81063 The World Bank Group 2010 Environment Strategy Analytical Background Papers Valuation of Ecosystem Services in World Bank Group Work Glenn-Marie Lange, Arati Belle and Sunanda Kishore December 15, 2010 Table of Contents 1. Context................................................................................................................................................. 3 2. Background ......................................................................................................................................... 3 3. Our Approach: Learning from Past Experience ............................................................................ 5 4. What is valued and what is missing—are we covering ecosystem services? .......................... 12 5. Prioritizing environmental valuation: when is it necessary, and under what conditions is it most likely to influence decisions? ........................................................................................................ 14 6. Why is environmental valuation not done? ................................................................................. 15 7. Recommendations............................................................................................................................ 17 References ................................................................................................................................................. 20 Annex 1: CEAs that included environmental valuation..................................................................... 21 Annex 2: Lending projects reviewed .................................................................................................... 22 1. Context The World Bank Group‘s new Environment Strategy will identify key areas in which the WBG should engage to support its internal and external client base to: i) more effectively address environmental priorities and move toward greater environmental sustainability; and ii) identify best approaches to pursue the environmental sustainability of the Bank Group’s operations. The preparation of the Environment Strategy is underpinned by a series of analytical background papers that emerged from the feedback received during internal consultations and review of the Environment Strategy concept note. This background paper addresses valuation of ecosystem services in World Bank work. 2. Background In 2005, the Millennium Ecosystem Assessment (MA, 2005) provided the first comprehensive report on global ecosystems, the dependence of human societies on the services they provide, their current state, and likely future trajectory. Despite their importance for human well-being, ecosystems are deteriorating worldwide, and with them, the capacity to support human well- being, a problem that is exacerbated by climate change. The Millennium Ecosystem Assessment identified the failure to value ecosystem services as a major contributing cause. It further proposed that part of the solution lies in policy making that takes into account the full value of ecosystem services, market and non-market. In the work of the World Bank Group, we can document cases where valuing environmental services1 has changed policy and project design for the better (See Box 1 below); it is likely, but much harder to show, that omitting environmental valuation has led to decisions that may not support long-term economic growth. But for all operational work there has been a general decline in economic analysis and even less use of valuation of environmental services. In a detailed review of 101 environmental projects approved between FY2000–2002 Silva and Pagiola (2003) found that two-thirds did not include any valuation of environmental impacts, and that, where valuation was done, it was often done poorly. The response was to develop valuation toolkits and conduct training sessions, notably for the costs of environmental degradation (e.g., Bolt et al., 2005). Despite the availability of toolkits and training, however, there has been little observable improvement. The World Bank’s 2009 Annual Review of Development Effectiveness on sustainable development (IEG, 2009), reports that the use of cost- benefit analysis for projects has continued to decline since the study by Silva and Pagiola (2003), and that economic valuation of environmental impacts was often not done at all. 1 Most environmental economists in the WBG use the term “environmental services” rather than “ecosystem services.” They are treated interchangeably in this paper, unless otherwise specified. 3 Box 1: Examples of the influence of environmental valuation on project and policy design, dialogue with client countries, and support for strengthening of environment programs and institutions MNA: COED studies were done in almost all countries in the Middle East and North Africa with significant impacts such as:  All MNA countries: COEDS were incorporated in CASs and country briefs for dialogue with client countries  Algeria: the first COED in MNA, 1999. As a result, the Ministry of Finance allocated $450 million for environmental protection  Morocco: The COED led to a solid waste management DPL and a water sector DPL  Egypt: COED led to strengthening of the Ministry of Environment, and increased funds earmarked for environmental protection.  Kuwait: COED led to PPP on solid waste management  Tunisia: The valuation of watershed benefits shed light on the best land use practices and the concrete incentives to adopt them. Ghana: the COED for soil degradation, deforestation and human health damages from pollution, later incorporated in the CEA, resulted in the first African Environment DPL Madagascar: a cost-benefit analysis of ecosystem services in protected areas led to tripling of the area under protection Costa Rica: Valuation in the Regional Silvo-Pastoral project quantified benefits that helped to establish payments for environmental services Peru: CEA resulted in the establishment of the Ministry of Environment, new regulations for air and water pollution, investment in monitoring equipment, and an Environmental DPL Colombia: CEA with COED analysis contributed to prioritizing air and water pollution issues in its reform agenda Sustainable Development DPL II and III Maldives: Environmental benefits including the cost of potential damages to coral reefs were included in a cost effectiveness analysis to determine the best option for a regional waste & wastewater management facility project China: valuation of benefits to human health from improved water quality fed into the design of the Lake Gyoshi project China: Bengbu Integrated Environmental Project valued a range of environmental benefits in determining how to provide increased water and sanitation services, including improved health benefits and storm drainage benefits Indonesia: CEA with values for greenhouse gases served as an input to a climate change DPL Timor Leste: CEA included estimates of the cost of poor sanitation that were included in the country’s Sanitation Policy and Strategy Thailand: The Climate Change and Adaptation study quantifies the expected cost of climate change damage and does a CBA of adaptation options. This study has been referenced by the Bangkok Governor when launching a new flood control plan. Sri Lanka: valuation of environmental services is assisting the World Bank in its dialogue with the government in the Ecosystems Conservation and Management Project to support conservation within designated protected areas and to extend protection to critical habitats outside protected areas. A more recent assessment by IEG, Cost Benefit Analysis in World Bank Projects (IEG, 2010a), confirmed the serious decline in economic analysis in World Bank operational work. It noted that in the 1980s, 70 percent of projects included a cost-benefit analysis, while this figure had dropped to 25 percent by the early 2000s. The report further noted that although nearly every 4 project appraisal document discusses environmental impacts and mitigation measures, only 13 percent of the documents included environmental costs and benefits in the economic analysis. The 2001 Environment Strategy did not explicitly address environmental valuation, although the focus on poverty and environment implies a need for valuing natural resources and environmental services.2 In consultations on the 2010 Environment Strategy, a wide range of stakeholders stressed the importance of mainstreaming environmental services. Global initiatives such as The Economics of Ecosystems and Biodiversity (TEEB)3 have also raised expectations about our ability to value non-market environmental services. Greening development—the overarching principle of the new Environment Strategy—cannot be achieved without a substantial emphasis on environmental valuation. Greening development is based on the efficient use of natural capital—the natural resources and ecosystem services that underpin economies. The Changing Wealth of Nations (World Bank, 2010), shows that developing countries are highly dependent on natural capital. In these countries, natural capital accounts for an average of 20 percent of total wealth, rising to 30 percent in low-income developing countries, compared to 2 percent of wealth in high-income countries. Development is, in part, a process of leveraging natural capital to build wealth in the form of produced capital and human and institutional capital. Promoting growth and poverty reduction requires taking into account the full value of environmental services and natural capital. But proper valuation can require costly data collection, and valuation does not bring the same benefits to all projects. Furthermore, relatively few World Bank staff have extensive experience in conducting environmental valuation exercises, or the budgets for hiring experienced consultants. To better direct limited resources for environmental valuation and training, a closer look is needed to identify the conditions under which valuation has had an impact on: policy and project design, policy dialogue in client countries, environmental investments, and strengthening the capacity of national institutions. While the studies referred to earlier have assessed the use of environmental valuation, none of them addressed the impact of environmental valuation. This report presents a review of environmental valuation in World Bank operational and analytical work, identifying what has been done and the impacts environmental valuation has had. The report goes on to identify the conditions under which valuation is most likely to influence decision-makers, and finally, the implications for the 2010 Environment Strategy. 3. Our Approach: Learning from Past Experience The core work of the World Bank is its operational activities, mainly project and development policy lending. Including environmental valuation in operational work can have a direct impact 2 Environmental valuation was mentioned only twice in the entire document. 3 See www.teebweb.org for reports. 5 on project design and implementation. But the analytical work of the World Bank is also important because of its potential to influence policy dialogue with client countries that sets priorities for project lending, policy reform, and institutional strengthening such as increased support for environment ministries. A review of operational and analytical work was carried out based on 1) a desk study of analytical and operational work and 2) interviews with Task Team leaders (TTLs). The desk study allowed us to determine how often environmental valuation was included, which environmental services were valued, and which were not. But it couldn’t tell us what the impact of valuation was, or why a TTL decided to include, or not include, environmental valuation. For this, the interviews with TTLs were essential. To understand the reasoning and constraints faced by TTLs, as well as to understand the policy impacts, we held extensive discussions with more than 40 TTLs (mainly economists and environmental specialists), who shared their experiences over many years’ work in the World Bank, and provided a rich understanding of environmental valuation at the Bank. TTLs provided examples of good practice in environmental valuation and identified the impacts of environmental valuation in client countries. Often the impacts were indirect, especially in the case of analytical work. Interviews with TTLs also helped us to identify the following:  Conditions influencing the decision by the TTL to include or omit environmental valuation in analytical or operational work.  Conditions affecting the likelihood that good valuation would influence decision-making in the client country.  How the World Bank can improve environmental valuation to provide better support to client countries To put the WBG work in perspective, interviews were also held with practitioners in more than a dozen institutions outside the WBG to understand their experience with environmental valuation. We begin our assessment with a review of environmental valuation in World Bank analytical work, since it is the analytical work that usually determines lending activities in a given country. This is followed by an assessment of environmental valuation in operational work. a. Environmental valuation in analytical work Analytical work mapped to the environmental theme is quite extensive and varied. There is, however, a key component of the analytical work—the Country Environmental Assessment (CEA)—that is especially important because it aims to systematically integrate environmental issues into the Bank’s country programming and policy dialogue, feeding into country strategies (CASs and CSPs), poverty reduction strategy papers (PRSPs), development policy lending (DPL), and country-level development assistance strategies and programs (Pillai 2008). CEAs can bring 6 together the results of environmental, economic, and sectoral work and facilitate dialogue, both within a country and among development partners. CEAs typically have three methodological building blocks: (i) state of the environment and priorities for development, (ii) policy analysis including links to the macro economy (with tools such as the World Bank’s Adjusted Net Saving) and sectoral analysis including cost of environmental degradation (COED) and analysis of sectoral issues and interventions, and (iii) institutional analysis including public expenditure reviews. A full CEA is not done in every case; sometimes a CEA may only focus on institutional assessment or on a specific sector rather than the entire economy. The second component of CEAs is of particular importance. The costs of environmental degradation typically estimate the cost of damage to human health from air or water pollution, soil degradation (due to salinization or erosion), deforestation, depletion of minerals, and sometimes the willingness to pay for various services. In some cases, COEDs have been carried out as studies in their own right, for example in Ghana and many countries in the Middle East and North Africa (Croitoru and Sarraf, 2010). The CEAs then draw on the information in the COEDs. In some instances CEAs drew on COEDs carried out by other institutions. For example, the CEA for Indonesia drew on a COED done by the Asian Development Bank. Our literature review of World Bank analytical work focused mainly on environmental valuation in the CEAs and the stand-alone COEDs, because this analytical work is designed specifically to feed into operational work. The review includes 28 CEAs completed in the period 2003-2009 (Table 1, and Annex 1) and also drew on a review of CEAs by Pillai (2008) and an extensive review of the experience with COEDs in the Middle East and North Africa region (Croitoru and Sarraf, 2010). In addition, a survey was conducted of all TTLs leading additional analytical work in Environment as well as Agriculture, Energy and Mining, and Water Sectors in the period FY08-10 to identify any additional analytical work where environmental valuation was carried out, such as Environment Policy Notes. Interviews with TTLs provided lessons from all analytical work, not just the CEAs and COEDs. Twenty-two of the 28 CEAs included some environmental valuation, mostly costs of environmental degradation that focused on human health damage from pollution (see Annex 1). Several included broader assessments including valuation of the depletion of natural resources (forests, fisheries) and land degradation. A few applied cost-benefit analysis to some components of environmental damage. Eleven of the CEAs with environmental valuation also included Adjusted Net Savings (ANS), the World Bank’s macroeconomic indicator of sustainable development. ANS provides macroeconomic estimates of pollution damages, deforestation and depletion of minerals and energy resources. When a COED is not available, ANS can provide an estimate of pollution damages. Another eight CEAs are ongoing or planned; seven will include environmental valuation. 7 Table 1: CEAs Reviewed for Environmental Valuation CEAs including Environmental Valuation CEAs not including any Environmental Valuation Belarus, 2003 Ethiopia, 2004 Serbia and Montenegro, 2003 India (National), 2007 Dominican Republic, 2004 India (North East), 2007 Tunisia, 2004 India (Orissa State), 2007 Egypt, 2005 Namibia, 2008 Bangladesh, 2006 Vietnam, 2008 Colombia, 2006 El Salvador, 2006 Pakistan, 2006 Ghana, 2007 Nigeria, 2007 Guatemala, 2006 Ecuador, 2007 Honduras, 2007 Peru, 2007 Nepal, 2007 Senegal, 2008 Tajikistan, 2008 Indonesia, 2009 Philippines, 2009 Timor Leste, 2009 Jordan, 2009 Environmental valuation in analytical work can have very wide-ranging influences. In some instances, the COEDs/CEAs directly influenced the policy dialogue with client countries through the CASs. For example, based on the COED for Lebanon, the country CAS included a pillar on natural resources and the environment. Similarly, the COED for Morocco provided important support for including improved water management and sanitation as one of the four key objectives in the CAS. In other cases specific lending activities emerged from COEDs/CEAs. For example, based on dialogue over the Energy Environment Review in Egypt, the World Bank and the government agreed to the Second Pollution Abatement Project and the COED in Jordon contributed to the Amman Solid Waste Management Project. A number of DPLs, including Ghana and Colombia (Box 2), cite the CEAs and include their recommendations. Valuation studies can influence the policy and reform agenda in a country, leading the country to strengthen country environmental institutions. For example, the Algerian COED resulted in government commitment of $450 million in 2001–2004 to implement institutional reforms and investments in the environment sector. Similarly, The CEA for Peru provided important support for the establishment of the Ministry of Environment in Peru, the budget support programs for forestry in Cameroon and Gabon. Environmental institutions outside government are also important. In Colombia, the media picked up on the costs of environmental degradation identified in the CEA and was instrumental in building support in civil society for environmental 8 regulation and reform. Measures for regulating air and water pollution have since been introduced. CEAs/COEDs can also influence client country practices, leading them to include the environment in analysis and strategic planning activities. For example, partly under the influence of the COEDs, the Syrian Arab Republic included in its 10th 5-Year Development Plan a requirement that environmental valuation be included in all environmental policies and programs. Colombia’s National Development Plan cites the figures from the CEA in its call for sustainable development policies. Box 2: CEAs Influence Development Policy Lending Colombia In Colombia, the government had requested a sustainable development DPL to help implement the priorities set forth in its national development plan. The Bank was already conducting a dialogue with the country on environmental issues, but analytical work was needed to provide the basis for a long-term programmatic policy and investment program, and a CEA was accordingly initiated as a part of its first DPL program. In the Colombia CEA, analysis of the cost of environmental degradation found that among the most important environment- development problems were urban and indoor air pollution; inadequate water supply, sanitation, and hygiene; natural disasters such as flooding and landslides; and land degradation. The burden of the associated costs, the equivalent of nearly 4 percent of gross domestic product (GDP), fell most heavily on vulnerable segments of the population, especially poor children under five years old. Based on key findings and recommended policy reforms from the CEA, the Colombia Sustainable Development DPL II and III was aligned to support air and water pollution regulation reform. Ghana The Ghana CEA highlighted significant impacts mainly in soil, forests, health (water). The CEA led to the Natural Resources and Environmental Governance DPL which identifies reforms needed to strengthen the forestry and mining sectors. b. Environmental valuation in operational work For operational work, following the approach of Silva and Pagiola (2003), the review covered PADs for all 97 projects in the period FY2008-2010, under both investment and concessional lending, that were coded as ‚core‛ environment and natural resources management projects , i.e., with investment of at least 65 percent in the ENRM theme areas.4 The ‘Environment and Natural Resources’ thematic group includes the following sub-themes: biodiversity, climate change, environmental policies and institutions, land management, pollution management and environmental health, water resources management, and other environmental and natural resources management. The portfolio of 97 projects, listed in Annex 2, includes 80 investment lending projects (including IBRD, IDA and GEF projects), 8 development policy lending (DPL) projects, and another 9 projects (IDF, Montreal protocol and other financial products). 4 Our assessment focused on 2008-2010 since Silva and Pagiola (2003) covered 2000-2002, and the IEG report reviewed economic analyses conducted for the complete sample of 51 ENRM projects which were approved in 2000 and closed in 2007 and 2008. 9 Only investment lending projects are mandated to include cost-benefit analysis and are discussed in detail in this section. DPLs aim to assist World Bank clients in achieving sustainable poverty reduction through a program of policy and institutional reforms and, because of their focus on institutions and policy, are not mandated to include an economic analysis. Although DPLs do not themselves include environmental valuation, all but one of the eight DPLs have drawn on analytical studies that include environmental valuation, mainly Country Environmental Analysis (CEAs) and cost of environmental degradation studies, as discussed previously. Table 2: Projects including Environmental Valuation, 2008-2010 Sector Number of projects Environmental services included Energy 8 Global benefits from reduction in carbon emissions. Human health benefits from increased water availability and reduced water pollution; increased amenity value of lake, benefits from improved water flow control (reduction of flood damage, increased agricultural Water 3 productivity due to irrigation) Transport 2 Global benefits from reduction in carbon emissions. Agriculture, fishing and Global benefits from carbon sequestration for forestry, forestry 3 methane reduction for agriculture. Human health benefits and reduced losses of livestock Solid Waste Management 2 from improved solid waste management. Value of coral reef ecosystem services (individual services not identified; a single value applied via benefits transfer Biodiversity 1 intended to capture total economic value) Land Management 2 Human health benefits from soil clean up Total 21 Source: Authors’ analysis Of the 80 investment lending projects, 53 included some level of economic analysis, and 21 of these included some environmental valuation.5 Table 2 summarizes environmental valuation in these projects. Environmental valuation focused mostly on human health benefits and reduction of greenhouse gas emissions. Energy and Transport projects included an estimate of the global economic benefits from reductions in carbon emissions, but did not include other potential benefits such as the improvement of human health from reduction of emissions of particulate matter, NOx and SOx. Lending projects in forestry and agriculture estimated greenhouse gas- related benefits, but not other ecosystem services that forestry can provide. Water and biodiversity projects included a broader approach to environmental valuation. The influence of environmental valuation in project design is not always easy to identify because a PAD doesn’t always include a detailed analysis of alternatives considered and the role of environmental valuation in deciding among alternatives. Two examples, in Box 3, show that environmental analysis was important in the decision about how to design the project. Both of 5 In some projects, the PAD economic appraisal implies that environmental values have been included in the assessment, but no explanation or figures are provided. These projects are treated as having no environmental valuation. 10 these projects are relatively complex, with many components, and in the case of Matanza, politically sensitive. In the Matanza case, the environmental valuation was not only useful from a technical point of view—identifying the best option while taking into account water environmental services, but it was also important for building a positive dialogue with civil society. Sound environmental valuation indicated that the environmental impacts were being taken seriously. Box 3: Environmental Valuation in Investment Projects Bengbu, China Environmental Management Project The objective of the Bengbu Environmental project was to improve the effectiveness of selected urban environmental services delivered by the Bengbu Municipality through investment in water resources management, environmental and urban infrastructure improvement, and institutional development and capacity building. A Willingness-to-Pay survey was carried out to help understand public support for the environmental improvements to be provided by the project. Cost-benefit analysis was carried out for each project component, wherever possible. When significant environmental improvements were identified, but benefits were difficult to measure, a cost-effectiveness approach was used to determine the least-cost means to achieve the improvement. The feasibility study showed that the project would generate a large range of economic benefits including increased or improved water supply and sanitation services, improved water quality and associated health improvement, agricultural production increases from better flood control and irrigation water supply systems, and improvements in the amenity value of the lake. The Argentina Matanza-Riachuelo Basin Sustainable Development Project The Argentine court had mandated a cleanup of the river, and environmental valuation played a major role in assessing the tradeoffs among different ways to achieve this. For the sanitation component, for example, a variety of technical alternatives for the level of wastewater treatment, the length of outfalls, and the number and location of the wastewater treatment plants were considered . The project was highly publicized and there was controversy over the decision to adopt a relatively low level of treatment consisting of preliminary treatment of wastewater coupled with effluent discharge through a long outfall. This decision was challenged by several NGOs who argued for a higher level of treatment. The alternative was found to be much more expensive with very little added environmental benefits. On the basis of the cost-benefit analysis, this alternative was rejected. Sites to monitor water quality were established so that if water quality was not up to standard additional treatment units would be installed. The environmental valuation was useful not only for making the choice of level of treatment, but also for dialogue with civil society, to show that the project and its different options had been examined carefully. TTLs were asked to explain why environmental valuation was omitted, or why only some environmental benefits were valued. The simplest answer is that the project was economically justified already, so there was nothing to be gained by adding environmental benefits. Why go to the trouble of doing environmental valuation (especially given scarce resources for analytical work) when it would not change the argument for project approval? On the other hand, TTLs stated that sometimes environmental benefits are either too difficult to value or that they lack the information necessary to do so (or resources and time to collect the information). 11 4. What is valued and what is missing—are we covering ecosystem services? We often began our discussions simply by asking TTLs what aspects of the environment are most likely to be included in a valuation, and which are most often not included. We found that environmental valuation, when done at all, was heavily weighted toward pollution damages to human health, and there are many other opportunities for providing environmental valuation that better informs the country management unit and the client country. The major findings and recommendations for improvement are discussed below. Measuring the cost of pollution damages to human health has had strong policy impact Valuation is most often done for damages to human health from air and water pollution, the work is generally well done, and the WBG has been very successful in reaching policy-makers with this information. The example of the CEA in Colombia, where the magnitude of the economic cost of pollution damages galvanized civil society and politicians to push for change, has been repeated in many other countries. Similar success stories can be found for environmental valuation in many countries the World Bank has worked with, especially in the Middle East and Northern Africa, where the COEDs were included in all CASs and country briefs (Croitoru and Sarraf, 2010). TTLs focus on pollution damages to human health for two reasons: a) international data for valuation are readily available and methodologies are fairly robust, b) there is a perception that human health damages are very large and more likely to engage decision-makers than values for damages to ecosystem services. …but other ecosystem services are often missing Relatively little work is done on ecosystem services other than pollution. The value of ecosystem services tends to be highly site-specific, expensive to compile, and there is no globally available database for valuation of ecosystem service comparable to that available for pollution damages. While there have been some good individual studies, such as a Policy Note Valuation of Environmental Services in Sri Lanka which looked at agriculture and watershed benefits, TTLs often omit the value of ecosystem services from their analysis. Emphasis has been on losses from degradation rather than the benefits from existing services. Valuation often focuses on measuring environmental damages resulting from human activities, and this is essential for mitigating some of the most serious environmental abuses. But valuation usually does not include a comprehensive measurement of the benefits, or incomes currently generated by ecosystems. This information would help identify and support policies to better manage an ecosystem before it is degraded, rather than remediate damage after it has occurred. For example, if we know the value of coastal protection services provided by mangroves before they are lost, we may be better able to prevent loss. Identifying winners and losers In the effort to scale up values to the national level, the distribution of benefits and costs to different stakeholders, especially to poor households, is often lost. Distributional aspects of 12 valuation are important both because the WBG has a mission to reduce poverty and because the incidence of benefits has a direct impact on management of ecosystems: countless studies have shown that incentives for sustainable management are strongest when benefits accrue to those who steward ecosystems. But in many developing countries, local, often poor, communities frequently lose out to other users; when local communities do not have a sufficient economic incentive, sustainable management often fails. While distributional issues are sometimes addressed in World Bank CEAs/COEDs, this is not done systematically. Macroeconomic consequences of environmental (mis)management The CEAs put cost of environmental losses in a macroeconomic perspective by showing the cost as a percent of GDP. However, there are other, more comprehensive macroeconomic indicators that are not routinely included: Comprehensive wealth and Adjusted Net Savings (See Where is the Wealth of Nations, 2006 and The Changing Wealth of Nations, 2010). These can indicate whether economic growth is sustainable and can be effective in engaging Ministers of Finance and planning agencies, particularly in resource-rich countries. Most CEAs did not include Adjusted Net Savings, nor does much of the operational work. Since the CEAs can feed into the CEMs, CASs, and CPSs, they are an important mechanism to get macroeconomic indicators into the discussion of WBG priorities in client countries. COED vs. Cost-Benefit Analysis in the dialogue for priority setting From an economic perspective, priority setting should weigh the benefits and costs of addressing an environmental problem. CEAs currently provide information about the potential benefits from reducing environmental degradation from different sources, but there is a danger of misplaced priorities if the costs of mitigation are not also considered. Only a few CEAs included Cost-Benefit Analysis. How can we do better? The focus on environmental damages in COEDs/CEAs, especially to human health, has been highly effective in bringing about change. It is now time to build on this success and expand the scope of environmental management in several ways: i) the World Bank’s approach should be forward-looking, rather than reactive, and be based on comprehensive coverage of the value of ecosystem services; ii) including the distribution of economic benefits and losses among different stakeholders, especially the poor, would make the results more useful for the design of specific interventions and policy reform, as well as to gain public support; iii) Routinely incorporating macroeconomic indicators that show the consequences of environmental (mis)management is an additional way to engage Ministries of Finance; iv) and expanding the use of cost-benefit analysis would improve dialogue about priority-setting, so that decisions are made on the basis of both the benefits and costs of reducing environmental degradation. The scope of CEAs is usually jointly determined by the World Bank team and the client country, so implementing these suggestions may require extended dialogue with client country governments. 13 5. Prioritizing environmental valuation: when is it necessary, and under what conditions is it most likely to influence decisions? Given the limited resources of the WBG and the overall decline in the use of economic analysis, we asked TTLs to prioritize where environmental valuation should be done, considering: a) characteristics of projects that make valuation an important part of engaging the client country; b) conditions in a client country that make it more open to considering environmental valuation in decision-making; and c) how valuation should be carried out in order to be successful. Project characteristics: Certain kinds of projects require careful environmental valuation in order to determine the optimal project design, but also because they are likely to be more closely scrutinized by stakeholders in client countries, or internationally. This is especially so for large, complex projects with multiple tradeoffs and long-term impacts and for projects that are located in areas that are ecologically and politically sensitive. Country characteristics: Environmental valuation is likely to be given higher priority in some countries than in others. In countries with strong civil society organizations (CSOs) and active public media, especially in middle-income countries, environmental valuation is likely to play an important role in the dialogue with stakeholders in the client country, showing that all options have been fully considered. Valuation is also likely to be important in countries that suffer serious local environmental damage (e.g., China, Colombia, some EU accession countries), or where high economic dependence on ecosystems is widely recognized (e.g., Mauritius and Costa Rica where eco-tourism is critical). Demand for valuation is likely to be stronger when leadership in such countries has good capacity for understanding economic analysis. Regional initiatives can help The Mediterranean Environmental Technical Assistance Program (METAP) was critical for initiating and supporting the COED work in MNA. METAP provided funding, as well as a regional forum for each country to share its experiences and learn from each other, increasing the demonstration effect and the motivation for all countries to join in (Croitoru and Sarraf, 2010). EU accession-candidate countries have also carried out analytical work to value environmental services, often in relation to activities needed to meet accession requirements. For example, Croatia has taken out loans to help expand and support Croatia’s preparations for EU integration in the Nature Protection Sector. The work includes valuation of protected areas and mechanisms for financing these areas in the future. How valuation is conducted strongly affects its ability to influence decision-makers. There are numerous examples where good environmental valuation was done, but it failed to influence decision-makers because the study did not meet one or more of the following conditions: 14  Must be strongly demand-driven within the client country and supported by the Country Director.  Translating analysis into actions that can be taken by client country. Success depends on the ability of the TTL to explain valuation to the client and translate interest in valuation into action in the country. The TTLs’ ability to do this was one of reasons for success of COEDs in MNA.  Credibility of valuation. Rapid COEDs/CEAs have been done where there are budget or time constraints, but the resulting environmental valuation is rarely as thorough as when a full CEA is done. In some instances, a ‘quick and dirty’ assessment is sufficient, but in others, (e.g., Nigeria, 2007) the client perceived the environmental valuation as lacking credibility and rejected it.  Local ownership through involvement of local consultants. The involvement of local consultants is also critical to creating local ownership and can increase the acceptance of the results by client countries (e.g., Ghana CEA). There have been cases (e.g., Mozambique) where good environmental valuation was done, but almost entirely by external consultants, and as a result there was no local buy-in, and the government rejected the results. 6. Why is environmental valuation not done? There are many reasons why TTLs may decide not to do environmental valuation. In some cases there are good reasons, and the lack of valuation does not negatively affect the project. In other cases valuation of ecosystem services could potentially increase the usefulness of the product, but the scope of the work is defined too narrowly, so that valuation doesn’t enter into it. Finally, there are cases where TTLs may think valuation is important but face obstacles to doing valuation. Cases where there may not be a strong need for valuation:  Sometimes the appropriate action is obvious, and the issue is to identify the most cost- effective solution. In ECA region, for example, a large part of the environment portfolio is for cleanup of damage from pollution that is so severe that valuation of damage is not needed; the issue is simply one of cost-effectiveness—finding the least expensive method for cleanup. However, it should be pointed out that even in this case, valuation can help set priorities, revealing which problem should be tackled first among the wide array of problems.  Payments for Environmental Services (PES) projects, popular in Latin America, bring about sustainable management of ecosystems through a payment scheme negotiated between ‘upstream’ land managers and ‘downstream’ beneficiaries. The payment scheme is based on a negotiation between ‘producers’ of an environmental service and ‘consumers,’ and often an 15 agreement is reached without valuation of the service provided, although in a number of countries, such as Costa Rica, valuation was carried out first.6  In some countries, there has already been a lot of environmental valuation done, and the country does not see the need for additional work. This was the reason that environmental valuation was not done for the India CEAs. Missed opportunities for ecosystem services valuation  Biodiversity projects funded by the GEF that are focused on maintaining ecosystem services and piloting PES schemes provide an opportunity for conducting economic valuation of ecosystem services. This opportunity has not been fully exploited by the Bank as the WB GEF PES portfolio supported by the GEF has remained modest to date and has been focused mainly on Latin America.  The water, forestry and agriculture sectors seem an obvious venue for inclusion of valuation of ecosystem services, but in recent years, most of the work in these sectors has focused on a narrow definition of benefits. o Water: Work has focused mostly on irrigation projects, water supply and sanitation where valuation, if done, focuses mainly on the value of increased crop yields and household willingness to pay for water. Watershed management projects, which are much less common, typically look at the management and institutional issues, but often do not include an economic valuation component (IEG, 2010b). o Agriculture: the major focus has been on the value of increasing crop yields. o Forestry: the WBG’s engagement in this sector has been in governance and institution strengthening in recent years, and does not look at valuation.  Climate change co-benefits have not yet been fully exploited for their potential to include valuation of ecosystem services Obstacles to environmental valuation Many TTLs would like to do careful environmental valuation in some of their projects and analytical work but face one or more serious obstacles:  Perception among TTLs that priorities for management are safeguards, procurement, and financial management but not economic analysis (IEG, 2010a). 6 The payment scheme is likely to be more efficient if it is based on valuation, but valuation can be costly and time consuming. It has been argued that as long as both parties can come to an agreement there is no need for valuation. But PES schemes are relatively new and parties are inexperienced in negotiating over this non-market service. Whether such agreements will hold over the long run remains to be seen. 16  Lack of funding for environmental valuation: good valuation can be costly and most of the best practice environmental valuation in operational work was at least partly funded from trust funds. In the past, the PHRD trust fund was an important source of support for valuation in project preparation, but this trust fund has ended and other trust fund resources are very limited.  Lack of information that can be readily used in operational and analytical work about the value of ecosystem services comparable to information about pollution damages to human health.  Shortage of qualified local consultants to carry out environmental valuation. 7. Recommendations There are a number of steps that can be taken to improve environmental valuation in the World Bank Group. I. Improve operational work by strengthening analytical work used to set priorities Given the relatively low priority for economic analysis in operational work in the WBG and the constraints that TTLs face, ENV should put particular focus on: a. Strengthening environmental valuation in the analytical work that influences dialogue with client countries to set priorities for operational work—COEDs, CEAs, Policy Notes. In part, this can be achieved by closer collaboration with other SDN departments. For example, work on the value of flood damage avoided through wetland conservation has been carried out under the Disaster Risk Reduction agenda. b. collaborating with PREM colleagues to make sure that this analytical work is included in their analytical work, such as the CEMs, and that the results are conveyed to country clients for preparing CASs and CPSs. This could include a pilot program with PREM to bring the environment into macroeconomics by promoting the inclusion of a Box in CEMs, CASs, CPSs on wealth accounts and Adjusted Net Savings for resource-rich countries. ECA is piloting such an approach for its CPSs. II. Strengthen analytical work within the WBG 1. To strengthen analytical work, ENV should develop a ‚next generation‛ CEA with environmental valuation that is inclusive and forward looking and should: a. Expand valuation to include the benefits and incomes from ecosystem services, not just damages due to degradation. b. Include distribution of benefits and costs among different stakeholders. 17 c. Include environmental macroeconomic indicators of performance, wealth and Adjusted Net Saving. 2. Funding: dedicated funding is needed for ecosystem services valuation, like PHRD or the TF that supported the CEAs. However, staff in the regions are already overstretched and AAA budgets are in decline, so there is likely to be little uptake of a new trust fund unless it contains a significant component of BB-type funding. 3. Create a training program for WBG staff on ecosystem services valuation that focuses concretely on operational issues for valuation, such as developing a framework that evaluates different valuation methods in terms of their ‘time-cost-data-capacity’ requirements. This may help TTLs understand what their options for valuation are and overcome the perception that these techniques are too expensive and take too long. III. Strengthen analytical work through partnerships 1. The WBG could partner with regional initiatives that can provide a forum for promoting valuation. One opportunity is with Know-MED, a knowledge and skills development and sharing component of the Environmentally Sustainable Mediterranean Development Program, which is replacing METAP in the MNA region. This regional initiative can provide a laboratory and demonstration site to develop the expanded valuation for other regions. 2. It will be important to build local ownership and capacity for environmental valuation by partnering with regional environmental economics associations so that more local experts can participate in studies. These associations include Economy and Environment Program for Southeast Asia (EEPSEA), south Asian Network of Development and Environment Economics (SANDEE), Environment for Development (EfD), Latin American Association for Environment and Resource Economics (ALEAR), Latin American and Caribbean Environmental Economics Program (LACEEP). 3. The WBG should collaborate with other initiatives to help develop databases for valuation of ecosystem services. Such initiatives include TEEB (The Economics of Ecosystems and Biodiversity), Ecosystem Services for Poverty Alleviation, Poverty Environment Partnership, Poverty-Environment Initiative (UNDP-UNEP). The new Global Partnership for Ecosystem Valuation and Wealth Accounting provides a forum for collaboration with others to promote this agenda (see Box 4). 4. There is an opportunity to leverage work on climate change (for valuation of co-benefits), Disaster Risk Reduction (for the value of natural hazard mitigation by ecosystems), and Payments for Environmental Services projects (where valuation provides guidance for establishing markets). 18 Box 4: Global Partnership for Ecosystem Valuation and Wealth Accounting The World Bank is launching a Global Partnership for Ecosystem Valuation and Accounting building on “green accounting”— the World Bank’s work on Comprehensive wealth and Adjusted Net Saving, and extensive country experience using the System of Environmental and Economic Accounts, developed under the aegis of the UN Statistics Commission. The partnership will include both developed and developing countries who will work together to: 1. Value ecosystems and their services, expressed in terms of national income and wealth accounts. 2. Incorporate natural wealth accounting in macroeconomic and sectoral development planning that links wealth and economic growth. The objective will be to build these values into national accounts and to apply at scale the incorporation of natural capital values in more conventional analysis for development finance decision-making. 3. Develop standardized guidelines for the practical implementation of natural wealth accounting that become part of official statistical guidelines that can be applied globally. 19 References Bolt, K, G. Ruta and M. Sarraf. 2005. Estimating the cost of environmental degradation; a training manual. Environment Department Papers. World Bank, Washington, DC. Croitoru, L. and M. Sarraf, eds. 2010. The Cost of Environmental Degradation: Case studies from Middle East and North Africa Region. Directions in Development. World Bank. Washington D.C. Independent Evaluation Group. 2009. Annual Review of Development Effectiveness: Achieving Sustainable Development. World Bank, Washington, DC. __________________. 2008. Environmental Sustainability: an Evaluation of World Bank Support. World Bank, Washington, DC. ___________________. 2010a. Cost-Benefit Analysis in World Bank Projects. World Bank, Washington, DC. _________________. 2010b. Water and Development: An Evaluation of World Bank Support, 1997-2007, World Bank, Washington, DC. Millennium Ecosystem Assessment. 2005. Ecosystems and Human Well-being: A Framework for Assessment. Island Press: Washington, DC Pillai, P. 2008. Strengthening policy dialogue on environment: learning from five years of country environmental analysis. Environment Department Paper: Institutions and governance Series #114. World Bank, Washington, DC. Silva, P and S. Pagiola. 2003. A review of environmental costs and benefits in World Bank projects. Environment Department Paper: Environmental Economics Series #94. World Bank, Washington, DC. World Bank. 2006. Where is the Wealth of Nations? World Bank, Washington, DC World Bank. 2010. The Changing Wealth of Nations. World Bank, Washington DC 20 Annex 1: CEAs that included environmental valuation Country Environmental valuation Macroeconomic indicators included Bangladesh COED for air and water pollution, degradation of fisheries None Belarus Adjusted Net Savings from World Bank data Colombia COED and Cost-Benefit Analysis for air and water pollution, None land degradation and soil erosion, cost of natural disasters Dominican Republic Local case studies of COED for air pollution, dam None sedimentation, but no national estimates Ecuador COED for air and water pollution; Estimated Annual Gross Adjusted Net Savings from Economic Nature-based tourism values World Bank data Egypt COED for air and water pollution Adjusted Net Savings from World Bank data El Salvador COED for air and water pollution, soil erosion, cost of natural None disasters Ghana COED for air and water pollution, agricultural land Adjusted Net Savings from degradation and deforestation World Bank data (relied on prior ESW for COED) Guatemala COED for air and water pollution, soil erosion, cost of natural None disasters Honduras COED for air and water pollution Adjusted Net Savings from World Bank data Indonesia COED for air and water pollution, impacts of climate change Adjusted Net Savings from carried out by Asian Development Bank World Bank data Jordan COED and Cost-Benefit analysis for air and water pollution Adjusted Net Savings from World Bank data Nepal COED for air and water pollution None Nigeria COED for air and water pollution, deforestation, global cost None of CO2 emissions Pakistan COED for air and water pollution, agricultural land None degradation Peru COED for air and water pollution, cost of natural disasters Asset Valuation??? Philippines COED and Cost-Benefit Analysis for air and water pollution; None Valuation of forest products; Cost of degradation for agricultural land, and for coastal and marine resources Senegal COED for land degradation; Cost-Benefit Analysis for air and Adjusted Net Savings from water pollution World Bank data Serbia and Adjusted Net Savings from Montenegro World Bank data Tajikistan COED for land degradation, air and water pollution, lead None poisoning, deforestation and the cost of natural disasters Timor Leste COED for air and water pollution Adjusted Net savings and Comprehensive National Wealth based on World Bank and other data Tunisia COED for air and water pollution, soil degradation, poor Adjusted Net Savings from management of solid waste World Bank data 21 Annex 2: Lending projects reviewed Commitment amount (million US$) Project Fiscal Project Title Region Total IBRD IDA Grant ID year P098040 MZ-GEF Mrkt Led Sm r Dev (FY07) FY08 AFR 4.5 - - 4.5 P090789 ET- Sustainable Land Management (FY08) FY08 AFR 9.0 - - 9.0 P096058 3A-GEF W Afr Biosafety APL (FY07) FY08 AFR 5.4 - - 5.4 P071579 BJ-GEF Com.-Based Coastal Marine Biodiv. FY08 AFR 4.3 - - 4.3 P104225 3A-Strategic PT for Fisheries GEF (FY07) FY08 AFR 0.7 - - 0.7 P105830 LR-Establish of Protected Areas (FY08) FY08 AFR 0.8 - - 0.8 P107139 ET-Sustainable Land Mgt SIL (FY08) FY08 AFR 16.0 - 16.0 - P105220 TZ-Lower Kihansi Env. Mgt SIL (FY07) FY08 AFR 3.5 - 3.5 - P102971 GH-Environmental Governance (FY07) FY08 AFR 20.0 - 20.0 - P105140 3A-West Africa Biosafety FY08 AFR 3.9 - 3.9 - P110802 GA:Capacity building in Env. Mgt FY08 AFR - - - - CN-GEF-Mainstreaming Climate Change P105229 Adap FY08 EAP 3.4 - - 3.4 P096418 VN Land Administration Project FY08 EAP 75.0 - 75.0 - P099757 ID-Geothermal Power Generation Dev FY08 EAP 2.7 - - 2.7 P098916 CN-GEF Energy Efficiency Financing FY08 EAP 13.5 - - 13.5 P084874 CN- Energy Efficiency Financing FY08 EAP 200.0 200.0 - - P093882 CN-Shandong Flue Gas Desulfurization FY08 EAP 50.0 50.0 - - P098308 ID Conservation of Aketajawe-Lolobata FY08 EAP 1.0 - - 1.0 P085393 VN-GEF-Hanoi Urban Transpt Dev FY08 EAP 6.6 - - 6.6 CN- Bengbu Integrated Environment P096925 Improv FY08 EAP 80.0 80.0 - - OREST AND MOUNTAIN PROTECTED AREA P087094 (GEF) FY08 ECA 2.8 - - 2.8 INT. NUTRIENT POLLUTION CONTROL P099528 (GEF) FY08 ECA 4.8 - - 4.8 P084605 LAKE SKHODER INTGD ECOSYST MGT GEF FY08 ECA 4.6 - - 4.6 P084608 NERETVA/TREBISNJICA RIVER BASIN GEF FY08 ECA 8.0 - - 8.0 P093775 INTEG NUTRIENT POLLUTION CONTROL FY08 ECA 59.2 59.2 - - P109572 Strengthening Forest Monitoring FY08 ECA - - - - ARP /I-CONTAMINATED SITES P104985 REHABILITATION FY08 ECA 74.5 74.5 - - ARP/III-LARGE SCALE OIL POLLUTED LAND P110682 CL FY08 ECA 60.0 60.0 - - P095169 6L-Biosafety in Centers of Biodiversity FY08 LCR 3.0 - - 3.0 P110098 Regional Biosafety Communications FY08 LCR 0.6 - - 0.6 P095038 MX-GEF Integrated Energy Services FY08 LCR 10.1 - - 10.1 P090119 AR Energy Efficiency Project FY08 LCR 11.4 - - 11.4 P094715 BR GEF National Biod Mainstreaming FY08 LCR 22.0 - - 22.0 P098248 6A GEF-Adaptation to the Impact of Glaci FY08 LCR 7.5 - - 7.5 P110849 MX Climate Change DPL/DDO FY08 LCR 501.3 501.3 - - P109786 PE (IDF) CONAM Institutional Capacity FY08 LCR - - - - P097322 Amazon Cartographic Base FY08 LCR 4.5 - - 4.5 P050567 EG-KUREIMAT SOLAR THERMAL HYBRID FY08 MNA 49.8 - - 49.8 22 Commitment amount (million US$) Project Fiscal Project Title Region Total IBRD IDA Grant ID year JO-PROMOTION OF A WIND POWER P093201 MARKET FY08 MNA 6.0 - - 6.0 P100198 1W-Critical Ecosystem Partnership Fund 2 FY08 OTH 13.4 - - 13.4 P108078 MV Environmental Management Proj FY08 SAR 13.2 - 13.2 - P111160 Bhutan Environmental Institutions FY08 SAR - - - - P083813 DRC-GEF National Parks (FY09) FY09 AFR 5.5 - - 5.5 P107841 NE Community Action Program (GEF) FY09 AFR 4.7 - - 4.7 P100620 DRC- Forest and Nature Conservation SIL FY09 AFR 49.9 - 49.9 - P105881 SN-Sustainable Mgt of Fish Resources FY09 AFR 3.5 - 3.5 - P111097 UG:Sust Mgmt Mineral Resources (Suppl) FY09 AFR 5.0 - 5.0 - P111330 3A- EN Watershed Management FY09 AFR 7.0 - - 7.0 P092062 SN-GEF Sustain Mgt of Fish Resources FY09 AFR 5.0 - - 5.0 P111290 RCI-GEF Protected Area Project (PARC) FY09 AFR 2.3 - - 2.3 P111621 DRC:Rehab&Particip Mgt of KeyProt. area FY09 AFR 5.7 - - 5.7 P103298 3A-Lake Victoria Phase II APL 1 (FY09) FY09 AFR 7.0 - - 7.0 P083172 KE-GEF Nairobi NP Ecsystm WCL SIL (FY07) FY09 AFR 0.7 - - 0.7 P100406 3A-Lake Victoria Phase II APL 1 (FY09) FY09 AFR 63.0 - 63.0 - P113172 GH-NREG DPO FY09 AFR 7.2 - 7.2 - P111366 UG:EMCBP II Additional Finance FY09 AFR 15.0 - 15.0 - 3A:SVP-Add'tial Grant Water Res. Plan P116318 &Mgt FY09 AFR 11.2 - - 11.2 P096556 CN-Eco-Farming FY09 EAP 86.4 86.4 - - ID: Dam Operational Improvement P096532 (DOISP) FY09 EAP 50.0 50.0 - - P116103 CN- Mainstreaming of WUA MES FY09 EAP - - - - P098654 CN- GEF-Thermal Power Efficiency FY09 EAP 16.5 - - 16.5 CN-Shanxi Coal Bed Methane P100968 Development FY09 EAP 80.0 80.0 - - P099460 Vietnam PCB Management Project FY09 EAP 7.0 - - 7.0 GEF Sichuan Earthquake Emgerency P112291 Project FY09 EAP 1.0 - - 1.0 LAND ADMINISTRATION AND P106906 MANAGEMENT FY09 ECA 10.9 10.9 - - P114409 GEOFUND 2: Armenia Geothermal Project FY09 ECA 1.5 - - 1.5 P107992 ENERGY EFFICIENCY FY09 ECA 7.5 7.5 - - IDF-AARHUS CONVENTION P114789 IMPLEMENTATION FY09 ECA - - - - P094233 BR GEF Espirito Santo Biodiversity FY09 LCR 3.5 - - 3.5 P096017 6L-GEF Sustain. Transp and Air Qualit FY09 LCR 2.6 - - 2.6 P114008 AR-GEF Sustain. Transp. and Air Quality FY09 LCR 3.6 - - 3.6 P112327 MX (Suppl) SINAP II - Fourth Tranche FY09 LCR 5.4 - - 5.4 P101471 PE First Prog. Environ DPL/DDO FY09 LCR 316.8 316.8 - - P115101 MXSupplement to Env Sustain. DPL FY09 LCR 401.0 401.0 - - P095205 BR 1st Prog. DPL for Sust. Env Mgt FY09 LCR 1,300.0 1,300.0 - - P095510 MX Environmental Sustainability DPL FY09 LCR 300.8 300.8 - - P101301 CO 3rd Sust. Dev DPL FY09 LCR 450.0 450.0 - - P110462 AR Mining Environmental Restoration Proj FY09 LCR 30.0 30.0 - - 23 Commitment amount (million US$) Project Fiscal Project Title Region Total IBRD IDA Grant ID year P108064 JO- Energy Efficiency FY09 MNA 0.8 - - 0.8 P104960 JO - Amman Solid Waste Management FY09 MNA 17.5 17.5 - - GZ- SOUTHERN WEST BANK SOLID WASTE P105404 MGT FY09 MNA 8.3 - - 8.3 P112108 Tiger Futures FY09 OTH 1.0 - - 1.0 P100531 Coal-Fired Generation Rehabilitation FY09 SAR 45.4 - - 45.4 P100584 Chiller Effcy-GEF FY09 SAR 6.3 - - 6.3 P112844 MSP Inst. Coord., Policy Outreach & M&E FY09 SAR 0.7 - - 0.7 P098151 Clean Air and Sustainable Environment FY09 SAR 49.8 - 49.8 - P102790 India - Chiller Energy Efficiency - MP FY09 SAR 1.0 - - 1.0 SN-Sustainable Land Management GEF P108144 FY09 FY10 AFR 3.2 - - 3.2 P097818 RW - Sustainable Energy Dev. Proj (GEF) FY10 AFR 3.0 - - 3.0 P108941 3A-West Africa Fisheries GEF FY10 AFR 10.0 - - 10.0 P106063 3A-West Africa Fisheries - Phase 1 FY10 AFR 45.0 - 45.0 - P096836 PH Mindanao Rural Dev. Program Phase II FY10 EAP 5.1 - - 5.1 China: Establishment of Groundwater P119799 Mana FY10 EAP - - - - P104670 TIEN SHAN ECOSYSTEM DEVELOPMENT FY10 ECA 2.2 - - 2.2 P117956 SFM through Climate Change Mitigation FY10 OTH 1.0 - - 1.0 Uttarakhand Watershed Management P112061 SLEM FY10 SAR 7.5 - - 7.5 P118499 CC Capacity Building, MoF, India FY10 SAR - - - - Total 4,831.6 4,075.8 369.9 385.8 24