 2 3 4 5 99
A lot
Worse
A little
Worse
No change A little
improvement
A large
improvement
Dont
Know

36. Are there any possible direct damages to your household, economically, with the
increase of water level by 3 meters (for example some properties may be damaged
by the increase)?
1. Yes, a lot
2. Yes, a little
3. No
99. Dont know

37. Do you think that the governing board of the Trust Fund as we described before
can do a good job in managing the implementation of the action plan?

1 2 3 4 5 99
No
Surely
No
To some
extent
Neutral Yes
To some
extent
Yes
Surely
Dont
Know

38. How realistic do you think it is for the trust fund management to collect monthly
payments as you may have agreed?

1. No problem, it can be collected
2. There will be some problems, but still possible
3. There will be a lot of problems and it is not realistic
99. Dont know

39. Do you think that if the action plan were to be implemented only by the Armenian
government, it can be appropriately implemented?

1 2 3 4 5 99
No
Surely
No
To some
extent
Neutral Yes
To some
extent
Yes
Surely
Dont
Know

40. With your understanding of the current situation in Armenia, do you think that the
action plan as we described before can be finally implemented?

1 2 3 4 5 99
No
Surely
No
To some
Neutral Yes
To some
Yes
Surely
Dont
Know
118
extent extent

41. Do you think your household can generate any income directly by using the lake in
the future after the water level be increased (such as fishing, services, etc.)?
1. Yes
2. No
99. Dont know /Not sure

42. Do you think your household will use the lake for recreational purposes in the
future?
1. Yes
2. No
99. Dont know /Not sure

If the respondent indicated that they would not be willing to pay anything, skip to
question 47.

43. Considering your maximum willingness to pay per month, the highest amount you
indicated before, is this amount a significant expense relative to your other bills and
expenses?

C Yes (Go to question 44)
C No (Skip to question 46)
99. I don't know (Go to question 44)

44. Which of your expenses would you reduce in order to contribute towards the
plan? (List & check as many that may apply)

C __ Food
C __ Clothing
C __ Gasoline/Transport
C __ Savings
C __ From all of them
__ I do not have to decrease any monthly expense (Skip to question 46)
C __ Other (specify) ________________________
99. __ I don't know

45. Do you consider it possible to decrease any of these expenses?

C Yes
C No
99. I don't know

46. Considering the maximum amount you are willing to pay and the potential decrease
in the ability to pay other expenses, would you like to change your willingness to
pay answer?
119

C Yes (Go back to question 26 and repeat the question)
C No (Go to question 47)
99. I don't know (Go to question 47)

47. What are those major factors determining the maximum amount you are willing to
pay for the Lake Sevan action plan? (even if your willingness to pay is zero)
__________________________________________________________________
__________________________________________________________________

48. Please make a list of additional information that you would require before making
your choice on how to vote (For example, if you have any uncertainty about the
plan, any environmental impacts, the trust fund, etc).
__________________________________________________________________
__________________________________________________________________
_____________________________________________________________
0. I dont need (Go to question 50)
99. I don't know (Go to question 50)

49. If we were able to provide more information on the items you listed above, would
you be more certain about your willingness to pay or make your decision any
easier?
C Yes C No 99. I don't know


IV. Socio-economic Characteristics

50. Gender of respondent: C Male C Female

51. What is your age?______ years

52. How many people stay and reside in your household in total (including yourself)?
_____
53. How many adults stay and reside in your household (18+ years)? _______

54. How many people in this household have paid jobs? _____

55. What is the highest level of education that you have completed? (Please check
one)
C __ None
C __ Incomplete secondary school
C __ Completed secondary school
C __ Professional technical education
C __ Institute / University
__ Postgraduate

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56. What kind of job(s) do you have? (List & check all that apply)
1. Management
2. Large business owner
3. Small business owner/ Retail sales
4. Specialist /Professional
5. Clerical
6. Factory worker
7. Farmer/Agricultural worker
8. Unemployed
9. Dont work (pensioner, student, housewife etc.)
10. Other (specify) ______________

57. Are you married? C Yes C No (Skip to question 59)

58. Does your spouse work for income?
C Yes
C No

59. Please tell me whether this household or any member of it has the following
working items:
Yes No

A. Hot water tank 1 2
B. Color television 1 2
C. VCR 1 2
D. Camcorder 1 2
E. Automobile 1 2
F. Washing machine 1 2
G. Telephone 1 2
H. Cellular phone 1 2
I. Cable aerial/satellite 1 2
J. Personal computer 1 2
K. Vacation home/villa 1 2
L. Indoor bathroom/toilet (only for village) 1 2

60. For your entire household, what was your average monthly income in the past
year from all sources?

If you know your yearly
income please enter this
number here:
______________________
C __ Less than $50 (< 25,000 drams)
C __ From $50 - 100 (25,000 - 50,000 drams)
C __ From $101 - 150 (50,500 75,000 drams)
C __ From $151 - 200 (75,500 100,000 drams)
C __ From $201 400 (100,500 200,000 drams)
__ From $401 600 (200,500 300,000 drams)
C __ Above $601 800 (300,500 - 400,000 drams)
__ Above $801 1000 (400,500 - 500,000 drams)
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__ Above $1000 (> 500,000 drams)
99. __ Dont know

61. Does the household currently receive any of these allowances from the state? (List
them)
C Yes C No (Skip to question 62)

61.1. What kind of allowances? (Check all that apply)

C __ Family benefit
C __ Veteran
C __ Children without parent
C __ Unemployment
C __ Other (specify) _____________________________
99 __ Dont know

61.2. Total amount of benefits received by the household?
______________
AMD per month
99. Dont
know

62. Does any member of the household currently receive a pension or scholarship?
C Yes C No (Skip to question 63)

62.1. Total amount of pensions received by the household?
______________
AMD per month
99. Dont
know

62.2 Total amount of scholarships received by the household?
______________
AMD per month
99. Dont
know

63. Does any member of the household currently have work for which he/she is paid a
wage?
C Yes C No (Skip to question 64)

63.1. Total amount of wages per month for all people
_____________
AMD/dollars per month
99. Dont
know

122
64. Did your household receive money or other assistance from a spouse living
abroad, relatives or friends (including those living overseas)?
C Yes C No (Skip to question 65)

64.1.What is the value of this assistance (including cash, gifts, or other assistance)
______________ AMD/dollars in
last year
99. Dont
know

65. Does your household have any other income (temporary work, agricultural sales,
own business, rent out, seasonal income, sales of property, etc.)?
C Yes C No (Skip to question 66)

65.1. Amount last year ________________AMD/dollars
99. Dont know

66. For your entire household, what were your total expenditures in the past month?
1. Less than $10 (< 5,000 drams)
2. $10 - 50 (5,000 - 25,000 drams)
3. $51 - 75 (25,500 - 37,500 drams)
4. $76 - 100 (38,000 - 50,000 drams)
5. $101 - 200 (50,500 - 100,000 drams)
6. $201 - 300 (100,500 - 150,000 drams)
7. $301 - 500 (150,500 - 250,000 drams)
8. Above $500 (> 250,000 drams)
99. Dont know

67. Is your household income enough for your family needs?

C No, far from enough for basic needs;
C Just enough for food;
C Enough for food and clothing
C Enough for a good quality of life
C With the income, we can have some savings
99. Dont know

68. How did your total household income change from the year before?

1 2 3 4 5 99
Significantly
worsened
Worsened No change Improved Significantly
Improved
Dont
Know

69. How would you describe the quality of your living condition relative to others in your
city/village?

1 2 3 4 5 99
123
Very Bad Average Good Very Dont
Bad Good Know

70. Over the next 5 years, how do you think your household's income may change?

1 2 3 4 5 99
Significantly
worsened
Worsened No change Improved Significantly
Improved
Dont
Know

71. Approximately how much did you pay for your household electricity bill last
month? ___________ AMD 99. Dont know

72. Approximately how much did you pay for your last household water bill last
month? ___________ AMD 99. Dont know

73. Do you own your house/apartment?
1. Yes 2. No (Skip to question 76)

74. If you sold your house today, what do you think its market value would be?
_______________ dollars 99. Dont know

75. If you decided to rent your house today, how much rent do you think you could
collect for it? ________________ dollars per month 99. Dont know

(Skip to question 77)

76. If you owned this house and decided to sell it today, how much do you think you
could sell it for (market price?) ________________ dollars 99. Dont know

77. If you wanted to borrow $1000 from a bank for one to two years, would this be
possible? (List & check one)

C __ Yes, quite easy to do
C __ Yes, but not easy
C __ Yes, but very hard
C __ Impossible
99. __ Don't know/Not sure

78. Are you a member of any environmental organization, such as Greenpeace, or any
other environmental non-governmental organization?
C Yes C No

79. Would you contribute (time or money) to an environmental organization?
C Yes C No C I dont know

124
80. Would you say that you are generally concerned about the quality of the
environment on earth? C Yes C No


V. Recreational Use of Lake Sevan

Frequency of trips to Lake Sevan

81. Have you visited Lake Sevan in the past 12 months?

1. Yes, I have been to Lake Sevan in the past 12 months (Go to question 82)
2. No, but more than 12 months ago (Stop the interview, Go to 109)
3. No, I have never been to Lake Sevan (Stop the interview, Go to 109)

82. How many trips did you make in the past 12 months? __________

83. How long ago was your most recent trip?_____ months
0. Less than 1 month ago

84. Approximately how many trips did you take per year in the past 3 years?
___________trips per year

I would like to ask you some questions about your most recent trip.

85. Including yourself, how many people were traveling with you on your last trip?
total________ people in the group,
including ________members of your household

86. How long did you stay at Lake Sevan during your last trip? ___________days

87. What activities did you do during your last trip at the lake? (Check all that apply)

1. To relax
2. Enjoying natural beauty and climate
3. Swimming / Beaching
4. Boating / Paddle boating
5. Picnicking / BBQ
6. Fishing
7. Visiting historical sites (i.e. churches, etc)
8. Other (specify) ____________________________________________

88. If you had worked during your most recent trip to Lake Sevan, how much money would
you have earned? ___________________________ AMD 99. Dont know

Costs:

89. Where was the starting point of your trip to Lake Sevan
125
C Yerevan C Other (specify) ________________________________

90. What means of transportation did you use to get to the lake and what did it cost to
you (round trip)?

90.1. Transportation type:
1. Walk (Skip to 91)
Public Transport 2. Bus
3. Marshrutka
4. Electric train
Private Vehicle 5. Own car
6. Friend / relatives car
7. Rental (car, bus and/or driver)
8. Other/specify:____________________

90.2. Transportation costs on tickets / fuel / rental to you (round trip):
_________________AMD

91. How long did it take to travel from your starting point to Lake Sevan?
_____ hour
_____minutes

92. Where were you staying?
1. Nowhere/Did not stay overnight
2. Tent (own)
3. Camping / camp
4. Sanatorium / Rest home
5. Hotel
6. Private house
7. Other_________________________

93. Was your last trip to Lake Sevan organized by yourself or was it a part of a
planned travel package organized by a travel company?

1. By me, my family, friends (Skip to question 96)
2. Package only to Lake Sevan
3. The trip was a part of a planned travel package organized by a travel
company

94. What was the total cost of the package? ________________AMD/$ per person

95. What was included in the package? (Check all that apply)

1. Accommodations
2. Meals /Beverages
3. Just snacks
126
4. Transportation
5. Entrance fee / Parking fee
6. Beaching fee
7. Picnicking fee
8. Boating / paddle boating
9. Fishing
10. Visiting historical sites
11. Other (specify) _____________________

96. Please tell me how much you paid for each of these items during the whole trip
(without fees included in the package):

Item Money spent (AMD / $)
99. Dont know/remember
Accommodation (rest home, hotels,
camping etc.)
rr
Food you brought with you
Food at Lake Sevan
Beverages you brought with you
Beverages at Sevan
Entrance/parking fees
Beaching fee
Picnicking fee
Boating/paddle boating
Fishing
Visiting historical sites
(churches, donations, etc)

Other, specify___________________

97. Do you remember how much you spent in total during the most recent trip,
including transportation costs (for all expenses)?

If YES, the total amount:
$0 (Skip to question 99)
C Less than $5 (< 2,500 drams)
C $6 10 (3,000 - 5,000 drams)
C $11 20 (5,500 10,000 drams)
C $21 50 (10,500 25,000 drams)
C $51 100 (25,500 50,000 drams)
$101 200 (50,500 100,000 drams)
C $201 300 (100,500 150,000 drams)
$301 500 (150,500 250,000 drams)
$501 1000 (250,500 500,000 drams)
1 Greater than $1000 (>500,000 drams)
99. Dont know (Skip to question 98)

98. Would you say this total expenditure was only for yourself, your household
members here at the lake, or the whole group coming with you?

127
1. Just for myself
2. Myself and my household members
3. The whole group coming with me to the lake
4. For part of the whole group
5. Cant tell

99. Was there anyone else who also paid for anything during your visit to the lake?

1. Yes, a lot
2. Yes, some
2. No

Hypothetical questions

100. The next set of questions will be based on hypothetical assumptions concerning
changes at Lake Sevan and how this would have influenced the number of trips
you took in the PAST. We would like to find out how many trips you MIGHT
have taken in the past 12 months (look at #82) if the trips had been more
expensive.

100.1. If the cost were 25% more, _____ trips/last 12 months
100.2. If the cost were 50% more, _____ trips/last 12 months
100.3. If the cost were 100% more, _____ trips/last 12 months

101. Do you think that a change in the water level of the lake such as a 3 meter
increase or 2 meter decrease would have affected your number of visits to the
lake in the past 12 months?

1. Yes, sure (Go to question 102)
2. Yes, probably (Go to question 102)
3. No, probably not (Skip to question 103)

102. Now consider the following changes that could occur to the Lake. And assume that
there was an entrance fee to use the Lake Sevan area for recreational purposes. The
entrance fee would be imposed per person for entering the Lake Sevan area. Please
tell me how these entrance fees would have influenced the number of trips you
would have taken in last 12 months, with different water levels of the lake.

( Ask and fill by rows )

Entrance fee # of visits / last 12 months
Per person
(AMD)
No change in
lake level
2m
decrease
3m
increase
0 (current) (as in #82)
100
200
300
128
500
1000
2500
5000
10000
25000
50000

(Skip to question 104)

103. Now consider the following changes that could occur to the Lake. Assume that
there is an entrance fee to enter the Lake Sevan area for recreational purposes.
The entrance fee would be imposed per person for entering the Lake Sevan area
for recreational purposes. Please tell me how these entrance fees would have
influenced the number of trips you would have taken in last 12 months.

Entrance fee
Per person
(AMD)
# of visits/last 12
months
0 (current) (as #82)
100
200
300
500
1000
2500
5000
10000
25000
50000

104. How much certainty do you have about the numbers of trips you would have
taken in the last 12 months?

1. Im pretty sure about my answers
2. I think my answers are roughly correct
3. I have no idea about those numbers, I simply gave a random guess
4. Other (specify) _______________________

105. When considering the number of trips above, what are the main features or
activities that made you choose to go to Lake Sevan? (Check all that may apply)
1. To relax
2. Enjoying natural beauty and climate
3. Swimming / Beaching
4. Boating / Paddle boating
129
5. Picnicking / BBQ
6. Fishing
7. Visiting historical sites (i.e. churches, etc)
8. Other (specify) ____________________________

Future visits:

106. If the level of the lake were to rise by 3 meters, do you think this would affect your
decision to visit Lake Sevan in the future?

1. Yes
2. No (Go to question 108)
99. Dont know (Go to question 108)

107. How many trips would you plan on taking in the next 12 months assuming the
imagined changes in Lake conditions occur very quickly after the water's rise?
_______ trips in the next 12 months 99. Dont know

108. Which future activities do you think the increase will affect the most and what way?

Affect of the quality of each item Activities
Worse Same Better N/A
Dknow
Relax 1 2 3 99
Enjoying natural beauty and climate 1 2 3 99
Swimming/beaching 1 2 3 99
Boating 1 2 3 99
Picnicking 1 2 3 99
Fishing 1 2 3 99
Visiting historical sites 1 2 3 99
Other/specify:_________________ 1 2 3 99


Thank the respondent for his/her participation and provide the incentive.


VI. Interviewer Debriefing Questions

109. Was the person who answered the questions irritated or nervous during the
interview?
C Yes C No

110. Do you think that it was easy for the respondent to answer the questions
concerning number of visits regarding entrance fees and lake level changes?
C Yes C No C NA/Missing

130
111. Was the person who answered the questions looking bored or tired during the
interview?
C Yes C No

112. Are you certain that the interviewee was answering to the questions honestly and
truly?
1 2 3 4 5
Very Moderately Neutral Moderately Very
Uncertain Uncertain Certain Certain

113. Who else was listening while you conducted this interview with the respondent?
(Check all that apply)
C No one
C Spouse
C Other adult family members
C Other adults
C Children
Other (specify) ________________________

Time finished: _____ : _____
Data entry operator ____________

131

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