By Jackie Crafford, Prime Africa Consultants
During the past 5 years we have seen rapidly increasing requirements from regulators and from our clients for resource economic related studies. This includes, for instance, quantification of liabilities, environmental tax assessments, resource cost and pricing assessments, ecosystem services valuation studies and “greened” cost-benefit analyses.
Resource economic valuation techniques used in these types of studies have a long and interesting history, often driven by key environmental questions. In this article we examine some of the key resource economic methods used around the world today, and their roots in environmental questions. We also investigate why we are seeing the current increased requirements for resource economic studies.
Much work has been done to classify ecosystem services (e.g. the EPA’s FEGS guideline), to develop accounting mechanisms (e.g. UNSD, UNEP and World Bank all have initiatives such as the SEEA and Green Economy and WAVES initiatives), and to refine and improve existing and new valuation techniques.
Resource economic valuation techniques have benefited from the information age, which brought us better data and improved computing ability and innovative software. The fledgling field of evidence-based environmental management, data-mining techniques, improved risk assessment techniques and expert opinion have improved the evidence-base for all valuation techniques. Adoption of novel market-research techniques such as conjoint analysis has also been helpful. Emergence of carbon and other markets have similarly contributed important economic evidence.
However, there are still many gaps and pitfalls in the field of resource economics. In 2006, Professor Charles Perrings of Arizona State University conducted a meta-analysis on peer reviewed resource economic studies. He found that most studies had focussed on a single dimension only, and ignored the multiple environmental goods and services effects of an impact introduced to a local system. Most of these studies had focussed on the direct use values of the environment, and put comparatively little effort into understanding the indirect linkages between ecological functioning, ecosystem services and the production and consumption of marketed goods and services. Another set of concerns related to the way in which valuation studies addressed the problems of risk and uncertainty. Since the value of ecosystem stocks is the discounted stream of net benefits they provide, it is sensitive to uncertainty about the environmental and market conditions under which they will be exploited. Ecosystem cost and benefit relationships tend to be highly nonlinear and therefore, damage (or consequence) might be barely noticeable for low levels of hazard (e.g. pollution), but then becomes severe or even catastrophic once some (unknown) threshold is reached. Closely associated with this was the problem that little effort went into understanding the value of the role of the environment in either mitigating or exacerbating risks. The production function approach is considered a key methodology to address many of these valuation weaknesses. They apply knowledge of ecosystem functioning and processes to derive the value of supporting and regulating ecosystem services and cutting edge work in resource economics currently focus on this methodology.
There is also an emerging understanding that perceptions around environmental values vary between developed and developing economies. For instance, the Environmental Impact Study (EIS) process is often perceived as a constraint to project development and thus a constraint to economic development across the economies of the developing world. Historically, in the developed economies, environmental policies and programs resulted from demands by the general population. In contrast, environmental policies in developing countries have been ‘top-down’ initiatives by Governments themselves, partly because of international pressures to respond to environmental problems. This often results in bottom-up frustration by project proponents in developing countries.
Both regulators and large infrastructure companies (large public entities engaged in power generation, transport and similar services, as well as mining, oil, gas and similar companies) regard “environmental risk” as their top priority risk. Environmental risk is perceived to include financial and economic uncertainties around ecosystem and human health, cumulative effects, obtaining environmental authorisations, costs of environmental compliance and environmental damages and liabilities that may arise in future.
EHS Support and Prime Africa are here to help you make sense of the financial and economic consequences of environmental risk. Our large data repositories, expert skills and improved data capturing and analysis techniques, support financial and economic studies at all stages of the investment life-cycle.
References used in this article:
Brown, G. (2000). Personal Notes on the History of Non-Market Valuation in the United States. University of Washington Draft November.
Crafford, J.G. (2015) Measuring the contribution of ecological composition and functional services of estuaries ecosystems to the dynamics of Kwazulu-Natal coast fisheries. PhD Economics Thesis. University of Pretoria, South Africa.
Perrings, C. (2006). Ecological Economics after the Millennium Assessment.International Journal of Ecological Economics & Statistics (IJEES).Fall 2006, Vol. 6, No.F06; Int. J. Ecol. Econ. Stat.; 8-22