1. 1 A Manual for Implementing Sustainable/Green Development Relevant for various spatial scales (villages, towns, cities, small islands, countries) Assistant Prof. Dr. Phoebe Koundouri ATHENS UNIVERSITY OF ECONOMICS AND BUSINESS E-mail: pkoundouri@aueb.gr

2. 2 Define Sustainable/Green Development (SD): Why do we care? SD: a pattern of resource use that aims to meet human needs while preserving the environment so that these needs can be met not only in the present, but also for future generations. Any other development path puts the society consumers producers businesses, including financial institutions on self-destructing rotations.

3. 3 Define triple goal of SD over space (i) and time (t) Environmental/ Ecological Sustainability: ecosystem resilience, resource-specific equilibrium (taking into a/c substitutability & complementarity of different natural capitals & other forms of capital, i.e. human and physical) Economic Sustainability: economic efficiency by economic sector overt t (allocation of resources in a way that accelerates growth and maximizes economic value) Social Sustainability: cross-sectional (by income group) and dynamic (inter- generational) affordability & equity

4. 4 Ecovillage Definition: Communities with the goal of becoming more socially, economically and ecologically sustainable. Relies on: (a) green infrastructural capital (b) autonomous building or clustered housing to min ecological footprint (c) renewable energy (d) permaculture (landscaping designed to mimic nature and to provide the community with food, fibre, fuel)

5. 5 Eco-Municipality/Eco-Town Definition: local government area that adopts ecological & social justice values. Accepts principles of sustainability in its operations & community-wide decision making processes. The purpose is to increase overall community sustainability. An eco-municipality recognizes that sustainability is key to all decisions made by government: a. Reduce dependence on fossil fuels b. Reduce dependence upon synthetic chemicals c. Reduce encroachment upon nature d. Better meet human needs fairly and efficiently

6. 6 Sustainable city/Eco-city Definition: A city designated with consideration of environmental impact, inhabited by people dedicated to min required inputs of energy, water, food, and waste output of heat, air pollution-CO2 and water pollution. A sustainable city can feed itself with minimal reliance on the surrounding countryside, and power itself with renewable sources of energy. The aim is to: a. create the smallest possible ecological footprint b. produce the lowest quantity of pollution possible c. efficiently use land d. compost used materials, recycle it or convert waste-to-energy …and thus the city’s overall contribution to climate change will be minimal.

7. 7 3-step Approach Towards Achieving the 3S A Common Integrated Framework Relevant for All Spatial Scales

8. 8 3-step approach for each NR&E service Characterization of supply and demand (including TEV) for all significant natural resources (NRs) and environmental (E) services The economic assessment of potential Measures/Investments for balancing demand & supply over time and space The assessment of the current recovery of costs of NR&E services Step 1 Step 3 Step 2

9. 9 Step 1: Characterization of the NR&E basis & identification of significant issues Step1_A. Evaluation of socio-economic significance of NR (n) in region (i) by economic sector (residential, industrial, agricultural, tourism, services, environment). Step1_B. Identification of key drivers (environmental /economic /social) influencing pressures and uses. Step1_C. How will these drivers evolve over time (t) & how will they influence pressures? Step1_D. How will demand and supply evolve over time & which problems their paths are likely to cause? Construct Baseline Scenario Time & Money Constraints Define the Detail of Step 1!

10. 10 Step1_A. Evaluate Significance of NR&E in the Region by economic sector Residential (e.g. population surved by the use of each resource, population with self-supply, number of related companies, etc.). Industrial (e.g. turnover for key sub-sectors, employment in sectors, etc.) Agricultural (e.g. total cropped area, cropping pattern, livestock, gross production, income, farm population, etc.) Tourism (e.g. total number of tourist days, daily expense per tourist day, employment and turnover in the tourism sector, etc.) Environment (e.g. Natura 2000, Eco-systemic services, etc.)

11. 11 Step1_B. Identify Key Economic Drivers Influencing Pressures and Uses General socio-economic indicators and variables (e.g. population growth, income, employment). Key sector policies that influence significant NRs&E uses (e.g. agricultural and environmental policies). Production or turnover of main economic sectors / significant NRs&E uses. Implementation of planned investments linked to existing regulation, likely to affect NR&E availability. Implementation of future (environmental and other) policies likely to affect NR&E uses.

12. 12 Step1_C. Evolution of Economic Drivers & their Influence on Pressures Changes in demographic factors, e.g. population growth in specific urban areas. Economic growth and changes in economic activity composition, e.g. changes in the relative importance of services/sectors. Changes in land planning, e.g. new areas dedicated to specific economic activities, etc. Changes in social values and policy drivers, e.g. globalization. Changes in natural conditions, e.g. climate changes. Changes in economic sector national/international policies, e.g. changes in agricultural policy or industrial policy that will affect production and consumption in economic sectors. Planned investments in different economic sectors, e.g. for developing NR&E services, for restoring the natural environment/ mitigating for damage caused by given uses. Development of new technologies likely to impact on NR&E use for industrial production and related pressures. Trend variables Critical Uncertainties Policy Variables

13. 13 Structure & Processes Environmenta l Functions Human Benefits Anthropocentri c Values Environment UseNon-Use ValuesValues Step1_D. Evolution of Supply & Demand over t (time) and i (space)  Evaluation of spatial and dynamic supply of significant NR(n) for region(i)  Evaluation of sector-specific NR&E demands for i.

14. 14 Market Failure leads the Need for Non-Market Valuation Methods Environmental resources are Public Good Not explicitly traded in any market No market price exists to reveal TEV (Hidden demand). We need to retrieve TEV via WTP Non-market Valuation Methods (using: psychology/economics/sociology/statistics/econometrics)

15. 15 Estimating Demand in Step1 i. Identification of Sector Water Demands in the Watershed Area HouseholdsAgricultureIndustryEnvironmen t Revealed preference methods (indirect methods) Hedonic Pricing Method Travel Cost Method Averting Behaviour Method Residual Analysis (Production Cost Method) Existence & Values for others (direct methods) Contingent Valuation Methodology Choice Experiments: Field, Lap Use ValueNon-use ii. Valuation Techniques for Specific Types of Water Demand Meta-Analysis Method Methods not strictly based on economic welfare Replacement Cost Methods Restoration Cost Methods

16. 16 An Example on Marine Resources

17. 17 Hedonic Valuation Method (HVM) A resource can be defined in terms of services it yields or an `attribute' it embodies. This attribute may be embodied in other goods or assets which are marketed, and which do have observable prices. Using these prices you can derive economic value. E.g: Farm prices in an area with good groundwater are most likely higher than in an area without either ground- or surface water. Comparing differences in farm prices across a region and controlling for other influences, then the difference in prices of these farms would lie in groundwater access. Problems: -Only capable of measuring the subset of use values that people are WTP for through the related market. - If consumers are not fully informed about the qualities of the attributes being valued, hedonic price estimates are of little relevance.

18. 18 Travel Cost Method (TCM) Infers the value of a set of attributes from expenditure (time and money spent on the trip) on outdoor recreational facilities or visits to nature reserves. E.g: Valuing the effects on the demand for recreation of a change in water quality in a river. Problems: - Capable of measuring the subset of values that people are WTP for in the related market. - Very few applications outside resource-based recreational amenities. - Data-intensive. - What value should be assigned to time costs of travel? - Statistical problems & sample bias.

19. 19 Averting Behavior Method (ABM) Use of expenditures undertaken by households that are designated to offset an environmental risk, in order to infer WTP for avoiding environmental degradation. E.g: Use of water filters. Problems: - Limited to cases where households spend money to offset environmental hazards. - Insufficient studies to comment on convergent validity.

20. 20 Residual Analysis Method (RAM) Values all inputs for the good produced at their market price – except for the natural resource in question. The remaining value of the good, after all other inputs are accounted for, is then attributed to this particular natural resource. E.g: Valuing water as an input in production of different crops. Problems: - Only part of use-value of natural resource can be captured. - Market imperfections can bias valuation estimates.

21. 21 Contingent Valuation Method (CVM) CVM relies on a constructed, hypothetical market to produce monetary estimates of value. The value of an environmental resource to an individual is expressed as: - Maximum Willingness-to-Pay (WTP) - Minimum Willingness-to-Accept (WTA, Compensation) E.g: Conduct survey to obtain peoples’ bids (either WTP or WTAC) for a specified change in the quality of water in a river, contingent upon the description of a hypothetical market where water quality is traded. Problems: - Interviewing bias- Non-response bias - Strategic bias- Yea-saying bias - Hypothetical bias- Information bias

22. 22 Choice Experiment Method (CEM) CEM is a survey-based technique which can estimate the total economic value of an environmental stock/flow or service and the value of its attributes, as well as the value of more complex changes in several attributes. E.g: Each respondent is presented with a series of alternatives of the environmental stock/flow or service with varying levels of its price and non- price attributes and asked to choose their most preferred option in each set of alternatives. Problems: - Simplified version of reality … but CEM eliminates or minimises several of the CVM problems (e.g. strategic bias, yea-saying bias, embedding effects).

23. 23 Operational at the policy level? Question: How can these methods be made operational at the policy level? Answer: Recent years have seen a growing interest in the potential for producing generally applicable models for the valuation of non- market environmental goods and services, which do not rely upon expensive and time-consuming original survey work, but rather extrapolate results from previous studies of similar assets. This approach is called meta-analysis for the use and non-use values generated by environmental resources.

24. 24 Meta-Analysis Method (MAM) Meta-analysis is the statistical analysis of the summary of findings of empirical studies: i.e. the statistical analysis of a large collection of results from individual studies for the purpose of integrating the findings. E.g: Freshwater fishing meta-analysis of valuation studies. Meta-analytical research seems to have been principally triggered by: - Increases in the available number of environmental valuation studies. - Seemingly large differences in valuation outcomes as a result of use of different research designs.

25. 25 Environmental Benefits- Transfer Transporting monetary environmental values estimated at one site (study site) to another (policy site). Values must be adjusted to reflect site specific features. When time or resources are limited, this provides an alternative to conducting a valuation study. Using meta-analysis for benefits transfer has advantages. E.g: Environmental Valuation Reference Inventory (www.evri.ca) Problems - May involve bias - Validity and reliability issues

26. 26 List of valuation studies by RESEES Direct use values Irrigation for agriculture PF, RC, MP Domestic and industrial water supply PF, RC, MP Energy resources (hydro-electric) CV Transport and navigation CV Recreation/amenity HP, TC, CVM, CEM Wildlife harvesting CEM

27. 27 List of valuation studies by RESEES Indirect use values Forest Conservation CVM, CEM Nutrient retention RC Pollution abatement RC Flood control and protection RC, CEM Storm protection RC, PF External eco-system support RC, CEM Micro-climatic stabilisation PF, CEM Reduced global warming RC, CEM Shoreline stabilisation RC, CEM Soil erosion control PF, RC, CV, CEM

28. 28 List of valuation studies by RESEES Option values Potential future uses of direct and indirect uses CVM, CEM Future value of information of biodiversity CVM, CEM Non-use values Biodiversity CVM, CEM Cultural heritage CVM, CE Bequest, existence and altruistic values CVM, CE

29. 29 Methodology for Constructing Baseline Scenario Using Parameters from Step 1 1  Consider three possibilities of evolution of population.  Consider two possibilities of evolution of demography of other cities in the region.  Consider possible evolution of rural population. 2 Build scenarios using basic assumptions and quantify the NR&E balance with these assumptions. 3 Apply step two over time. 4 Based on steps 1,2,3, imagine a plot that tells the story of the system from now until at least 2100, giving consistency to the assumptions and NR&E balance curves.

30. 30 How to apply the ‘Baseline scenario’? Sustainability: Env/Eco/Soc Initial status gap Starting from initial status it is possible to elaborate a baseline scenario. The baseline scenario refers to the situation without doing anything else than planned today. Date at which Sustainability should be achieved. Measures to close the gap are needed!

31. 31 Step2: Assess Cost-Recovery of NR&E Services Step2_A. How much do current NRs&E services cost? Step2_B. Who pays these costs? Step2_C. What is the current cost-recovery level? Step2_D. Propose cost-recovery mechanisms.

32. 32 Step2_A&B. Current cost of services Who pays for these costs? Estimate costs of NRs&E services by sector. Do users and/or institutional mechanisms recover these costs? Full-Economic Cost: - Financial Cost: Capital, Administrative, Operation & Maintenance - Environmental Cost (Approximated by use of Valuation Methods) - Resource Cost (Approximated by use of Valuation Methods)

33. 33 Step2_A&B. Current cost of services Who pays for these costs? COST OF Natural Resource ABSTACTION TOTAL ECONOMIC VALUE CAPITAL COST OPERATION & MAINTENANCE (O&M) COST RESOURCE ADMIN COST FORGONE VALUE OF ALTERNATIVE USES (present/future) EXTERNAL COST OF QUALITY REDUCTION PAID BY USERS FINANCIAL COSTS RESOURCE COST ENVIRONMENTAL COST Estimate costs of NR services by sector. Do users and/or institutional mechanisms recover these costs? Analysis per use: Households, Tourism, Industry, Agriculture, Ecosystem

34. 34 Step2_C. Current cost-recovery level. Elements to be investigated: Status of key NRs&E services (e.g. number of people being served). Costs of NRs&E services (financial, environmental & resource costs). Institutional set-up for cost-recovery (e.g. prices and tariff structure, direct & indirect subsidies, cross-subsidies). Contribution from key uses to the recovery of costs. Resulting extent of cost-recovery levels, linked with the affordability for NRs&E users.

35. 35 RESEES Results for Water Resources Cost-Recovery for Greece

36. 36 Βαθμός Ανάκτησης Κόστους ανά Υδατικό Διαμέρισμα Υδατικό ΔιαμέρισμαΒαθμός Ανάκτησης Κόστους (%) Αττικής106.13 Θράκης78.28 Κεντρικής Μακεδονίας78.27 Ανατολικής Μακεδονίας70.74 Βόρειας Πελοποννήσου68.22 Ηπείρου68.11 Ανατολικής Στερεάς Ελλάδας57.61 Δυτικής Μακεδονίας51.71 Κρήτης50.91 Δυτικής Πελοποννήσου50.54 Δυτικής Στερεάς Ελλάδας46.19 Νήσων Αιγαίου37.84 Ανατολικής Πελοπονήσσου34.18 Θεσσαλίας29.82

37. 37 Βαθμός Ανάκτησης Κόστους Ύδρευσης Ανά Υδατικό Διαμέρισμα Υδατικό Διαμέρισμα Βαθμός Ανάκτησης Κόστους Ύδρευσης (%) Αττικής108.14 Θράκης103.29 Κεντρικής Μακεδονίας86.58 Ανατολικής Μακεδονίας79.39 Βόρειας Πελοποννήσου77.31 Ανατολικής Στερεάς Ελλάδας75.1 Ηπείρου71 Δυτικής Πελοποννήσου62.21 Δυτικής Στερεάς Ελλάδας61.29 Δυτικής Μακεδονίας53.55 Κρήτης49.67 Νήσων Αιγαίου42.94 Ανατολικής Πελοποννήσου37.89 Θεσσαλίας33.66

38. 38 Βαθμός Ανάκτησης Κόστους Άρδευσης ανά Υδατικό Διαμέρισμα Υδατικό Διαμέρισμα Βαθμός Ανάκτησης Κόστους Άρδευσης (%) Κρήτης56.25 Δυτικής Μακεδονίας41.05 Ανατολικής Μακεδονίας27.38 Ηπείρου22.44 Αττικής21.30 Βόρειας Πελοποννήσου19.41 Ανατολικής Στερεάς Ελλάδας15.98 Ανατολικής Πελοποννήσου15.66 Δυτικής Στερεάς Ελλάδας14.28 Κεντρικής Μακεδονίας12.04 Δυτικής Πελοποννήσου11.44 Θράκης11.05 Θεσσαλίας6.38 Νήσων Αιγαίου1.78

39. 39 Step2_D. Identify potential cost-recovery mechanisms/Green Investments? Potential cost-recovery mechanisms: Pricing Tradable permits Quotas Taxes/subsidies Charges Direct Controls Educational/Awareness Campaigns Voluntary Agreements Legal Instruments Green Investments in:  Pollution Control and Remediation (Air, Hazardous Substances, Waste, Water, Coast, Cultivated Land)  Resource Conservation and Management (Fisheries, Forest, Historic Sites, Minerals, Oil & Gas, Parks, Biodiversity/Species, Water)  Planning, Land Use and Infrastructure (Municipal Planning, Land Use, Transportation Infrastructure, Energy infrastructure)  Renewable Energy Sources (Solar, Wind, Bio-mass, Natural Gas, Bio-fuels, Photovoltaic, fuel cells, geothermal, etc.)

40. 40 Time to Introduce Sustainable Finance (SF)

41. 41 SF: Concept & Activities Concept: Activities that enhance the financial industry, while improving the environment and the allocation of natural capital promoting sustainable economic growth Activities: Financing ‘green’ enterprises and technologies, which are essential for a healthy/sustainable economic growth Development of ‘green’ financial products and ‘green’ investors Efficient operation of emissions and other trading markets Consideration of environmental risks in lending decisions

42. 42 Global Trend… Indicative of the global trend is the dramatic growth of investment in Clean Energy and Carbon Market. Source: World Economic Forum Growth barely dented by the global economic and financial crisis. Trend expected to resume.

43. 43 Examples Retail FinanceCorporate Finance  Green Mortgage  Green Home Equity Loan  Green Commercial Building Loan  Green Car Loan  Green Credit Card  Green Project Finance  Green Securitization  Green Venture Capital & Private Equity  Green Technology Leasing  Carbon Finance Asset ManagementInsurance  Fiscal Fund (Treasury Fund)  Eco Fund  Carbon Fund  Natural Disaster Bond  Auto Insurance  Carbon Insurance  Catastrophe Insurance  Green Insurance  Strengthening Environmental Risk Assessment in Financing (Avoiding Default, Maintaining Collateral Value, Maintaining Good Reputation, Complying with Legal Issues on Environment, Creating Value, …)

44. 44 Step3: The economic assessment of potential measures/investments for reaching a SD status Step3_A. Identify least-cost set of measures/ green investments. Step3_B. Assessment of cost of measures/green investments. Step3_C. Assessment of the impact of measures/green investments on economic sectors/uses. Step3_D. Social Cost-Benefit Analysis

45. 45 Step3_A. Search for Least-Cost Set of Measures/Investments Economic instruments (e.g. taxes, tradable permits, subsidies). Measures to increase awareness regarding NRs&E scarcity, aiming at reducing over-exploitation & pollution. Direct controls. Programs providing financial and technical assistance for reallocation of production & consumption functions, so that each input is allocation to its most efficient production or consumption use. Green Investments for each economic sector.

46. 46 Step3_B. Assessment of Cost of Measures/ Green Investments - Estimate a range of costs along with key parameters influencing costs over time (cost change with developments in sectors). - Allocate costs of measures/investments to users and identify winners and losers, in order to potentially feed into the CBA (possibly use to justify derogation from different EU and International Treaties (Step3._D)). - Identify potential sources for financing green investments.

47. 47 Step3_C. Impact of Measures/ Investments on Key Economic Sectors/Uses Net impacts on public expenditures and revenues: e.g. - impacts on expenditures for agri-environment schemes - revenues of economic instruments - impacts of changes in the prices charged for publicly owned services. Wider economic and social impacts: e.g. - significant changes in patterns of employment - economic impacts on industries & local economic development from changes in the price of NR&E supply Effects on the retail price index and inflation.

48. 48 Step3_D. CBA: Cost-Benefit Analysis Cost Benefit Analysis (CBA) is an economic tool for government policy and investment project analysis used widely. Can incorporate environmental impacts of policies/projects within CBA to correct for market failure “Social” appraisal of policies and projects, carried out by aggregation of benefits from, and costs of a policy/project over individuals and over time Welfare theoretic underpinning: Economic efficiency with a temporal dimension

49. 49 CBA Steps Stage 1: Definition of policy/project: The reallocation of resources being proposed The population of gainers and losers being considered Stage 2: Identification of policy/project impacts: Define all impacts that will result from policy/project implementation Consider additionality (net impacts) and displacement (crowding out)

50. 50 CBA Steps Stage 3: Identification of economically relevant impacts: Environmental impacts of a policy/project are relevant in CBA if either They change the utility of at least one person in the society They change the quantity or quality of the output of some positively valued commodity Stage 4: Physical quantification of relevant impacts: Determine physical amounts of costs and benefits and when they occur in time Use environmental impact analysis to estimate the impact of policy/project on the environment Estimations will be made with uncertainty, calculate the expected value of costs and benefits

51. 51 CBA Steps Stage 5: Monetary valuation of relevant effects All physical measures of impacts should be valued in common units to be comparable Common unit = money CBA analyst must Predict prices for value flows extending into the future Correct market prices where they are distorted Calculate prices where non exists using environmental valuation methods

52. 52 CBA Steps (cont.) Stage 6: Discounting of costs and benefits: Once costs and benefits are expressed in monetary units they should be converted to present value terms by discounting PV= X t [(1+r) -t ] where X= cost or benefit; r = discount rate; [(1+r) -t ] discount factor; t= time The higher the value of t the lower the discount factor The higher the discount rate for a given t the lower the discount factor

53. 53 CBA Steps (cont.) Stage 7:Applying the net present value test: Apply NPV test to choose those policies and projects that are efficient in terms of their use of resources Where B t = benefits of the project at period t, C t = the costs of the project at period t, r = the discount rate, n = the number of years over which the project will operate NPV is the present value of the project’s/policy’s net benefit stream, obtained by discounting the stream of net benefits produced by the project/policy over its lifetime, back to its value in the chosen base period, usually the present. If NPV>0 accept policy or project (Based in Kaldor-Hicks Criterion) since it would improve social welfare

54. 54 Is Discounting so straight forward? ‘Humanity has the ability to make development sustainable: to ensure that it meets the needs of the present without compromising the ability of future generations to meet their own needs.’ WCED, 1987 ‘There is something awkward about discounting benefits that arise a century hence. For even at a modest discount rate, no investment will look worthwhile.‘ The Economist (1991), March 23, p 73. In the decade since that comment in The Economist, the nature of the problem with long-run discounting has become clearer.

55. 55 The Need for Time Declining Social Discount Rate… There are powerful reasons for choosing a declining social time preference rate. This conclusion is supported by robust recent theoretical work, which has taken several different approaches to the subject. Although there is a paucity of empirical evidence on the pattern of that rate's decline, it may be better to use those data, which are available rather than to continue practicing discounting with non-declining rate in the long term. The data best suited the policy-makers' need were produced by Newell & Prizer (2003) and Koundouri et al (2005).

56. 56

57. 57 Case Study: Floods Defense Over the last ten years, flood-defence investment has been characterized by annual expenditure that has been assumed to offset significant damage; i.e., a cost–benefit ratio much greater than unity. Stochastic model designed to assess the costs and benefits of investment in a particular cell (protected area) of flood defences for Shrewsbury for the Environment Agency. The model determines the net benefit of investment by comparing the damage suffered in a ‘do nothing’ scenario, with damages in the case where 100-year flood defences have been constructed. The benefits can then be compared with the costs of constructing and maintaining the defences.

58. 58 Benefit–cost ratio for a particular cell of flood defences in Shrewsbury

59. 59 Suggested Step Schedule of Discount Rates Period of YearsDiscount Rate (%) 0 – 303.5 31 – 753.0 76-1252.5 126-2002.0 201-3001.5 301 +1.0

60. 60 Effect of shift from flat 3.5% to the step schedule of discount rates Project time horizonPotential effect on project NPV 0-30 yearsSmall, generally insignificant 30-100 yearsSignificant (± 50%) 100-200 yearsLarge impact (± 100%) 200-400 yearsMajor impact (± 150%)

61. 61 1- Characterisation economic significance of NR&E trends in key indicators and drivers dynamic path of demand and supply of NR&E gaps by the agreed date of meeting ‘sustainability’? 2- Assess current cost-recovery how much NR&E services cost and who pays this cost? how much of this cost is recovered? potential cost-recovery mechanisms 3- Identification of measures/investments & economic impact construction of a cost-effective programme of measures/investments assessment of cost-effectiveness of potential measures/investments Env/Eco/Soc implications of the programme of measures/investments Social Cost Benefit Analysis Summary of the 3-Step Methodology

62. 62 Thank You! From the Wealth of Nations… To the Wealth of Nature! Phoebe Koundouri E-mail: pkoundouri@aueb.grpkoundouri@aueb.gr http://www.aueb.gr/users/resees