Environmental damage compensation: Main issues

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1 Valuing Environmental Damage: an integrated economic framework Forest fire damage case Edi Defrancesco Dept. TeSAF, University of Padova Yoshkar-Ola, November 5-6th 2007 Environmental damage compensation: Main issues ) Theoretical background 2) Multi-dimensional operating procedure to identify damage elements 3) Valuation methods 4) Multi-dimensional scale of damage: profile across time 5) Concluding remarks

2 ) Environmental damage Measurable adverse change in a natural resource or measurable impairment of a natural resource service Measure injured Resource TEV change in terms of Compensating surplus Individuals react to damage Individuals do not change their behaviour Welfare losses observing changes in expenditure Welfare losses directly assessing WTP Multi-dimensional approach: Scale of injury: Geographical distribution of the injury Different resources involved Different individuals suffering welfare losses Time length to re-establish the baseline 2

3 Multi-dimensional approach: Assessing environmental damage: Multi-dimensional scale of the effects (in-site vs. off-site) Different evaluation methods Risk of double-counting errors Time length and choice of a proper discount rate 2) Five steps multi-dimensional operating procedure Step: Detect and interrupt injury Take remedial actions 2 Preliminary damage assesment: identify damaged ecosystems/resources 3 Abiotic Biotic Matrix linking phisical indicators to related use/ passive values Matrix linking phisical indicators to related use/ passive values Secondary effects on other related resources 3

4 Irrigation Livestock Aquaculture Fishing Goods production Energy production Transport Tourism Swimming Boating Others Civil uses Recreational fishing Other recreational uses Others Primary sector Manufactory Sector Services sector Recreation and landscape Floodwater storage and conveyance Groundwater recharge and discharge Shoreline stabilization Pollution assimilation Biodiversity storehouse Nutrient cycling Habitat for species Others Preservation for future generations Preservation of genetic resources Preservation for others Cultural-Historical Others.. Wood production Non-wood production Goods production Energy production Transport Tourism Other Civil Uses Hunting Non-wood products picking Fuel-wood Recreational uses Other Protection agains ckimate change (CO2 uptake) Conservation for genetic inheritance Biodiversity conservation Habitat conservation Other Other Primary Sector Industrial sector Services sector Recreation and landscape Hydrogeological protection (soil erosion) Hydrogeological protection (runoff) Conservation for genetic inheritance for future generations Conservation for rare ecosystems for future generations Historical-cultural values Matrix approach linking indicators to public services loss or impairment: a Forest VALUE FUNCTIONS USE USE/PASSIVE PASSIVE Production Demand Ecosystem Services SERVICES INDICATORI Indicator Indicator 2 Indicator 3 Matrix approach linking indicators to public services loss or impairment: a River VALUE USE USE/PASSIVE PASSIVE Production Demand Ecosystem services FUNCTION/ SERVICES INDICATORS Indicator Indicator 2 Indicator 3 4

5 Damage: Reversible, the injured resource can be naturally recovered Irreversible, the injured resource can not be naturally recovered Resource: Restorable, human intervention may activate and/or accelerate natural resource recovery, at a reasonable cost Not Restorable, human intervention may not activate and/or accelerate natural resource recovery, at a reasonable cost IDENTIFICATION OF DAMAGE PROFILE OVER TIME AND CHOICE OF VALUATION METHODS Resource restorable Choice of restoration option Cost not eccessive Cost eccessive Cost not eccessive Substitution possible Resource not restorable Cost eccessive Substitution not possible Step 4 Restoration cost Interim losses (when necessary) permanent losses Substitution cost Interim losses (when necessary) permanent losses Interim losses Permanent losses Choice of the discount rate and aggregation of damage components Step 5 5

6 Compensation for environmental damage (con t) Resource Damage Reversible Restorable () Defensive expenditures Substitution Costs Restoration costs Temporary welfare losses Not restorable (2) Defensive expenditures Substitution Costs Temporary welfare losses Irreversible (3) Defensive expenditures Substitution Costs Restoration costs Temporary welfare losses (4) Defensive expenditures Substitution Costs Temporary and permanent welfare losses 2) Approaches in valuing compensation for environmental resource damage Approach Method Type of Study Imputed Revealed Stated Defensive cost Restoration cost Substitution cost Market price Travel cost Hedonic pricing Contingent valuation Conjoin analysis Primary study: ad hoc field survey Secondary study: benefit transfer 6

7 Primary sector Manufactory sector Services sector Civil use Recreational and landscape Species habitat Pollution assimilation Biodiversity storehouse Others Preservation for future generations Preservation of genetic resources Preservation for others Cultural-Historical Others.. Valuation Methods for public services losses ECONOMIC VALUATION METHODS Production FUNCTIONS/SERVICES Demand Ecosystem services Defensive expenditure cost X x x x x x x x Restoration cost x x x Substitution cost x x x x x x x x Market prices x x x x/x x Hedonic price x x x x/x X Travel cost X Contingent valuation x x X X X X X X X Conjoint Choice analysis x x X X X X X X X Damage valuation and time ) Welfare losses profiles across time Interim/ permanent losses Damage claim Periodo transitorio Temporary phase Permanent phase Natural resource injury starting point Irreversible damage Reversible damage 0 m n Time 7

8 Damage valuation and time (con t) 2) Restoration/substitution costs and averting expenses profiles across time Restoration Costs Defensive expenditures Damage claim Periodo transitorio Temporary phase Permanent phase Natural resource injury starting point Restoration costs Defensive expenses 0 m n Time Compensation for environmental damage D m m i 0 (B i C )( i r) m-i n j m (B j C j) ( r) j-m ( B k C r k ) ( r) n m Declining long term social discount rate Period of years > 300 Discount rate 3.5% 3.0% 2.5% 2.0%.5%.0% 8

9 Concluding remarks: Environmental damage compensation under Italian law (Art. 8, law 349/986) Experts valuation Judicial decision Valuation approaches Valuation methods ACCORDING TO EQUIVALENCE PRINCIPLES Imputed Revealed Defensive expenditure Restoration cost Substitution cost Market price Travel cost Hedonic pricing Primary (ad hoc surveys) Secondary (benefit transfer) ACCORDING TO EQUIVALENCE PRINCIPLES ENVIRONMENTAL DAMAGE 2 Stated Contingent valuation Conjoint Analysis Judicial discretion ENVIRONMENTAL DAMAGE MONETARY ACCORDING TO EQUITY PRINCIPLES Imputed Restoration cost Profit gained through damage by causer Primary (ad hoc surveys) Secondary (benefit transfer) ACCORDING TO EQUITY PRINCIPLES Conclusions: environmental damage evaluation in a court ISSUE Conflictual environment Monetary evaluations Many injury s effects Direct and indirect effects CONCLUSION Robust estimations are needed TEV but parsimony principle Different estimation methods Double-counting risk With-without principle not ante-post 9

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