José M. Martínez-Paz

What weight should be assigned to future environmental impacts? A probabilistic cost benefit analysis using recent advances on discounting

Cost-benefit analysis is a standard methodological platform for public investment evaluation. In high environmental impact projects, with a long-term effect on future generations, the choice of discount rate and time horizon is of particular relevance, because it can lead to very different profitability assessments. This paper describes some recent approaches to environmental discounting and applies them, together with a number of classical procedures, to the economic evaluation of a plant for the desalination of irrigation return water from intensive farming, aimed at halting the degradation of an area of great ecological value, the Mar Menor, in South Eastern Spain. A Monte Carlo procedure is used in four CBA approaches and three time horizons to carry out a probabilistic sensitivity analysis designed to integrate the views of an international panel of experts in environmental discounting with the uncertainty affecting the market price of the projects main output, i.e., irrigation water for a water-deprived area. The results show which discounting scenarios most accurately estimate the socio-environmental profitability of the project while also considering the risk associated with these two key parameters. The analysis also provides some methodological findings regarding ways of assessing financial and environmental profitability in decisions concerning public investment in the environment.

Intergenerational equity and dual discounting

Dual discounting is a new approach under consideration for use in environmental cost–benefit analysis. This paper updates the literature on this subject and subjects it to the assessment of an international panel of experts on environmental discounting by means of a Delphi study. Subsequently, a case study provides some findings deriving from the practical application of this strategy as the choice of discounting scenario in the economic evaluation of a plant for the desalination of irrigation return water, aimed at halting the degradation of a wetland. There are theoretical and practical reasons to support the use of this discounting approach in relation to projects with intergenerational impact, where the environmental effects are considerable in relation to market effects. Although still under investigation, the dual discounting approach appears to provide an appropriate methodological platform enabling the quantification of the degree of intergenerational equity implicit in the project.

The Water Footprint as an indicator of environmental sustainability in water use at the river basin level.

One of the main challenges in water management is to determine how the current water use can condition its availability to future generations and hence its sustainability. This study proposes the use of the Water Footprint (WF) indicator to assess the environmental sustainability in water resources management at the river basin level. The current study presents the methodology developed and applies it to a case study. The WF is a relatively new indicator that measures the total volume of freshwater that is used as a production factor. Its application is ever growing in the evaluation of water use in production processes. The calculation of the WF involves water resources (blue), precipitation stored in the soil (green) and pollution (grey). It provides a comprehensive assessment of the environmental sustainability of water use in a river basin. The methodology is based upon the simulation of the anthropised water cycle, which is conducted by combining a hydrological model and a decision support system. The methodology allows the assessment of the environmental sustainability of water management at different levels, and/or ex-ante analysis of how the decisions made in water planning process affect sustainability. The sustainability study was carried out in the Segura River Basin (SRB) in South-eastern Spain. The SRB is among the most complex basins in Europe, given its special peculiarities: competition for the use, overexploitation of aquifers, pollution, alternative sources, among others. The results indicate that blue water use is not sustainable due to the generalised overexploitation of aquifers. They also reveal that surface water pollution, which is not sustainable, is mainly caused by phosphate concentrations. The assessment of future scenarios reveals that these problems will worsen if no additional measures are implemented, and therefore the water management in the SRB is environmentally unsustainable in both the short- and medium-term.

A participatory approach for selecting cost-effective measures in the WFD context: The Mar Menor (SE Spain)

Achieving a good ecological status in water bodies by 2015 is one of the objectives established in the European Water Framework Directive. Cost-effective analysis (CEA) has been applied for selecting measures to achieve this goal, but this appraisal technique requires technical and economic information that is not always available. In addition, there are often local insights that can only be identified by engaging multiple stakeholders in a participatory process. This paper proposes to combine CEA with the active involvement of stakeholders for selecting cost-effective measures. This approach has been applied to the case study of one of the main coastal lagoons in the European Mediterranean Sea, the Mar Menor, which presents eutrophication problems. Firstly, face-to-face interviews were conducted to estimate relative effectiveness and relative impacts of a set of measures by means of the pairwise comparison technique. Secondly, relative effectiveness was used to estimate cost-effectiveness ratios. The most cost-effective measures were the restoration of watercourses that drain into the lagoon and the treatment of polluted groundwater. Although in general the stakeholders approved the former, most of them stated that the latter involved some uncertainties, which must be addressed before implementing it. Stakeholders pointed out that the PoM would have a positive impact not only on water quality, but also on fishing, agriculture and tourism in the area. This approach can be useful to evaluate other programmes, plans or projects related to other European environmental strategies.

Assessment of the Programme of Measures for Coastal Lagoon Environmental Restoration Using Cost--Benefit Analysis

The degradation of marine and coastal ecosystems has given rise to the creation of specific protection rules. The Marine Strategy Framework Directive and the Water Framework Directive are the standards agreed in the European Union with the aim of obtaining a good ecological status in marine and coastal waters by applying a programme of measures, if necessary. These measures must be technical, social and economically feasible, in such a way that costs do not exceed benefits. This work expounds the implementation of two economic tools to assess the programme of measures intended for the environmental restoration of one of the most important coastal ecosystems in Europe, the Mar Menor coastal lagoon (SE Spain). Thus, the cost–benefit analysis (CBA) (and its extensions) and the contingent valuation method are used to assess the aforementioned programme in terms of economic and environmental profitability. Results prove the socioeconomic and environmental profitability of the actions due to be undertaken, with rates of return of around 10%. From a methodological point of view, there is a clear need to widen the classic CBA scheme by using the extended CBA and the dual CBA to gauge this type of environmental restoration actions.

Probabilistic evaluation of the water footprint of a river basin: Accounting method and case study in the Segura River Basin, Spain

In the current study a method for the probabilistic accounting of the water footprint (WF) at the river basin level has been proposed and developed. It is based upon the simulation of the anthropised water cycle and combines a hydrological model and a decision support system. The methodology was carried out in the Segura River Basin (SRB) in South-eastern Spain, and four historical scenarios were evaluated (1998-2010-2015-2027). The results indicate that the WF of the river basin reached 5581 Mm3/year on average in the base scenario, with a high variability. The green component (3231 Mm3/year), mainly generated by rainfed crops (62%), was responsible for the great variability of the WF. The blue WF (1201 Mm3/year) was broken down into surface water (56%), renewable groundwater (20%) and non-renewable groundwater (24%), and it showed the generalized overexploitation of aquifers. Regarding the grey component (1150 Mm3/year), the study reveals that wastewater, especially phosphates (90%), was the main culprit producing water pollution in surface water bodies. The temporal evolution of the four scenarios highlighted the successfulness of the water treatment plans developed in the river basin, with a sharp decrease in the grey WF, as well as the stability of the WF and its three components in the future. So, the accounting of the three components of the WF in a basin was integrated into the management of water resources, it being possible to predict their evolution, their spatial characterisation and even their assessment in probabilistic terms. Then, the WF was incorporated into the set of indicators that usually is used in water resources management and hydrological planning.

Measuring conflicts in the management of anthropized ecosystems: Evidence from a choice experiment in a human-created Mediterranean wetland

Economic valuation of ecosystem services provides valuable information for the management of anthropized environments, where individual preferences can be heterogeneous and even opposed. Here, we discuss how these ecosystem services were approached in the literature and we address the main issues in relation to their economic valuation. We consider that avoiding misspecifications in economic valuation surveys requires considering the linkages between anthropized ecosystems and human intervention. To illustrate, we analyse the case study of a human-created Mediterranean wetland (El Hondo, SE Spain) using a Choice Experiment. Our findings suggest that management strategies in El Hondo should be oriented to improve the water ecological status, to enhance biodiversity and to develop ecotourism, whereas hunting should be strictly limited and controlled. Our measures of conflict (trade-off between ecosystem services and willingness to pay values) can help to find the optimal allocation of public and private goods and services and for the implementation of compensation schemes in the area. According to public preferences, a conservationist management strategy would generate 331,100 €/year in terms of environmental benefits, whereas a tourism-based management strategy would benefit society with 805,200 €/year.

Multi-output Technical Efficiency in the Olive Oil Industry and Its Relation to the Form of Business Organisation

This work studies the level of technical efficiency in the Andalusian oil industry from a multi-output, non-parametric approach by conducting the data envelopment analysis (DEA) methodology with non-radial distance functions, as well as implementing environmental and non-discretionary variables. The production frontier includes three outputs: quantity and quality of oil production, the outputs to be maximised, and one output to be minimised, the environmental impact of the production process. The inputs are the following: grinded olive, labour, and capital (both fixed and floating). The analysis is carried out by including non-discretionary variables from two points of view. It is considered that the business structure (cooperative or corporation) of the firm affects the frontier (technology). This variable is included through a specific three-stage method. The relation between efficiency and other non-discretionary variables is analysed by the estimation of a Tobit model. Having a sample of 88 oil-mill industries in Andalusia as the starting point, the indices for the two nonconventional outputs in this type of analysis are elaborated; quality is quantified by means of an aggregated index that gathers some aspects related to the separation of olives, critical points, and traceability. The environmental impact is assessed by another index that includes the effects produced on soil, water, air, and sound comfort. From the analysis of results, it can be underlined that, in spite of the fact that the levels of efficiency are high on average, some production adjustments to reduce inputs and the environmental impact of the process could be implemented. The influence of the business structure is significant, and results show that corporations are the most effective ones.

Pooling Expert Opinion on Environmental Discounting: An International Delphi Survey

The primary aim of this study is to examine the various issues involved in environmental discounting using a Delphi survey of a worldwide panel drawn from specialists in issues relating to discounting and long-term investment evaluation. The environmental discount rate is applied when performing cost–benefit analysis (CBA) on projects with environmental impact, in order to aggregate tangible and intangible effects. A review of the preceding literature shows that, after decades of academic debate, opinions have gradually converged. Furthermore, public administrations have begun to echo the need for a new look at the long-term discounting. One of the main findings of this study is the virtual unanimity of experts regarding the need to modify the approach to intergenerational discounting. The survey also yields a proposal for specific values for discount rates, based on the time horizon for the project under evaluation. The application of the resulting rates in the socio-economic evaluation of a project of environmental restoration provides numerical evidence of the importance of the choice of both discount rate and discount strategy.