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Strategic planning and adoption of greenhouse gas mitigation options in Asia
Pergamon
Energy Convers. Mgmt Vol. 37, Nos 6---8,pp. 991-998, 1996 Copyright © 1996 Elsevier Science Ltd 0196-8904(95)00348-7 Printed in Great Britain. Art rights reserved 0196-8904/96 $15.00 + 0.00
STRATEGIC PLANNING AND ADOPTION OF GREENHOUSE GAS MITIGATION OPTIONS IN ASIA
A M I T BANDO, DIRECTOR
Resource Management International, Inc. 1130 Connecticut Avenue, Suite 350 Washington D.C. 20036-3904, USA Telephone: (202) 429-8615; Fax: (202) 659-2926 e-mail: amit_bando @sac.rmiinc.com Asia's global warming potential (GWP) is large and growing. Asia releases an estimated 8.4 billion metric tons of Carbon Dioxide (CO2) each year from fossil fuel use, cement manufactures and "land use changes" while its anthropogeulc emissions of methane (emissions derived primarily from wet rice cultivation and livestock -- estimates from these being highly unreliable) represent nearly half the global total. These greenhouse gas (GHG) emissions represent 30% (28.3 billion metric tons) of the global total of CO2 equivalent emitted in 1989. Per capita GHG emissions are low but per-unit GDP emissions are very high (anywhere from two to six times more than in the OECD countries). The countries participating in the Asia Least Cost Greenhouse Gas Abatement Strategies (ALGAS)~ project account for nearly 70% of the total CO2 emissions and over 80% of the methane emissions in the entire Asian region. This paper highlights several key issues that must be considered while developing GHG emissions mitigation options within the context of an overall strategy of moving countries rapidly along a path of sustainable development that increases inter-sectoral energy efficiencies within the economy, enhance sinks, and decrease GHG emissions per capita. In particular, this integrated strategy should promote "no regrets" policies and emphasize "winwin" options that result in sustainable economic development over and above any GHG abatement benefits that might result from the adoption of such initiatives. This emphasis on long term economic sustainability requires a detailed economic evaluation of environmental impacts of potential ALGAS projects. The GHG emissions mitigation potential of the candidate projects must be evaluated within this overall framework of evaluating anticipated economic and environmental impacts. Part I of this paper highlights key issues in economic
~ALGAS (which is a multi-year GEF project being implemented by the Asian Development Bank) is designed to identify mechanisms and opportunities to reduce the growth rate of GHG emissions in the twelve participating countries (these are Bangladesh, China, India, Indonesia, Democratic People's Republic of Korea, Mongolia, Myanmar, Pakistan, Philippines, Thailand and Vietnam). It aims to build the technical and infraatrucutural capacity required to reduce GHG emissions. Besides training participating countries to meet FCCC requirements via development of relevant human and technical resources along with policy and institutional infrastructures, the project focuses on developing a portfolio of bankable GHG emissions mitigation initiatives. The project will rely on a coherent strategy for identifying, evaluating and eventually implementing cost-effective GHG emissions abatement and sink enhancement initiatives.
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evaluation of environmental impacts and provides recommendations on how to use accepted evaluation techniques during strategic planning and project economic analysis. Project economic analysis incorporates the economic evaluation of environmental impacts. One important set of environmental impacts is that on global climate change through the candidate project's net impacts on GHG emissions. To assess the relative significance of climate change impacts of potential projects, a systematic screening exercise should be adopted during the strategic planning stage. This screening mechanism would allow a comparison of specific climate change impacts relative to other environmental impacts. A monetization of such impacts would then allow an objective assessment of the candidate project's role in mitigation of the impacts of GHG emissions. The special concerns related to development of strategies based on technical estimates and projections of economic parameters that are highly uncertain, are enumerated in Part 1. In addition to recognizing specific economic and political considerations while developing such strategies, the importance of private sector participation in pursuing options for abatement of GHG emissions must be acknowledged. Thus, several private sector specific issues must be factored into overall strategy development; these are discussed in Part 2.
PART I : ECONOMIC BASIS OF STRATEGIC PLANS
Any plan that promotes GHG abatement options that also generate net positive economic benefits to society, must be based on a screening exercise that involves a comparison of relevant benefits and costs. As a first step, an appropriate set of "baseline" activities should be developed and maintained which: (1) meet national developmental goals, (2) are technically feasible, (3) are consistent with political and social constraints, (4) ate environmentally acceptable, and (5) are affordable. All eligible activities, that result in GHG abatement and sink enhancement, must be screened so that the costs of identified activities are compared to those associated with the activity replaced or made redundant Similarly, benefits from identified activities must deliver at least the same benefits planned in the set of baseline activities. The screening process for evaluating GHG mitigation options must start with those that maintain the level of domestic benefits identified in the baseline yet increase global (environmental) benefits. These additional benefits can be clearly quantified only ff the baseline information is properly devised to identify all domestic and global net benefits. In addition to achieving the same national developmental goals as those targeted in the baseline, GHG mitigation options may deliver additional or secondary domestic benefits beyond those already identified in the baseline. However, added efforts may be needed to expand the project initiative beyond the level strictly required for delivery of the global benefits. Furthermore, these additional benefits provided by the GHG mitigation options may not be national priorities. In such cases, the screening exercise must incorporate suitable decision making criteria based on, among others, multi-attribute analytical techniques (the technical details of such methods are not presented in this paper since they are the subject of standard texts on the topic).
BANDO: GREENHOUSEGAS MITIGATIONOPTIONS IN ASIA For proper evaluation of all options, they must directly comparable in terms of well identified benefits and costs. In particular, appropriate "systems boundaries" must be established to ensure that all the direct and indirect project impacts are enumerated and assessed. In addition, the costs associated with global benefits must be identifiedseparately from those associated with added domestic benefits. All significantcosts need to be identified; in particular,these include indirectcosts (e.g.,travel costs) and systems costs. Including systems costs can lead to significantlyhigher costs not only because initialcapital costs may be high but also when, for example, a renewable energy option is considered and the overall system capacity has to reflectthe fact that increased baseload capacity may be required since the renewable option's capacity provides intermittentsupply. At the same time, care should be taken to avoid double counting of costs and benefits. Finally, for GHG mitigation options to be economically sustainable, they must be evaluated in a comprehensive manner as part of the strategic planning exercise so that they are integrated with relevant national and regional objectives. This is often done via a number of standard analytical techniques including sensitivity analysis, reverse analysis and multiattribute analysis. The next three sections describe several factors that are relevant during the process of deriving economic values using comprehensive valuation techniques. Such techniques need to be emphasized during the process of strategic planning. All types of economic evaluation of environmental impacts, whether they use primary research or expedited methods (e.g., benefits transfer), involve a certain degree of estimation. The monetary estimates of environmental impacts produced by economic evaluations are likewise approximations of true values. These approximations embody omissions, biases, and uncertainties, and are influenced by the discount rate employed and other factors. These issues must be carefully considered when examining the values contained in and derived from an economic evaluation.
Issues in Deriving Economic Values: Omissions, Biases and Uncertainties Economic evaluations of environmental impacts are likely to include several omissions, biases, and uncertainties. This is because environmental impacts are often difficult to identify, quantify, and value. Biases and omissions need to be clearly presented and assessed as part of a project economic analysis, and efforts must be made to identify and reflect critical uncertainties 2. Omissions. In most cases, information gaps will exist regarding the environmental effects of proposed projects. It is thus important to:
identify which information about environmental impacts is omitted from the initial environmental examination or environmental impact assessment, and/or omitted from the economic evaluation explicitly state these omissions in the project economic analysis report, and indicate how they might bias the quantitative results (see below)
2 Several sections of this paper are adapted from Amit Bando's ongoing collaborativework on Economic Evaluation of Environmental Impacts, to be published in late 1995 by the Asian DevelopmentBank.
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help to improve future project evaluations by identifying data to be collected in the initial fact finding and project preparatory phases of a project Biases. The term "bias" refers here to any factor that causes the quantified estimates of benefits or costs to be larger or smaller than their actual values. For example, if all project costs are included in an evaluation but some project benefits are omitted (e.g., due to lack of data), then the quantified net benefits (benefits minus costs) will be biased downwards. Biases are a natural part of the assessment process, and can be of many types (empirical, sample, methodological, professional, departmental). Biases should be explicitly recognized. It is important to consider whether the biases affect the (1) choice of which impacts are important or large enough for monetization, (2) estimated magnitude of the environmental impact, (3) choice of affected populations, (4) choice of discount rate, (5) relative importance of the estimated values. Many types of bias can lead to under- or over-estimating individual values. Uncertainty. All parts of an assessment are uncertain to some degree. This is because they involve estimating or predicting changes in the physical world (e.g., dose-response functions) and in socio-economic relationships (e.g., human behavior and values). For example, doseresponse models may be very imprecise, yielding estimates of health risks that may vary by orders of magnitude for a given level of exposure. The types and sources of uncertainty determine its effect on a project's rate of return or net benefits, and should be examined. It is not possible to deal with all types of uncertainty. In most cases, it will be quite helpful to describe the uncertainty that affects the different parts of an assessment. The uncertainties can be rated as "high," "moderate," or "slight," and can be assessed using sensitivity analyses (e.g., using bounding assumptions for parameters with uncertain values). Sensitivity analysis takes many forms, but basically involves changing some key assumption or key input variable to see how it affects the outcome. More rigorous uncertainty analysis involves applying statistical techniques to the data. One such technique is known as Monte Carlo simulation. Although many computer software packages now facilitate them, evaluators rarely have sufficient time to perform such simulations, as they involve specifying probability distributions for a computerized random sampling on one or more sets of data. Discounting and Present Value Project costs and benefits (or damages) can accrue over different time periods. As a result, the economic values that are derived need to be further adjusted to reflect the fact that the benefits and costs associated with GHG mitigation options may accrue over different time periods. Typically, a project's costs come in the early years during construction, while the benefits accrue several years later. Discounting refers to the process by which total social (internal plus external) costs and benefits in different years are converted to a common metric so that they can be properly compared to one another. The metric most often used in discounting is the present value 0PV). It is the amount one would need to invest today, at the specified discount rate, to yield the same economic return as the projected stream of benefits and costs.
BANDO: GREENHOUSE GAS MITIGATION OPTIONS IN ASIA
While economic benefits may begin accruing immediately (e.g., improved transit and regional development because of road construction), environmental benefits and costs may be delayed many years. This is a particular concern for projects that may contribute to (or help minimize) global warming or stratospheric ozone depletion. There is often considerable debate about the appropriate discount rate to apply to project benefits and costs. There is no one "correct" number that economists agree upon. Some environmentalists and economists recommend the use of a zero discount rate, particularly when project impacts may affect future generations and/or include irreversible outcomes (e.g., species extinction). A discount rate of zero means society doesn't care when the benefits or costs occur: it values the future the same as the present. A discount rate of infinity means that society places no value on the future. Alternatively, some economists recommend a discount rate that approximates prevailing real rates of interest on low-risk (e.g., government) bonds, because such risk-free, net-of-tax rates best reflect the "social rate of time preference." Finally, others suggest the use of the opportunity cost of capital since the project's funds might otherwise be invested in private, for-profit ventures with appreciable expected returns. It is not possible to conclusively specify what single discount rate should be used in each project economic analysis. However, the following suggestions will help ensure consistent, defensible analyses: (1) As a base case, apply the discount rate specified by the Bank for project economic analysis; and (2) As an alternative to the base case, it is important to conduct sensitivity analyses by varying the discount rate to see if it makes an applicable difference in the present value of net benefits. As part of the sensitivity analysis, use a zero discount rate for environmental impacts that are long term, potentially irreversible, or pertain to human health.
Other Application Issues There are several other issues that may arise in an economic evaluation. Four that are of particular concern, and that do not always lend themselves to quantitative or monetized analysis, are described below.
Equity Equity essentially means fairness. Fairness is rarely (if ever) considered as part of a standard economic evaluation. An important part of equity is considering who receives the benefits and who pays the costs. If a particular set of individuals bears the costs and/or another group of individuals receives the benefits, this may be deemed undesirable or unfair from society's point of view. Such equity concerns may be a factor in considering whether to recommend that the project go forward.
QuaUtafive Assessment Procedures Many issues and impacts typically lend themselves to qualitative, rather than quantitative assessment. These include impacts in regions for which no data exist, the migration and resettlement of people as a result of unforseen circumstances, and impacts on species about which little is known.
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Defining the Appropriate Baseline A critical aspect of any economic evaluation is the proper definition of the baseline. The baseline should reflect conditions as they would occur without the project. Several issues should be taken into account in defining the appropriate baseline. These include:
Facility modernization and offsets. In many instances, new projects will entail rehabilitating existing facilities, or replacing older plants with cleaner, more efficient ones. Thus, the economic evaluation should reflect the changes in environmental impacts due to the reduction in stressor levels, increased energy efficiency, or other improvements due to moving from the older facility baseline to the new projects. Opportunity costs. Some projects displace activities that otherwise would have yielded economic gains (or losses). These foregone yields (whether positive or negative) need to be reflected in the economic evaluation as part of the projectinduced change from the baseline. Resource uses and conditions. In many instances, the degree to which a project can alter ambient environmental conditions and/or related monetary values, is limited by the extent to which factors or causes separate from the project have affected baseline conditions. For example, a wastewater treatment project may significantly reduce pollutant loadings to a river at one location. However, if the river is already severely degraded by discharges from other sources at other locations, then little or no overall improvement in water quality or related benefits may be anticipated. However, this does not necessarily imply that waste-water treatment yields no benefits. Instilutional Factors: Project Design versus Implementation Many project analyses will rely on assumptions about the extent to which institutions in the ALGAS member countries ensure that environmental pollution controls and other mitigation methods are fully implemented and enforced. If the environmental precautions included in the project design are not put in place, or are built but not maintained, then the actual environmental impacts may be significantly greater than those included in the design-based evaluation. One approach to account for the uncertainty associated with such institutional capabilities is to conduct sensitivity analyses to reflect different enforcement and other institutional scenarios. This approach might be implemented by developing a weighting scheme to reflect the institutional capacity to sustain all of the project's initiatives. Some of the factors that should be included in such institutional assessments are evaluations of the leadership at the central level of the developing member country, the implementing staff at the central and local levels, and social acceptance at the local level.
BANDO: G R E E N H O U S E GAS MITIGATION OPTIONS IN ASIA
PART 2" MOVING FROM STRATEGIES TO IMPLEMENTATION
Once a set of options for mitigation of the impacts of GHG emissions have been identified and evaluated during the strategic planning exercise, ALGAS member countries will need to implement a series of high-priority projects. In doing so, ALGAS will need to recognize potential barriers to implementation, choose the financing modalities and identify special issues related to the role of the private sector. The last concern is particularly important under ALGAS given that it is expected that several initiatives are likely to be implemented by private sector institutions or via collaborative efforts undertaken jointly by the private and public sectors. Under ALGAS, every effort will be made to ensure that global and regional funds are amply augmented by national funds; these funds are expected to come from a combination of private and public sector sources. This section of the paper outlines some of the important issues that should be considered; effective solutions need to be identified if the prioritized options are to be successfully implemented. The potential barriers to implementing GHG mitigation options include: Additional costs imposed on a nation. These costs are typically associated with developing ancillary infrastructure required to support the particular option being to be implemented. Similarly, indirect costs (e.g., travel costs) may impose significant burdens on an implementation plan. Short-term financing burden. The economically viable options may be financially constrained owing to, axriong others, high initial start-up costs. Thus there may be a genuine financing gap resulting from, among others, initial incremental financing requirements being exceptionally high given the potentially high capital intensity of selected options. Need to safeguard against risk. These risks could result from technological, institutional and commercial factors. While several elements of risk are typical of any project, there are additional risks associated with implementation of projects that try to introduce previously untried technologies (often in "greenfield" applications) to mitigate impacts that are poorly quantified (even by the best scientific and economic estimates) in countries that may not have in place all the institutional and political infrastructure necessary for project success.
These and other related barriers need to be overcome during project implementation under ALGAS. There are several innovative mechanisms for overcoming these barriers. The details of such methods are beyond the scope of this paper and will be developed as ALGAS is implemented. Typically, barriers should be identified via sequential consideration of possibilities and financing justified accordingly. Non-exclusive financing options that may be used concurrently include: facilitation, concessional finance, contingent finance, lump-sum grants, and recurrent grants. The choice of a particular financing modality depends on, among other things, the nature of the investment need, the amount of financing required and the relative maturity of the host country's capital markets. When the private sector is involved in project implementation, there are several operational issues that need to be addressed. These include the need to clearly identify specific cost-
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components since some of the systemic or indirect costs may not be home by the private sector entity. Thus, societal costs may be much larger than the private sector costs associated with project implementation; these societal costs must be part of a comprehensive benefitcost estimate. Additionally, while backing "winners" in the private sector via grant-financing to support selected project, the benefits of competition must not be muted; the issue of transfer payments and generation of "excess economic profits" must be addressed. This is a distinct possibility whenever a small number of private sector institutions are helped under ALGAS. To ensure full private sector cooperation, a fool-proof system must be established so that commercially sensitive data is made available to ALGAS and is kept confidential while using them for benefit-cost estimation. Finally, eligibility reqnirements for private sector participation in ALGAS must be determined so that there is a level international playing field. The flow-diagram in Exhibit 6 provides an overview of the project design phase within the strategic framework described in this paper. As ALGAS moves into its implementation stages, the above issues should be addressed adequately to ensure long term sustainability of project initiatives. An overall strategic planning framework adopted for ALGAS addresses these implementational issues up-front while developing a portfolio of suitable GHG mitigation options in Asia. Conclusions
A comprehensive strategic planning exercise has several key elements. As this paper points out, a standard screening exercise must be adopted so that overall environmental impacts of selected projects are identified, prioritized and evaluated. The GHG emissions impacts are part of the overall environmental impacts of a project. Prioritized impacts must be evaluated. Economic evaluations of environmental impacts are challenging, imprecise, and often controversial. Therefore, it is important that the project analyst both recognize and portray the limitations of the economic evaluation and, concurrently, incorporate them into the analysis in a practical and informative manner. Omissions, biases and uncertainties are to be anticipated, and can be addressed using several simple yet constructive and informative techniques. This can be accomplished, for example, by indicating the direction of the bias or omission, and/or through applying simple sensitivity analysis to alternative scenarios and assumptions. Discounting raises several complex issues. There is neither a conclusive conceptual nor empirical basis for selecting a single "correct" rate of discount and, indeed, there are several legitimate arguments to support a wide range of alternatives. Nonetheless, some simple and practical guidelines can be followed that can address the primary issues and lead to an informed project economic analysis. Finally, the participation of the private sector warrants some special consideration in light of the discussion in Part 2. ALGAS' approach to strategic planning and adoption of GHG mitigation options will incorporate all relevant economic development and environmental issues raised in this paper in a manner that is consistent with global, regional and national objectives.
Energy Convers. Mgmt Vol. 37, Nos 6---8,pp. 991-998, 1996 Copyright © 1996 Elsevier Science Ltd 0196-8904(95)00348-7 Printed in Great Britain. Art rights reserved 0196-8904/96 $15.00 + 0.00
STRATEGIC PLANNING AND ADOPTION OF GREENHOUSE GAS MITIGATION OPTIONS IN ASIA
A M I T BANDO, DIRECTOR
Resource Management International, Inc. 1130 Connecticut Avenue, Suite 350 Washington D.C. 20036-3904, USA Telephone: (202) 429-8615; Fax: (202) 659-2926 e-mail: amit_bando @sac.rmiinc.com Asia's global warming potential (GWP) is large and growing. Asia releases an estimated 8.4 billion metric tons of Carbon Dioxide (CO2) each year from fossil fuel use, cement manufactures and "land use changes" while its anthropogeulc emissions of methane (emissions derived primarily from wet rice cultivation and livestock -- estimates from these being highly unreliable) represent nearly half the global total. These greenhouse gas (GHG) emissions represent 30% (28.3 billion metric tons) of the global total of CO2 equivalent emitted in 1989. Per capita GHG emissions are low but per-unit GDP emissions are very high (anywhere from two to six times more than in the OECD countries). The countries participating in the Asia Least Cost Greenhouse Gas Abatement Strategies (ALGAS)~ project account for nearly 70% of the total CO2 emissions and over 80% of the methane emissions in the entire Asian region. This paper highlights several key issues that must be considered while developing GHG emissions mitigation options within the context of an overall strategy of moving countries rapidly along a path of sustainable development that increases inter-sectoral energy efficiencies within the economy, enhance sinks, and decrease GHG emissions per capita. In particular, this integrated strategy should promote "no regrets" policies and emphasize "winwin" options that result in sustainable economic development over and above any GHG abatement benefits that might result from the adoption of such initiatives. This emphasis on long term economic sustainability requires a detailed economic evaluation of environmental impacts of potential ALGAS projects. The GHG emissions mitigation potential of the candidate projects must be evaluated within this overall framework of evaluating anticipated economic and environmental impacts. Part I of this paper highlights key issues in economic
~ALGAS (which is a multi-year GEF project being implemented by the Asian Development Bank) is designed to identify mechanisms and opportunities to reduce the growth rate of GHG emissions in the twelve participating countries (these are Bangladesh, China, India, Indonesia, Democratic People's Republic of Korea, Mongolia, Myanmar, Pakistan, Philippines, Thailand and Vietnam). It aims to build the technical and infraatrucutural capacity required to reduce GHG emissions. Besides training participating countries to meet FCCC requirements via development of relevant human and technical resources along with policy and institutional infrastructures, the project focuses on developing a portfolio of bankable GHG emissions mitigation initiatives. The project will rely on a coherent strategy for identifying, evaluating and eventually implementing cost-effective GHG emissions abatement and sink enhancement initiatives.
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evaluation of environmental impacts and provides recommendations on how to use accepted evaluation techniques during strategic planning and project economic analysis. Project economic analysis incorporates the economic evaluation of environmental impacts. One important set of environmental impacts is that on global climate change through the candidate project's net impacts on GHG emissions. To assess the relative significance of climate change impacts of potential projects, a systematic screening exercise should be adopted during the strategic planning stage. This screening mechanism would allow a comparison of specific climate change impacts relative to other environmental impacts. A monetization of such impacts would then allow an objective assessment of the candidate project's role in mitigation of the impacts of GHG emissions. The special concerns related to development of strategies based on technical estimates and projections of economic parameters that are highly uncertain, are enumerated in Part 1. In addition to recognizing specific economic and political considerations while developing such strategies, the importance of private sector participation in pursuing options for abatement of GHG emissions must be acknowledged. Thus, several private sector specific issues must be factored into overall strategy development; these are discussed in Part 2.
PART I : ECONOMIC BASIS OF STRATEGIC PLANS
Any plan that promotes GHG abatement options that also generate net positive economic benefits to society, must be based on a screening exercise that involves a comparison of relevant benefits and costs. As a first step, an appropriate set of "baseline" activities should be developed and maintained which: (1) meet national developmental goals, (2) are technically feasible, (3) are consistent with political and social constraints, (4) ate environmentally acceptable, and (5) are affordable. All eligible activities, that result in GHG abatement and sink enhancement, must be screened so that the costs of identified activities are compared to those associated with the activity replaced or made redundant Similarly, benefits from identified activities must deliver at least the same benefits planned in the set of baseline activities. The screening process for evaluating GHG mitigation options must start with those that maintain the level of domestic benefits identified in the baseline yet increase global (environmental) benefits. These additional benefits can be clearly quantified only ff the baseline information is properly devised to identify all domestic and global net benefits. In addition to achieving the same national developmental goals as those targeted in the baseline, GHG mitigation options may deliver additional or secondary domestic benefits beyond those already identified in the baseline. However, added efforts may be needed to expand the project initiative beyond the level strictly required for delivery of the global benefits. Furthermore, these additional benefits provided by the GHG mitigation options may not be national priorities. In such cases, the screening exercise must incorporate suitable decision making criteria based on, among others, multi-attribute analytical techniques (the technical details of such methods are not presented in this paper since they are the subject of standard texts on the topic).
BANDO: GREENHOUSEGAS MITIGATIONOPTIONS IN ASIA For proper evaluation of all options, they must directly comparable in terms of well identified benefits and costs. In particular, appropriate "systems boundaries" must be established to ensure that all the direct and indirect project impacts are enumerated and assessed. In addition, the costs associated with global benefits must be identifiedseparately from those associated with added domestic benefits. All significantcosts need to be identified; in particular,these include indirectcosts (e.g.,travel costs) and systems costs. Including systems costs can lead to significantlyhigher costs not only because initialcapital costs may be high but also when, for example, a renewable energy option is considered and the overall system capacity has to reflectthe fact that increased baseload capacity may be required since the renewable option's capacity provides intermittentsupply. At the same time, care should be taken to avoid double counting of costs and benefits. Finally, for GHG mitigation options to be economically sustainable, they must be evaluated in a comprehensive manner as part of the strategic planning exercise so that they are integrated with relevant national and regional objectives. This is often done via a number of standard analytical techniques including sensitivity analysis, reverse analysis and multiattribute analysis. The next three sections describe several factors that are relevant during the process of deriving economic values using comprehensive valuation techniques. Such techniques need to be emphasized during the process of strategic planning. All types of economic evaluation of environmental impacts, whether they use primary research or expedited methods (e.g., benefits transfer), involve a certain degree of estimation. The monetary estimates of environmental impacts produced by economic evaluations are likewise approximations of true values. These approximations embody omissions, biases, and uncertainties, and are influenced by the discount rate employed and other factors. These issues must be carefully considered when examining the values contained in and derived from an economic evaluation.
Issues in Deriving Economic Values: Omissions, Biases and Uncertainties Economic evaluations of environmental impacts are likely to include several omissions, biases, and uncertainties. This is because environmental impacts are often difficult to identify, quantify, and value. Biases and omissions need to be clearly presented and assessed as part of a project economic analysis, and efforts must be made to identify and reflect critical uncertainties 2. Omissions. In most cases, information gaps will exist regarding the environmental effects of proposed projects. It is thus important to:
identify which information about environmental impacts is omitted from the initial environmental examination or environmental impact assessment, and/or omitted from the economic evaluation explicitly state these omissions in the project economic analysis report, and indicate how they might bias the quantitative results (see below)
2 Several sections of this paper are adapted from Amit Bando's ongoing collaborativework on Economic Evaluation of Environmental Impacts, to be published in late 1995 by the Asian DevelopmentBank.
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help to improve future project evaluations by identifying data to be collected in the initial fact finding and project preparatory phases of a project Biases. The term "bias" refers here to any factor that causes the quantified estimates of benefits or costs to be larger or smaller than their actual values. For example, if all project costs are included in an evaluation but some project benefits are omitted (e.g., due to lack of data), then the quantified net benefits (benefits minus costs) will be biased downwards. Biases are a natural part of the assessment process, and can be of many types (empirical, sample, methodological, professional, departmental). Biases should be explicitly recognized. It is important to consider whether the biases affect the (1) choice of which impacts are important or large enough for monetization, (2) estimated magnitude of the environmental impact, (3) choice of affected populations, (4) choice of discount rate, (5) relative importance of the estimated values. Many types of bias can lead to under- or over-estimating individual values. Uncertainty. All parts of an assessment are uncertain to some degree. This is because they involve estimating or predicting changes in the physical world (e.g., dose-response functions) and in socio-economic relationships (e.g., human behavior and values). For example, doseresponse models may be very imprecise, yielding estimates of health risks that may vary by orders of magnitude for a given level of exposure. The types and sources of uncertainty determine its effect on a project's rate of return or net benefits, and should be examined. It is not possible to deal with all types of uncertainty. In most cases, it will be quite helpful to describe the uncertainty that affects the different parts of an assessment. The uncertainties can be rated as "high," "moderate," or "slight," and can be assessed using sensitivity analyses (e.g., using bounding assumptions for parameters with uncertain values). Sensitivity analysis takes many forms, but basically involves changing some key assumption or key input variable to see how it affects the outcome. More rigorous uncertainty analysis involves applying statistical techniques to the data. One such technique is known as Monte Carlo simulation. Although many computer software packages now facilitate them, evaluators rarely have sufficient time to perform such simulations, as they involve specifying probability distributions for a computerized random sampling on one or more sets of data. Discounting and Present Value Project costs and benefits (or damages) can accrue over different time periods. As a result, the economic values that are derived need to be further adjusted to reflect the fact that the benefits and costs associated with GHG mitigation options may accrue over different time periods. Typically, a project's costs come in the early years during construction, while the benefits accrue several years later. Discounting refers to the process by which total social (internal plus external) costs and benefits in different years are converted to a common metric so that they can be properly compared to one another. The metric most often used in discounting is the present value 0PV). It is the amount one would need to invest today, at the specified discount rate, to yield the same economic return as the projected stream of benefits and costs.
BANDO: GREENHOUSE GAS MITIGATION OPTIONS IN ASIA
While economic benefits may begin accruing immediately (e.g., improved transit and regional development because of road construction), environmental benefits and costs may be delayed many years. This is a particular concern for projects that may contribute to (or help minimize) global warming or stratospheric ozone depletion. There is often considerable debate about the appropriate discount rate to apply to project benefits and costs. There is no one "correct" number that economists agree upon. Some environmentalists and economists recommend the use of a zero discount rate, particularly when project impacts may affect future generations and/or include irreversible outcomes (e.g., species extinction). A discount rate of zero means society doesn't care when the benefits or costs occur: it values the future the same as the present. A discount rate of infinity means that society places no value on the future. Alternatively, some economists recommend a discount rate that approximates prevailing real rates of interest on low-risk (e.g., government) bonds, because such risk-free, net-of-tax rates best reflect the "social rate of time preference." Finally, others suggest the use of the opportunity cost of capital since the project's funds might otherwise be invested in private, for-profit ventures with appreciable expected returns. It is not possible to conclusively specify what single discount rate should be used in each project economic analysis. However, the following suggestions will help ensure consistent, defensible analyses: (1) As a base case, apply the discount rate specified by the Bank for project economic analysis; and (2) As an alternative to the base case, it is important to conduct sensitivity analyses by varying the discount rate to see if it makes an applicable difference in the present value of net benefits. As part of the sensitivity analysis, use a zero discount rate for environmental impacts that are long term, potentially irreversible, or pertain to human health.
Other Application Issues There are several other issues that may arise in an economic evaluation. Four that are of particular concern, and that do not always lend themselves to quantitative or monetized analysis, are described below.
Equity Equity essentially means fairness. Fairness is rarely (if ever) considered as part of a standard economic evaluation. An important part of equity is considering who receives the benefits and who pays the costs. If a particular set of individuals bears the costs and/or another group of individuals receives the benefits, this may be deemed undesirable or unfair from society's point of view. Such equity concerns may be a factor in considering whether to recommend that the project go forward.
QuaUtafive Assessment Procedures Many issues and impacts typically lend themselves to qualitative, rather than quantitative assessment. These include impacts in regions for which no data exist, the migration and resettlement of people as a result of unforseen circumstances, and impacts on species about which little is known.
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BANDO: GREENHOUSE GAS MITIGATION OPTIONS IN ASIA
Defining the Appropriate Baseline A critical aspect of any economic evaluation is the proper definition of the baseline. The baseline should reflect conditions as they would occur without the project. Several issues should be taken into account in defining the appropriate baseline. These include:
Facility modernization and offsets. In many instances, new projects will entail rehabilitating existing facilities, or replacing older plants with cleaner, more efficient ones. Thus, the economic evaluation should reflect the changes in environmental impacts due to the reduction in stressor levels, increased energy efficiency, or other improvements due to moving from the older facility baseline to the new projects. Opportunity costs. Some projects displace activities that otherwise would have yielded economic gains (or losses). These foregone yields (whether positive or negative) need to be reflected in the economic evaluation as part of the projectinduced change from the baseline. Resource uses and conditions. In many instances, the degree to which a project can alter ambient environmental conditions and/or related monetary values, is limited by the extent to which factors or causes separate from the project have affected baseline conditions. For example, a wastewater treatment project may significantly reduce pollutant loadings to a river at one location. However, if the river is already severely degraded by discharges from other sources at other locations, then little or no overall improvement in water quality or related benefits may be anticipated. However, this does not necessarily imply that waste-water treatment yields no benefits. Instilutional Factors: Project Design versus Implementation Many project analyses will rely on assumptions about the extent to which institutions in the ALGAS member countries ensure that environmental pollution controls and other mitigation methods are fully implemented and enforced. If the environmental precautions included in the project design are not put in place, or are built but not maintained, then the actual environmental impacts may be significantly greater than those included in the design-based evaluation. One approach to account for the uncertainty associated with such institutional capabilities is to conduct sensitivity analyses to reflect different enforcement and other institutional scenarios. This approach might be implemented by developing a weighting scheme to reflect the institutional capacity to sustain all of the project's initiatives. Some of the factors that should be included in such institutional assessments are evaluations of the leadership at the central level of the developing member country, the implementing staff at the central and local levels, and social acceptance at the local level.
BANDO: G R E E N H O U S E GAS MITIGATION OPTIONS IN ASIA
PART 2" MOVING FROM STRATEGIES TO IMPLEMENTATION
Once a set of options for mitigation of the impacts of GHG emissions have been identified and evaluated during the strategic planning exercise, ALGAS member countries will need to implement a series of high-priority projects. In doing so, ALGAS will need to recognize potential barriers to implementation, choose the financing modalities and identify special issues related to the role of the private sector. The last concern is particularly important under ALGAS given that it is expected that several initiatives are likely to be implemented by private sector institutions or via collaborative efforts undertaken jointly by the private and public sectors. Under ALGAS, every effort will be made to ensure that global and regional funds are amply augmented by national funds; these funds are expected to come from a combination of private and public sector sources. This section of the paper outlines some of the important issues that should be considered; effective solutions need to be identified if the prioritized options are to be successfully implemented. The potential barriers to implementing GHG mitigation options include: Additional costs imposed on a nation. These costs are typically associated with developing ancillary infrastructure required to support the particular option being to be implemented. Similarly, indirect costs (e.g., travel costs) may impose significant burdens on an implementation plan. Short-term financing burden. The economically viable options may be financially constrained owing to, axriong others, high initial start-up costs. Thus there may be a genuine financing gap resulting from, among others, initial incremental financing requirements being exceptionally high given the potentially high capital intensity of selected options. Need to safeguard against risk. These risks could result from technological, institutional and commercial factors. While several elements of risk are typical of any project, there are additional risks associated with implementation of projects that try to introduce previously untried technologies (often in "greenfield" applications) to mitigate impacts that are poorly quantified (even by the best scientific and economic estimates) in countries that may not have in place all the institutional and political infrastructure necessary for project success.
These and other related barriers need to be overcome during project implementation under ALGAS. There are several innovative mechanisms for overcoming these barriers. The details of such methods are beyond the scope of this paper and will be developed as ALGAS is implemented. Typically, barriers should be identified via sequential consideration of possibilities and financing justified accordingly. Non-exclusive financing options that may be used concurrently include: facilitation, concessional finance, contingent finance, lump-sum grants, and recurrent grants. The choice of a particular financing modality depends on, among other things, the nature of the investment need, the amount of financing required and the relative maturity of the host country's capital markets. When the private sector is involved in project implementation, there are several operational issues that need to be addressed. These include the need to clearly identify specific cost-
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BANDO: GREENHOUSE GAS MITIGATION OPTIONS IN ASIA
components since some of the systemic or indirect costs may not be home by the private sector entity. Thus, societal costs may be much larger than the private sector costs associated with project implementation; these societal costs must be part of a comprehensive benefitcost estimate. Additionally, while backing "winners" in the private sector via grant-financing to support selected project, the benefits of competition must not be muted; the issue of transfer payments and generation of "excess economic profits" must be addressed. This is a distinct possibility whenever a small number of private sector institutions are helped under ALGAS. To ensure full private sector cooperation, a fool-proof system must be established so that commercially sensitive data is made available to ALGAS and is kept confidential while using them for benefit-cost estimation. Finally, eligibility reqnirements for private sector participation in ALGAS must be determined so that there is a level international playing field. The flow-diagram in Exhibit 6 provides an overview of the project design phase within the strategic framework described in this paper. As ALGAS moves into its implementation stages, the above issues should be addressed adequately to ensure long term sustainability of project initiatives. An overall strategic planning framework adopted for ALGAS addresses these implementational issues up-front while developing a portfolio of suitable GHG mitigation options in Asia. Conclusions
A comprehensive strategic planning exercise has several key elements. As this paper points out, a standard screening exercise must be adopted so that overall environmental impacts of selected projects are identified, prioritized and evaluated. The GHG emissions impacts are part of the overall environmental impacts of a project. Prioritized impacts must be evaluated. Economic evaluations of environmental impacts are challenging, imprecise, and often controversial. Therefore, it is important that the project analyst both recognize and portray the limitations of the economic evaluation and, concurrently, incorporate them into the analysis in a practical and informative manner. Omissions, biases and uncertainties are to be anticipated, and can be addressed using several simple yet constructive and informative techniques. This can be accomplished, for example, by indicating the direction of the bias or omission, and/or through applying simple sensitivity analysis to alternative scenarios and assumptions. Discounting raises several complex issues. There is neither a conclusive conceptual nor empirical basis for selecting a single "correct" rate of discount and, indeed, there are several legitimate arguments to support a wide range of alternatives. Nonetheless, some simple and practical guidelines can be followed that can address the primary issues and lead to an informed project economic analysis. Finally, the participation of the private sector warrants some special consideration in light of the discussion in Part 2. ALGAS' approach to strategic planning and adoption of GHG mitigation options will incorporate all relevant economic development and environmental issues raised in this paper in a manner that is consistent with global, regional and national objectives.