Episode 4 in this series on principles to follow when ranking environmental projects. This one discusses how to think about environmental conditions and the resulting environmental values. 

In the previous post I said that the benefit from an environmental project is the difference between the environmental values with the project and without the project. This time I will break that down a bit. The point of this post is that there are two parts to that change in environmental values: a change in the physical condition of the environment, and a resulting change in the values generated by the environment (in other words, the value of the environmental services).

So, to estimate the benefits of an environmental project, you need to (a) predict the physical environmental conditions with and without the project, and (b) translate the difference into a measure of value or importance or significance.

This raises the question, what is the relationship between the physical condition of an environmental asset and the values it provides to the community? As environmental conditions improved, values would increase, but is it a simple linear increase, or something else? To some extent, this would depend on how you measure the condition of the environment, but a common result in the environmental economics literature is for values to increase at a decreasing rate, as illustrated in Figure 4. (In fact, we see this sort of relationship for all sorts of things, not just environmental goods.)

Figure 4.

The relationship in Figure 4 relates to the values that people in the community put on environmental improvements, but it is also consistent with one aspect of the ways that environmental scientists tend to think about values: if something is rarer, each unit of it is considered more valuable.

In theory, if you could quantify environmental conditions and knew the relationship between condition and value, you could read off the change in value from this graph. For example, Figure 5 shows that a project that increases the environmental condition score from 40 to 60 results in an increase in value from about 0.8 to 0.9. If we are measuring the value in millions of dollars, the benefit of that project would be $100,000.

Benefit = V(P₁) – V(P₀) = V(60) – V(40) = 0.9 – 0.8 = 0.1 $million = $100,000

where V is value, which depends on the physical condition, P₁ is physical condition with the project and P₀ is physical condition without the project.

Figure 5.

In practice, we may or may not have a system for quantitatively scoring the type of environmental condition we are interested in in a particular case, but we should at least be able to describe the environmental conditions in words, with and without the project. Then we have to translate those into a measure of value (the topic of the next post).

Amongst the systems I’ve seen in use for ranking environmental projects, a surprising number make no attempt to evaluate the difference that the project will make to environmental conditions. Without that, there is no prospect of obtaining a meaningful estimate of the benefits from the project, so decision making (and ultimately the environment) suffers.

Further reading

Pannell, D.J., Roberts, A.M., Park, G. and Alexander, J. (2013). Designing a practical and rigorous framework for comprehensive evaluation and prioritisation of environmental projects, Wildlife Research (forthcoming). Journal web page ♦ Pre-publication version at IDEAS

Episode 3 in this series on principles to follow when ranking environmental projects. This one discusses the “with versus without” principle for estimating the project benefits. 

Through the series, we will cover a number of points about the estimation of benefits from an environmental project. Initially, to keep things simple, I’ll talk about the case where there is a single type of benefit being generated by an environmental project (e.g. a threatened species is being made safer). In later posts I’ll talk about cases with multiple types of benefits from the same project.

This first point is deceptively simple. It is that the benefit of an environmental project is the change in value of the environmental asset as a result of the project. In other words, it is a difference: the difference between the environmental value with the project and without the project.

So, to estimate the benefits of a project, you need two pieces of information: the environmental values with the project and the values without the project. Usually, when we are evaluating a project, the project has not yet been implemented. In that case, both of the required pieces of information have to be predicted. You can’t observe them, because they are in the future.

Note that comparing environmental values “with versus without” the project is not the same as comparing values “before versus after” the project. The reason is that the condition of the asset would probably not be static in the absence of the project. For example, it may be that the asset would degrade in the absence of the project, but its condition would be improved by the project (relative to its current condition). This is illustrated in Figure 1.

The graph illustrates a case where the asset currently has a value of 57 [labelled (1)]. (The 57 is just some measure of value – we’ll discuss values more in later posts.) Without the proposed project, the value is expected to decline steadily, to a score of 37 after 25 years [labelled (3)]. With the project, value would increase to a score of 76 after 25 years [labelled (2)].

Figure 1.

Clearly, in this example, the benefits of the project grow over time (the two lines diverge in Figure 1). Ideally, we would estimate the benefits in each year after the project is implemented and add them up (after allowing for discounting, which we’ll cover in a later post). A practical simplification is to estimate the environmental benefits based on the difference in the asset value with and without the project in a particular future year. For example, we might choose to focus on 25 years in the future, and estimate values at that date with and without the project. In doing this, we need to be careful that we deal appropriately with time (see a later post for details).

Assuming we go with that simplified approach (focusing on benefits at year 25), the relevant measure of project benefits for ranking projects is (2) minus (3). I have seen ranking systems which use (1) minus (3), (2) minus (1), (1) alone or (2) alone, and sometimes more than one of these in the same ranking system, but they are all irrelevant. If you include (2) minus (3) you should not include any of the others listed. To do so will just make the rankings worse.

Because of the “with versus without” principle, a project can generate benefits even if it does not completely prevent degradation of the environmental asset. As long as it slows or reduces degradation, this should be measured as a benefit. Figure 2 shows an illustration of this. In this example, future asset condition with the project (2) is below the initial asset condition (1), but is above future asset condition without the project (3). Since the project benefit is (2) minus (3), the benefit is positive.

Figure 2.

On the other hand, a project that superficially appears to generate large benefits may actually not do so, because those benefits would have been generated even without the project. In other words, the benefits are not ‘additional’ to what would have happened anyway. The without-project line in the graph would be almost as high as the with-project line, so the difference between them (= the benefit of the project) would be minimal (Figure 3).

Figure 3.

For example, suppose that a proposed project encourages farmers to adopt a new type of environmentally beneficial crop, where that crop is much more profitable than farmers’ existing crops. If the private benefits are large enough, it’s a safe bet that the farmers would have adopted the new crop even without the project. It would have been promoted by word of mouth and by private farm business consultants. Adoption of the crop for commercial reasons would have generated environmental benefits as a spin-off.

Making good predictions about the “without project” scenario can be quite difficult, requiring good knowledge of the environment, the relevant management practices and the people whose behaviour matters. Weak thinking about the “without” scenario for environmental projects is a common failing, sometimes leading to exaggerated estimates of the benefits.

Further reading

Pannell, D.J., Roberts, A.M., Park, G. and Alexander, J. (2013). Designing a practical and rigorous framework for comprehensive evaluation and prioritisation of environmental projects, Wildlife Research (forthcoming). Journal web page ♦ Pre-publication version at IDEAS