Back of the envelope estimates of environmental damage costs in Mexico

Policy Research WORKING PAPERS Agriculture Operations Country Departmentill Latin America and the Caribbean Regional Office The World Bank January 1992 WPS 824 Back-of-the-Envelope Estimates of Environmental Damage Costs in Mexico Sergio Margulis Developing countries cannot afford an in-depth study of every environmental issue. Policymakers must be given rough, "back- of-the-envelope" estimates of the economic costs of various environmental problems if they are to rank the issues and act. Here is one such estimate - for Mexico. Policy ReacArch WoikingPapers disseminate the findings of work in pmgress and encourage the exchange of ideas amongBank staffand all others interested in development issues. These papers, distributed by the Research Advisory Staff, carry thenames ofthe authors. reflect only theirviews. and should be used and cited accordingly. The findings, interpretations, and conclusions are he authors'own. They should not be attnbuted to the World Bank, its Board If Directors, its management, or any of its member countries.  Country Operations WPS 824 This paper-a product of the Agriculture Operations Division, Country Department 11, Latin America and the Caribbean Regional Office - is part of a larger effort in the Bank to define a strategy for the environment in Mexico. Copies of this paper are available free from the World Bank, 1818 H Street NW, Washington DC 20433. Please contact Josie Arevalo, room 1'7-100, extension 30745 (29 pages). January 1992. For developing countries, budget constraints help different environmental problems in Mexico. set the agenda on mitigating environmental Although the examples are from Mexico, the dimage, one of the indelible marks of our era. method can be useful in other developing And political considerations often dictate the countries as well. measures taken. There are no firm analytical formulas to help even environmentally conscious Margulis shows how creative use of U.S. and policymakers rank needs and remedies. other data can help provide simple estimates of the likely costs of soil erosion, air pollution, A developing country such as Mexico - the mining of underground waters, and estimates of focus of this paper - cannot afford an in-depth the health effects of water and solid waste study of every environmental issue. Policymak- polluton, lack of sanitation, and the ingestion of ers need to be provided with rough, "back-of- food contaminated by polluted irrigation. The the-envelope" estimates of the economic costs of assumptions underlying all calculations are various environmental problems. This allows conservative. Some environmental damage them to rank the issues and act. issues, such as loss of biodiversity, were too complex to permit quantification. In this paper Margulis applied existing methods to estimate the costs stemming from The Policy Research Working Plaper Series disseminates the findings of work under way in the Bank. An objective of the series is to get these findings out quickly, cven if presentations are less than fully polished. The findings, interpretations, and conclusions in these papers do not necessarily represent official Bank policy. Produced by the Policy Rcscarch Dissemination Center  CONTENTS I. Introduction and Conclusions H. Mathod and Limitations m. Cost Estimates of Major Problems Soil Erosion Uir Pollution in Mexico City Metropolitan Area Suspended Particulate Matter Ozone Lead Mining of Underground Waters and Pricing Water Supply to Mexico City Metropolitan Area rrigation Waters Health Effects from Water and Solid Waste Pollution, from Lack of Sanitation, and from Ingestion of Foodstuff Contaminated by Untreated Wastewaters Used for Irrigation References Annex - Dose-Response Relations Not Estimated in the Mex.can Case I am grateful to Sweder van Wijnbergen, Antonio Estache, Gunnar Eskeland, and Hans Binswanger for their help in preliminary discussions and later comments. Special thanks to Allan Krupnick for his extensive comments and suggestions. John Dixon, Robert Anderson, Nancy Birdsall, Jan Bojo and Ronaldo Seroa da Motta also provided helpful comments. Any views expressed or errors made are my responsibility. John Mclntire provided parameters for the estimates on soil erosion, and Jose Simas for those on irrigation waters. Many thanks to Rebecca Hall who helped me with the calculations and a number of parameters.  L. INTRODUCTION AND CONCLUSIONS For developing countries budget constraints help set the agenda on mitigating environmental damage, one of the indelible marks of our era. Political considerations often dictate the measures taken. There are no frm analytical formulae to help even environment-conscious policy makers to rank needs and remedies. A developing country like Mexico-the focus if this paper-cannot afford an in-depth study of every environmental issue. Policy makers need to be provided with rough, "back-of-the- envelope" estimates of the economic costs of various environmental problems. This will allow them to tank the issues-and to act. In this paper, the outcome of an exercise in LA2AG, I applied existing metiod to estimate the costs stemming from different environmental problems in Mexico. Although the examples are Mexican, the method can be relevant in other developing countries as well. The paper shows how creative use of U.S. and other data can help provide simple estimates of likely costs of soil erosion, air pollution, mining of underground waters, and estimates of the health effects of water and solid waste pollution, lack of sanitatic n, and ingestion of feod contaminated by polluted irrigation. The assumptions in all calculations are conservative. Table 1 summarizes the major problems analyzed, their potential effects, the costs involved, and a summary of the equations and calculations. Chapter II describes the method and its limitations. Chapter Im gives details on the cost estimates. (Some environmental damage issues, such as loss of biodiversity, were too complex to permit quantification). 1  TABLE 1 SUMMARY OF MAJOR ENVIRONMENTAL COSTS IN MEXICO () Probles Potential effects Method/formula Annual costs Suitt-in - production/health ( tUSS billions) assumpt f ons SOIL Loss of agricultural Average productivity Application of EROSION output loss A output 1.00 projected tendenicy (soybeans, maize, losses in U.S. to sorghunm and wheat) perpetuity. Particulates: Morbid- ARRAD * 0.0114 x Day Lost=USS32. ity (respiratory baseline RRAD x (conc. 0.36 Conc.FP=119 pg/m3. restricted activity fine particulates - FP Standardx5O Ag/m3. days - RRAD) legislation standard) Baseline RRAD=3. Particulates: AXR = 1.69/million x Conc.s a 298 gg/m3. Mortality (MR) concent. suspended 0.48 1 StatisticaL life z particles US$75,000. Ozone: Morbidity ARRAD a baseline x 50% productivity loss adult population x exp 0.10 other assumptions as _(6.88 x Aozone) - 11 above. HEALTH EFFECTS FROM Lead: Children's Population affected x Screening if>251Lg/dl. AIR POLLUTION treatment for high average estimated 0.06 EDTA test if>35g&g/dL. (MEXICO CITY ONLY) blood lead levels treatment costs 1X require chelation. (BLL) Hospital cost = 1/15 _ _ _ _ _ _ _of U.S. cost. Lead: Children's Population affected x 20% of those>40gg/dl. compensatory education education costs 0.02 Average education expenditure per child Lead: Hypertension in Population affected x A11tg/m3 lead in air a aduLts average estimated 0.01 A3Ag/dl in blood. treatment costs 1% BLL a AO.8% prob. of hypertension. Lead conc.air = 1.4 jLg/m3. Average BLL 15Ag/dl. Lead: Myocardial As above 60% occur in infarctions 0.04 hypertense. Costs=1/2 as in U.S. Subsidies to supply (Marg.cost - charge) x Average price PS2900. EXCESS USE OF water to Mexico City consumption 1.00 Marginal Cost PS4500. UNDERGROUND WATEP Average consumption - DUE TO POOR PRIC * 1.8 billion m3. (not social costs) Subsidies to As above Implicit subsidy of irrigation 0.16 US$82/ha/year to 2 _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ m i llion _h a . Morbidity Incidence x average Children and elderly treatment costs 0.03 require treatment, 50% ORT, 20% lab analysis. DIARRHEAL DISEASES Adults require treat- FROM WATER AND SOLID ment and 20% ORT. WASTE POLLUTION, LACK OF SANITATION AND Mortality: Scenario 1 No.of lives x life 1 Statistical life x FOODSTUFF POISONING - current situation expectancy x value 3.60 USS75,000. Mortality: Scenario 2 Incidence x average 0.00 Treatment * US$3, - with oral rehydrat. treatment costs (USs450,000) ORT a USS1 + 12 l_______________________ therapy (ORT) adninistration. (*) - In all cases, the rate of discount is 5%. 2  The estimates presented here are conservative estimates of the likely environmental costs of the problems analyzed. Policy recommendations based on these estimates have to be made with extreme caution. A much more detailed analysis of the data provided, as well as of the applicability of the U.S. experience to the Mexican conditions, would have to be made. From the calculations, we draw the following conclusions. (1) Where human lives are at risk, the costs of environmental problems rise sharply, even attributing the most conservative values to them. (2) Water- and solid-vwaste related health problems are significant only if one assumes current diarrheal disease mortality rates, without reference to the potential benefits of oral rehydration therapy (ORT). Guaranteeing water supply, sewage supply, water treatment, and solid and toxic waste disposal are all vital. But given the potential benefits of ORT, the government should urgently promote campaigns to advertise ORT, its proper administration, and its benefits, and attempt to guarantee access of all those at risk to serum ingredients or laboratory compounds. '3) If diarrheal infant mortality were controlled or significantly reduced, air pollution in Mexico City would be the country's major environmental problem. This would reflect both the large urban population and the incredibly high pollution level. (4) Particulate matter is Mexico's most damaging pollutant, more dangerous than ozone and lead. Lead should soon cease to be a major health hazard-although the issue of use of leaded and unleaded gasoline in MCMA, their prices and effects on the use of catalytic converters are still critical issues for government. (5) Water supply to both Mexico City and to irrigation in agriculture are rarely mentioned as major Mexican environrmental problems. But underpricing water has led to overuse. We calcul- ad only the subsidies implicit in the charging systems. Massive pumping underground waters is also causing the terrain to sink, threatening infrastructure. Although the effects of subsidence in Mexico City were not even calculated, the cost estimates here suggest that adjustment of p.i^ing is urgent. (6) Soil erosion is often considered the major environmental problem in Mexico and some Central American countries. The calculations suggest that after water pollution and related problems this could well be the case. We only considered on-farm costs (impaired crop yields), but off-farm costs (siltation of dams, for example) must eventually be taken into account. We also could not estimate the costs from increased fertilizer applications. Estimation based on applying U.S. parameters to Mexican soil data may be particularly invalid because the effects of soil erosion are very site specific. Such issues deserve much further analysis. 3  11. METHOD AND IlMITATIONS Ranking Environmental Problems No unambiguous criterion ranks one environmental problem over another-for instance, making urban water pollution more critical than air pollution, loss of biodiversity, or soil erosion. The issue is complicated by the different nature and effects of the problems. One criterion would be to consider more severe the prcblem that implies the highest costs-but this would not necessarily indicate which problem must be addressed first. Given the budgetary constraint, even though the costs of water pollution may be higher than those caused by air pollution, it may be more cost effective to control air pollution first, if the control costs are lower. On a practical level, the above limitation may not be so serious. There is a significant lack of information on the extent of physical problems, on the damages, and on the costs of control. Thuis, it would be too grand a goal to make a full benefit/cost analysis of every majo; environmental problem in a country such as Mexico. This is probably true in most nations. Making rough estimates of damages may be a realistic, less ambitious way to indicate to environmental authorities the relative severity of national environmental problems. This is a necessary first ster to defining priorities. The exercise here demonstrates to policy makers that benefits can be estimated with currently available information, so that when full cost-benefit analyses are performed, they already have a place to start, i.e., a very practical (back-of-the-envelope) guide for first cut benefit estimation. An impo.Iant additional benefit derives from the quantification of the enviromnental costs of different problems. Under the laws of most =ountries, and under the Bank's lending conditionalities, environmental impact assessments (EIA) are now required for different t,pes of investment projects. But economic decisions on the viability of projects are usually independent of EIA; since a number of environmental costs are direct costs, there is clear scope for estimates ^f such costs to be made based on EIA and then incorporated in the economic evaluation of projects. This would allow for EIA to become a more integral part of project preparation. The economic evaluation would give a more rational ranking of alternatives. Method Three basic steps help estimate the costs associated with environmental degradation. The first is to measure the level of environmental quality (or degradation). The second is to relate such level of quality to damages--health, productivity, materials. This depends on knowledge of the "dose-response" function, the relationship that associates the incidence of health problems (or other 4  effects) to different levels of environmental qudlity.' The last step then assigns costs to the predicted in.Adence of health problems (or loss of agricultural production, or damage to materials). In the case of the health effects, we tried to assess both direct costs (hospital and treatment costs, for example) and indirect costs (a mother's time). This paper does not discuss the pros and cons of assigning monetary values to physical or to health effects from environmental degradation. There is a fairly vast literature on this issue. What is missing are applications of theory, particularly in the context of developing countries. The existing applications have been made almost exclusively for the U.S. and some European countries. Some methodologies used in the U.S. studies are not readily applicable elsewhere, because of geographic and socioeconomic differences. Even so, in some situations, simple first order estimates of the damage costs can be made by "direct" application of the U.S. experience; that procedure is not new here. Limitations This study is limited in several respects. As indicated, dose-response curves are not necessarily applicable to all populations and all regions. In addition, (1) quantification methodologies are still subject to much debate. (2) Not all major problems have been considered in this study, and for those probiems analyzed, not all the effects have been estimated and a great deal of uncertainty is involved. (3) In the case of Mexico, there is a paucity of information on parameters. We have additionally opted for a conservative approach, so that estin-iates tend to be underestimates of the true costs of each problem. (1) Estimating the economic effect of environmental improvement (or degradation) has been controversial. In some environmental problems, society incurs in "direct" costs-matetial damage, loss of agricultural production, and so on. It is necessary to incorporate these costs into decisions on investment projects. The costs associated to the health effects of pollution involve subjective pain, which cannot be readily quantified, as well as direct costs (hospital and treatment cost, loss of productivity). "Much research has been devoted to the area and several health benefit studies on the acute effects and the mortality effects [of air pollution] are now available" (Krupnick and Alicbusan 1990). Cost studies on the mortality effects of environmental degradation involve estimating the "value of life" (premature death). This cannot be thought of in terms of willingness to pay by any 1. In the case of health effects, the incidence of problems is related to the exposure rather than to ambient concentration of pollutants. Models that attempt to determine exposure of individuals to pollutants require a considerably larger volume of information. For the population at large, it is questionable w.'.ether the results differ significantly. 5  particular indivilual; instead, it mu:st be measurt i in statistical terms-as the costs incurred by society to avoid a greater probability of a deadly accidenw or as an individual's willingness to accept a risky activity at a higher payment. Tne human capital approach, which values an individual's life according to the net present value of his/her productivity, is subject to wider technical and ethical criticism but requires substantially less data. (2) Though the conceptual framework exists to evaluate in money terms the consequences of loss of biodiversity, this aspect is not included in the analyses. The main reason is lack of knowledge on the effects of loss of biodiversity (oss of known and unknown pharmaceutical products, soil erosion and so on). Economic valuations thus involve many subjective considerations and great uncertainty. The information available is extremely limited, even for developed countries. As to uncertainties,