Contents - Previous - Next

This is the old United Nations University website. Visit the new site at http://unu.edu

Assessing environmental costs

Perhaps not surprisingly, the field of environmental economics is rapidly expanding, both in its scope and with respect to the determination of real economic costs associated with resource development and usage. One of the most significant areas of research in the 1990s is the definition of direct (internalized) and indirect (externalized) environmental costs.

Direct environmental costs are the easiest to define, although in many instances these are associated with new or future technologies and are more difficult to quantify. In general, however, they can be divided into five main areas:

1. Assessment costs are direct costs incurred in defining the anticipated environmental impacts of an individual project or activity. Normally, this would include base-line studies, environmental impact analyses and the preparation of an Environmental Impact Study (EIS).
2. Prevention costs are direct costs incurred in operations which prevent environmental impacts. These include such items as tailings dams for mining operations and safety-valves on offshore drilling platforms.
3. Mitigation costs, the largest of the direct costs, are those for mitigation of environmental impacts. Unlike assessment and prevention costs, which are primarily associated with new projects, mitigation costs are incurred by both new and existing facilities or activities. Common to both energy and mineral use are gaseous emission controls and effluent/discharge controls.
4. Reclamation costs are direct costs incurred in returning the site of activity, and surrounding affected areas, to a state 'agreed upon' by those controlling and those exploiting the resource, that is, approximating that existing prior to exploitation. Such direct costs may be incremental through the life of the project or occur as an assessed cost at the end of the project.
5. Compensation costs are direct costs assessed as compensation to affected parties or costs assessed for irrecoverable damage to the environment. Often such costs are as a result of civil or criminal litigation under existing protective legislation.

In dealing with direct environmental costs, a general rule is that all except compensation (1-4) are defined primarily as a charge for new and/or ongoing projects. However, mitigation and reclamation costs (3 and 4) are often assumed at the state/provincial/national levels for environmental protection, or restoration of areas where past energy and mineral activities have been carried out. The US 'Superfund' is perhaps the largest example of reclamation-compensation costs undertaken by the government subsequent to energy and mineral operations. Particularly for the developing nations of South-East Asia, assessment, prevention, mitigation and reclamation costs (1-4) should always be included in energy and mineral developments now and in the future in order to avoid massive deferred costs for reclamation (4) and compensation (5) once energy and mineral activities in specific areas have ceased operation.

Despite uncertainty about selection, cost and time frames of technologies to meet present and future environmental policies and standards, the direct costs can be clearly defined and the impact of the economic costs on the industry and national economy evaluated. Such is not the case with respect to indirect environmental costs which are in many instances unknown, and are difficult to measure and integrate into overall economic evaluation and planning.

What is clear, however, is that indirect environmental costs are not represented in the standard measures of economic growth such as gross national product (GNP) or GDP or per capita consumption. These deficiencies in accounting for indirect environmental costs are particularly critical when viewed in the context of sustainable economic development as measured by GDP. Specifically, this approach fails to recognize the depletion of national resources, in particular energy, minerals and the environmental components of water, air, soil and habitat; the exclusion of environmental damage/ degradation but the inclusion of direct environmental costs such as reclamation in national accounts, further distorting the national economic profile; and the association of indirect environmental costs with the lack of conservation and efficiency in resource utilization, requiring greater resource development and associated environmental degradation, are large and hidden costs in the economy of most nations.

A study by the World Resources Institute focused on the impact of indirect environmental costs by computing an environmentally adjusted net domestic product (NDP) and net income (Nl). In an analysis including depreciation for oil, timber and topsoil in Indonesia, they found that the growth rate of the NDP for 1971-84 was only 4 per cent, compared to an official GDP growth rate of 7.1 per cent. Although the actual values for NDP might be calculated in several ways, and undoubtedly would produce different growth rates, the important issue is that adjusting economic growth indicators for indirect environmental costs produces a significantly reduced rate of growth. When viewed in the context of sustainable economic development versus energy and mineral consumption, the conclusion seems inescapable: the efficiency of resource utilization in economic growth is much lower than previously predicted when indirect environmental costs are considered.

TABLE 4.8 Environmental Impacts and Relative Costs of Offshore Oil and Gas Development

a Qualilative estimate of the scope and permanency of the impact.
M = Minor
S = Significant
H = High
b Qualitative estimate of the areal extent of the impact. VL = Very local, that is, confined largely to site of occurrence.
L = Local, that is confined largely to immediate area of site of occurrence.
P = Provincial, confined to broad surrounding area bounded by primary dispersal controls.
R = Regional, broad distribution resulting from primary and secondary dispersal.
c Associated costs of environmental impact, mitigation or prevention for medium- to large-scale mining activities (does not include annual upkeep costs).
1. $0 - 250.000.
2. $250.000 - 1 .000.000.
3. $ 1.000.000 - 10.000.000
4. $10.000.000 50.000.000
5. $50.000.000 or more.

As stated earlier, measuring indirect environmental costs is, at best, difficult in most instances due primarily to a lack of base-line data against which to measure impacts, the uncertainty surrounding the interactions within the environment in terms of cause and effect, and the long time frames within which environmental impacts occur and total impact can be assessed. That indirect environmental costs are significant is easily substantiated; however, the associated actual costs are much more difficult to ascertain. The assessment of indirect environmental costs, and their impact on economic development, is a new and challenging frontier of research and quantification.

Direct Environmental Impacts and Costs. Energy and Minerals

In any assessment of environmental impacts and costs, the rapidly increasing rate, scale and complexity of interactions associated with development, population, and energy and mineral development and usage present an almost limitless number of effects. It is not possible in this short overview to delimit environmental impacts and costs except in the most general terms; this is, however, sufficient to demonstrate that even at a summary level, both impacts and associated mitigation or prevention costs are high. For both energy and mineral activities, they occur throughout the cycle of exploration, development, extraction, beneficiation, processing and transportation. In general, it can be said that scale and complexity increase in the downstream industries of beneficiation and processing as do the associated costs of mitigation and prevention.

Energy development (oil and gas), world-wide and within South-East Asia specifically, occurs both onshore and offshore with somewhat differing environmental impacts (Tables 4.8 and 4.9), although costs are similar for both types of operations. As discussed earlier, Asia-Pacific countries are expected to invest $27-29 billion in refining and petrochemical processing during the 1990s. If this investment takes place and only 510 per cent of the total is for environmental controls, then a conservative estimate of direct environmental costs would be approximately $2 billion for the refining and processing industries during the 1990s alone.

TABLE 4.9 Environmental Impacts and Relative Costs of Onshore Oil and Gas Development

a Qualitative estimate of the scope and permanency of the impact.
M = Minor
S = Significant
H = High
b Qualitative estimate of the areal extent of the impact.
VL = Very local, that is, confined largely to site of occurrence.
L = Local, that is, confined largely to immediate area of site of occurrence.
P = Provincial, confined to broad surrounding area bounded by primary dispersal controls.
R = Regional, broad distribution resulting from primary and secondary dispersal.
c Associated costs of environmental impact, mitigation or prevention for medium-to large-scale mining activities (does not include annual upkeep costs).
1. $0 - 250,000,
2. $250,000 - 1,000,000.
3. $1,000,000-10,000,000.
4. $10,000,000-50,000,000.
5. $50,000,000 or more.

Conversely, with the mineral industry (including coal) the environmental impacts are principally on land, although specific activities such as tin mining/dredging are major offshore mining activities. Also, unlike the oil and gas industries, the very nature of mineral extraction, beneficiation and processing results in large and highly visible environmental impacts; for example, in the oil and gas industry, over 95 per cent of the extracted resource is utilized; in the coal industry, it is only 55-65 per cent; and in the mineral industry, less than 10 per cent. As a result, large quantities of waste rock, low-grade ores, tailings and slag must be stored and/or disposed of in an environmentally sound manner. This need to handle and store large quantities of extracted material significantly increases the environmental impacts and costs of mining (Table 4.10).

As with energy, the expenditure on mineral development in the AsiaPacific region is anticipated to be $20 22 billion during the 1990s. Based on estimates in other areas, ranging from 5 to 23 per cent of total miningproject costs, the direct environmental costs incurred (assuming a conservative 10 per cent) will be $2-2.2 billion for mineral developments alone during the 1990s. Clearly, these could be significantly higher within the region if existing environmental policies and regulations are made more stringent.

As the scope and timing of energy and mineral development in the AsiaPacific region in general, and the nations of South-East Asia specifically, depend on numerous externalities (discoveries, economic growth, demand), the exact direct environmental impacts and costs are uncertain. It is certain, however, that they will occur and they will be sufficiently high to have an impact on economic development and the environmental quality of the countries of South-East Asia. If the costs, economic and environmental, are judged to be too high, development will be retarded; conversely, if they are essentially balanced, then development will take place. There will have to be trade-offs of multiple objectives, yet they must be made if sustainable economic development is to take place.

TABLE 4.10 Environmental Impacts and Relative Costs of Mineral Development (Including Coal)

a Qualitative estimate of the scope and permanency of the impact.
M = Minor.
S = Significant.
H = High
b Qualitative estimate of the areal extent of the impacct
VL = Very local. that is, confined largely to site of occurrence.
L = Local, that is confined largely to immediate area of site of occurrence.
P = Provincial confined to broad surrounding area hounded by primary dispersal controls.
R = Regional, broad distribution resulting from primary and secondary dispersal.
c Associated costs of environmental impact, mitigation or prevention for medium- to large-scale mining activities (does not include annual upkeep costs).
1. $0 - 250,000,
2. $250,000 - 1,000,000.
3. $1,000,000 - 10,000,000.
4. $10,000,000 - 50,000,000.
5. $50,000,000 or more.

Indirect Environmental Costs: Energy and Minerals

Indirect environmental costs for energy and mineral development and use are significant in the context of national accounting. They are perhaps more critical in connection with sustainable development of a nation, even though the actual monetary cost may be difficult to ascertain. The principal reasons for this importance are:

1. Energy and mineral development and usage is an irreversible process in which, for all intents and purposes, the resources are utilized and lost to future generations.
2. Although some nations have followed the 'get dirty and clean up' development path, it is doubtful that such a course will succeed for most. The result is that energy and mineral development, may well exceed the ability of the environment to absorb such impacts without permanent disruption. The loss of these attributes impacts on future generations.
3. Pollution transfer is the logical extension of exhausting national energy and mineral resources, as such commodities have to be sought elsewhere. Indeed, a common allegation is that the developed world is transferring its pollution to the developing world, both literally and figuratively. In some cases, this may indeed be a deliberate policy, but in most cases, it is a matter of availability of resources and economics which, de facto, results in the pollution transfer. Regardless of the reasons, globalization of the energy and mineral industries has further spread pollution and environmental impacts internationally. This is and will be the inheritance of future generations; a high indirect environmental cost now, but a major direct cost for the future.
4. Perhaps the highest environmental cost is yet to be extracted, that is, in global climatic change. From the perspective of the early 1990s, it represents the ultimate indirect cost; for example, estimates for reducing greenhouse emissions by achieving a world-wide 35 per cent efficiency in converting coal to electric power would require $400 million per year until 2050 (Torrens, 1991). At present, such costs are indirect and largely unaccounted for in national accounts.

Overall, the nations of the world, including those of South-East Asia, are utilizing their energy and mineral resources, and those of their neighbours, at an ever-increasing rate of consumption and at high levels of indirect environmental cost.

Contents - Previous - Next