The Economic Value of Pneurop’s Green Challenge
2020: The Economic Value of Sustainability
Scientific Director
Prof. Dr. Phoebe Koundouri
phoebe.koundouri@icre8.org
CEO
Dr. Osiel González Dávila
osiel.davila@icre8.org
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Prof. Dr. Phoebe Koundouri
Scientific Director, ICRE8:
International Centre for Research
on the Environment & the Economy
http://www.icre8.org
Vice president of the European Association
of Environmental and Resource Economists
http://www.eaere.org/
Professor in Environmental, Natural Resources, Energy Economics &
Econometrics, Athens University of Economics & Business, GREECE
http://www.aueb.gr/users/koundouri/resees/
Senior Research Fellow, London School of Economics, UK
http://www.lse.ac.uk/GranthamInstitute/profile/phoebe-koundouri/
e-mails: phoebe.koundouri@icre8.org; pkoundouri@aueb.gr
Session plan
1. The Pneurop Green Challenge 2020.
2. How can ICRE8 help you?
3. The Economic Value of Sustainability.
4. Valuation Methods with Applied Examples.
5. Cost-Recovery Mechanisms and Policies.
6. European Commission: Horizon 2020.
1.The Pneurop Green Challenge 2020
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What is the Pneurop Green Challenge 2020?
To put Compressor and Vacuum technologies on the agenda of sustainable
technologies, contributing to meet the overall EU challenge of 2020.
To bring forward the capability of compressors and vacuum pumps as
natural, innovative and viable solutions for a large number of process
applications.
By confining or increasing efficiency of various processes in
reducing usage of harmful chemicals.
By allowing development and manufacture of materials that will
allow the meeting of energy efficiency targets.
By enabling the new hydrogen economy.
By allowing the use of a safe energy media compatible with various
demanding environments.
Externalities, Public Goods, Total Economic Value
Economic Translation of Pneurop Green Challenge 2020:
1. Reduction of Externalities:
Health and Environment
2. Energy Efficiency and
Energy Safety
3. Investment in Renewable
Energy Resources
External Costs of Energy
The price you see is the price paid by the final user.
This is mainly based on the private cost of producing the
service.
But in addition to the private cost we also have some external
costs – pollution from emissions, fires caused by open lamps,
climate change, etc.
The true cost is called:
Price and cost
(€ per unit)
Externality: Air pollution from a factory
Marginal
damage from
pollution
Quantity
of output
Price and cost
(€ per unit)
Externality: Air pollution from a factory
MSC
Deadweight
loss
MPC
P1
P0
D=MB
Q1
Q0
Quantity
of output
MSC = MPC + Marginal Damage from pollution
MSC = Marginal Social Cost
MPC = Marginal Private Cost
Demand curve is the same as the
marginal benefit curve: D = MB
Market Failure
Environmental resource is a 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
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2. How can ICRE8 help you?
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www.icre8.org
Environment, Energy, Economy, Eco-innovation
and e-versions
ICRE8 MISSION STATEMENT
ICRE8 does interdisciplinary research on environmental, natural resources
and energy issues, for a variety of circumstances and stakeholders and across
different temporal and spatial scales.
The overreaching goal of ICRE8 is to support the understanding and
implementation of Sustainable Development, as the only non-self-destructive
path of socio-economic development, and the pursuit of excellence in the
conduct and presentation of research.
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.
Research tools include
financial analysis
socio-economic and econometric analysis
environmental valuation
political and institutional analysis
integrated environmental-economic modeling
cost-benefits analysis
multi-criteria analysis
life cycle analysis
risk analysis
geographical information systems
multi-stakeholder mediations techniques
game theory
information technology decision making tool development
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Completed & Ongoing Projects
Funded Research Projects
e-LUP - Simulating Land Use Processes
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3. The Economic Value of
Sustainability
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Total Economic Value
Provides a systematic tool for considering the full range of
impacts on the environment and on human welfare.
TEV reflects the preferences of individuals.
Preferences can be studied and estimated by stated preference
methods and revealed preference methods
Quantifying the impacts of environmental degradation on
human welfare is essential for the development of wellinformed investments and policies.
Valuation
Environmental
Functions
Structure
&
Processes
Human
Benefits
Anthropocentric
Values
Use
Values
Environment
Non-Use
Values
Total Economic Value
Use Value
Actual Use
Value
Direct Use
Value
Indirect
Use Value
Option
Value
Non Use Value
Existence
Value
For Others
Bequest
Value
Altruistic
Value
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Total Economic Value
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4.Valuation Methods with Applied
Examples
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Valuation Methods with Applied Examples Relevant to
Pneurop’s Green Challenge
The main approaches for environmental impact valuations can
be broadly classified into revealed and stated preference
techniques.
Revealed preference methods use market data to elicit
preferences of a consumer among bundles of goods, given their
budget constraint.
Stated preference methods use structured questionnaires to elicit
individuals’ preferences for a given change in a natural resource
or environmental attribute.
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Hedonic Price Method
Can be used to estimate the demand for air quality
improvements.
The most common implementation of hedonic pricing is in the
housing markets.
The theoretical structure behind hedonic pricing assumes that
households, when making housing choices, consider a vector of
characteristics including among others environmental factors as
air pollution.
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HPM Example
Koundouri, P., & Kougea, E. (2011). Air Quality Degradation: Can
Economics Help in Measuring its Welfare Effects? A Review of
Economic Valuation Studies.
Air pollution and environmental degradation can have direct impact
on property values. It is expected that properties in areas with severe
pollution problems will experience lower prices compared with
properties located in areas of high air quality.
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HPM Example
HPM involves the estimation of a hedonic housing value
equation with air pollution or other environmental factor as one
of the housing attributes.
Econometrical analysis will reveal each household’s willingness
to pay for a marginal change in air pollution from the hedonic
housing value equation.
A marginal WTP function for all households in the urban area
examined is analogous to a demand curve for clean air.
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Results
Authors
Study
Area
Valuation Environmental Impact /
Technique
Good to be Valued
Kamavora
Hedonic
Moscow
(2009)
pricing
Results
Ecological variable had a
negative sign while increasing
Relationship between air
the level of air contamination
pollution and housing
from carbon monoxide,
prices
nitrogen dioxide, sulphur
dioxide and particles
Marginal WTP for air quality, $|
Pollution Variables
Particles (TSP)
Carbon monoxide (CO)
Sulphur dioxide (SO2)
Nitrogen oxides (NOX)
Hydrocarbons (HC)
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Choice Experiment Method
In a CE framework, the good in question is broken down into its
component attributes, which are presented to respondents
normally as a set of combinations of the attributes.
Respondents are then presented with a sequence of choice sets
differentiated by its attributes and levels
CEM Example
Yoo, S. H., Kwak, S. J., & Lee, J. S. (2008). Using a choice experiment to
measure the environmental costs of air pollution impacts in Seoul. Journal of
environmental management, 86(1), 308-318.
Air pollution, a by-product of economic growth, has been incurring
extensive environmental costs in Seoul, Korea.
Air pollution impacts are not treated as a commercial item, and thus it is
difficult to measure the environmental costs arising from air pollution.
There is an imminent need to find a way to measure air pollution impacts so
that appropriate actions can be taken to control air pollution.
CEM Example
This study applies a choice experiment to quantifying the
environmental costs of four air pollution impacts (mortality,
morbidity, soiling damage, and poor visibility), using a specific
case study of Seoul.
The trade-offs between price and attributes of air pollution
impacts for selecting a preferred alternative and derive the
marginal willingness to pay (WTP) estimate for each attribute.
According to the results, the households’ monthly WTP for a
10% reduction in the concentrations of major pollutants in
Seoul was found to be approximately 5494 Korean won (USD
4.6) and the total annual WTP for the entire population of Seoul
was about 203.4 billion Korean won (USD 169.5 million).
Laboratory Experiment Method
Experimental methods provide an important and inexpensive
means for weeding out and improving bad theories.
By studying the decisions of individuals motivated by real
money within well defined and controlled institutional contexts,
one can gain deep insights about valuation of public goods or
bads!
LEM Example
Drichoutis, A., Koundouri, P., & Remoundou, K. (2014). A
Laboratory Experiment for the Estimation of Health Risks: Policy
Recommendations. In Water Resources Management Sustaining
Socio-Economic Welfare (pp. 129-137). Springer Netherlands.
In order to assess the social cost from consuming products produced
in an area where water resources are not in good condition the authors
conducted a lab experimental auction.
Participants were asked to bid to exchange an agricultural product
(potatoes) from region A (polluted with heavy metals) with a similar
product from a region in a good ecological status, region B.
The aim was to elicit WTP a premium to avoid potential health risks
related to heavy metal contamination.
Results
• Consumers are indeed WTP a premium
to
exchange
their
agricultural
endowment.
• Mean bid is 60 cents per kilo of potatoes.
• Gender, income, households with
underage kids and education do not seem
to influence bidding behaviour in a
statistically significant way.
Contingent Valuation Method
The CVM is based on the development of a hypothetical market
or scenario in which the respondents to a survey are given the
opportunity to state their Willingness-to-Pay (WTP) or
Willingness-to-Accept (WTA) for marginal changes in a nonmarket good or service.
CVM Example
Koundouri, P., Kountouris, Y. and Remoundou K. (2009).“Valuing a Wind
Farm Construction: A Contingent Valuation Study in Greece”. Energy
Policy, 37, 1939-1944.
The analysis is based on data from a double-bounded dichotomous choice
contingent valuation study implemented to elicit public attitudes towards
renewable energy generation and their willingness to pay for the construction
of a wind farm in the area of Messanagros in the island of Rhodes, Greece.
CVM results
Significant positive values deriving from the proposed project.
Respondents report a mean willingness to pay a premium in
their bi-monthly electric bills of €8.86 for the sole purpose of
the construction of the wind farm.
The estimated economic benefits to the local population are
weighed against the investment cost in a cost–benefit analysis to
inform policy making and implications for EU energy policy are
provided.
36
Cost - Benefit Analysis
CBA is a technique that assesses the monetary social costs and
benefits of an investment project over a time period in
comparison to a well-defined baseline alternative.
In a CBA framework, the estimated economic values accrued
by the involved stakeholder groups are aggregated over their
relevant populations and added to capture the TEV generated by
the investment project.
To assess the economic efficiency of the wind farm
construction, the aggregate benefits estimated from the
contingent valuation application are used to conduct CBA for
the construction of the wind farm based on the total economic
value.
CBA Future Cash Flows
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Discounting
Once costs and benefits are expressed in monetary units they
should be converted to present value terms by discounting
NPV= NBt[(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.
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Cost-Benefit Analysis
The economic life of the wind
farm is 20 years
The construction cost that will
be incurred exclusively in the
first year is €5,121,000
The maintenance cost is 0.0108
€/KWh/year
NPV of the anticipated benefits
appears to be large enough to
cover the construction and
maintenance costs for the
economic life of the project
The wind farm construction
results in an increase of the
overall social welfare.
Discount Rate
NPV under the low estimates
NPV under the midpoint estimates
NPV under the high estimates
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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.
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Discounting
Constant discount
rates (CDRs) s
Utility
discounting
ρ
Time declining
discount rates
(TDDRs) s(t)
Consumption
discounting μg
Uncertainty about
discount rate (s)
Weitzman
Koundouri et al.
Uncertainty
about the
future
Future
fairness
Uncertainty
about
growth (g)
Gollier
Chichilnisky
Heal
Li & Löfgren
Observed
individual
choice
Hyperbolic
discounting
Cropper et
al
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Example Climate Change
Time Schedule of 1 tone of CO2 emission
Annual damage = mitigation benefit ($/tC)
1.2
1
0.8
0.6
0.4
0.2
0
2000
2050
2100
2150
2200
2250
2300
2350
2400
Year
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Example Climate Change
Marginal damage (present value, $/tonne)
60
50
40
30
20
10
0
Flat Rate (6%)
Flat Rate
(3.5%)
Gamma
Discounting
NPV (200 years)
Gamma Sliding Li and Lofgren
Schedule
Hyperbolic
Discounting
NPV (400 years)
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Example Climate Change
The main result is that estimates of the social cost of CO2 emissions
will at least double if declining discount rates are used!
This will have a huge impact on policies:
(a) Increase the NPV of Kyoto Protocol target achievement.
(b) Increase the estimate of the social benefit of replacing dirty
with clean energy and hence change relevant subsidization.
(c) Increase incentives for green innovation and renewable energy
investments.
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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.
The data best suited the policy-makers' need were produced by
Newell & Prizer (2003) and Koundouri et al (2005).
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Suggested Step Schedule of Discount Rates
Period of Years
Discount Rate (%)
0 – 30
3.5
31 – 75
3.0
76-125
2.5
126-200
2.0
201-300
1.5
301 +
1.0
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Effect of shift from flat 3.5% to the step
schedule of discount rates
Project Time Horizon
Potential Effect on Project NPV
0 - 30 years
SMALL, generally insignificant
30 - 100 years
SIGNIFICANT (± 50%)
100-200 years
LARGE (± 100%)
200-400 years
MAJOR (± 150%)
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Declining Discount Rates have been adopted by:
UK: 2003: 3.5% for first 30 years, then declining schedule
http://www.aueb.gr/users/koundouri/resees/uploads/socialdisco
unting.pdf
FRANCE: 2005 (reviewed on 5 year cycle) : 4% for t < 30
years, 2% for t > 30 years.
USA: 2006: 3.0% or 7.0% depending type of cash flow, lower
rates for longer-term.
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Meta-Analysis Method
Meta-analysis is the use of statistical methods to combine
results of individual studies.
This allows the best use of all the information gathered in a
systematic review by increasing the power of the analysis.
By statistically combining the results of similar studies one can
improve the precision of our estimates of treatment effect, and
assess whether treatment effects are similar in similar situations.
MAM Example
Delucchi, M. A., Murphy, J. J., & McCubbin, D. R. (2002). The health and
visibility cost of air pollution: a comparison of estimation methods. Journal
of Environmental Management, 64(2), 139-152.
Meta-analysis of hedonic pricing studies addressing health risks from air
pollution. The WTP estimates in next slide (VAUS) is the total national
household WTP for the visibility change from pollution in residential areas
of the United States.
Visibility cost refers to loss in visibility due to anthropogenic emissions. The
authors assume that in the absence of anthropogenic air pollution, the
visibility range would be 80 to 100 miles.
Results
a Total annualized household WTP to eliminate anthropogenic TSP pollution.
b annualized household health cost of anthropogenic emissions, equal to VA multiplied by the assumed health share of total costs.
c annualized household visibility cost of anthropogenic emissions, equal to VA multiplied by the assumed visibility share of total costs.
d Includes fine PM (less than 2_5 mm) and coarse PM (between 2_5 mm and 10 mm).
e Includes NO2 weighted by its relative light-absorption effect, and particulate nitrate weighted by its relative light-scattering effect.
f Particulate sulfate weighted by its relative light-scattering effect.
g Secondary organic aerosol weighted by its relative lightscattering effect.
h The effect of removing all pollutants at once.
i The sum of the effects of removing pollutants one by one. This is not the quite the same as the effect of removing all of them at once,
because the damage function is nonlinear. The difference, however, is not great.
Benefit Transfers Method
A practice used to estimate economic values for ecosystem
services by transferring information available from studies
already completed in one location or context to another.
This can be done as a unit value transfer or a function transfer.
Policy-effective because:
- Cheaper in terms of time!
- Cheaper in terms of money!
BTM Example
Koundouri, P., Papandreou, N., Stithou, M., & Dávila, O. G. (2014). A
Value Transfer Approach for the Economic Estimation of Industrial
Pollution: Policy Recommendations. In Water Resources Management
Sustaining Socio-Economic Welfare (pp. 113-128). Springer Netherlands.
In order to assess the welfare impacts associated with improvements in water
bodies of Asopos basin we are using existing valuation literature and our
expertise in transferring values from relevant and comparable projects.
BTM Example
Only studies with a common environmental stressor (industrial
pollution).
Studies value similar impacts, share similar baseline scenario and the
location is as close to policy site as possible.(only studies undertaken
in the European territory and Mediterranean were used).
Value transfer estimate for improvement of the ecology of the river
from ‘bad’ to ‘very good’: is €116.94 per household per year.
Value transfer estimate for a maximum improvement of the ecology
of the wetland: €14.45 per household per year.
Value transfer estimate for improvement of groundwater quality:
€0.021 per m3
6.Cost recovery mechanisms and
policies
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Construction of a baseline scenario
Date at which sustainable
equilibrium is achieved
Cost-recovery mechanisms
Pricing
Tradable permits
Quotas
Taxes/subsidies
Charges
Direct Controls
Educational/Awareness Campaigns
Voluntary Agreements
Legal Instruments
…and 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.)
Classification of Economic Instruments
Economic Instrument
Advantages
1. Standards and Quotas
Disadvantages
Not economically
efficient
2. Water abstraction
charges
Adjustment of price signals to reflect
actual resource costs; encourage new
technologies; flexibility; generation
of revenues
Low charges will have minimal
impact on user behavior and
will continue in resource overutilization; Difficult to police
3. Pollution charges
Same as water abstraction
charges; polluter-pays principle
Same as water abstraction
charges
4. Subsidies on water
saving measures
5. Tradable permits
Readily acceptable
Financial Constraints
Quantity based targets that
are able to attain least-cost
outcome. Allows flexibility.
May entail high
transaction costs
6. Voluntary agreements
Readily acceptable
Needs High Env
Awareness
7. Liability legislation
Assess and recover damages
ex-post but can also act as
prevention incentives
Require an advanced
legal system; high control
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costs; burden of proof
Time to Introduce
Sustainable Finance (SF)
61
61
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.
62
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Global Trend…
Indicative of the global trend is the dramatic growth of
investment in Clean Energy and Carbon Market.
• Growth barely
dented by the
global economic
and financial
crisis.
• Trend expected
to resume.
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Source: World Economic Forum
Examples
Retail Finance
 Green Mortgage
 Green Home Equity Loan
 Green Commercial Building
Loan
 Green Car Loan
 Green Credit Card
Corporate Finance
 Green Project Finance
 Green Securitization
 Green Venture Capital & Private Equity
 Green Technology Leasing
 Carbon Finance
Asset Management
 Fiscal Fund (Treasury Fund)
 Eco Fund
 Carbon Fund
 Natural Disaster Bond
Insurance
 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, …)
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64
What can your company benefit?
The accurate estimation of the social benefit that can be
obtained from reduction of externalities can give your
companies the power to negotiate subsidies and favorable
policies.
The existing economic instruments can allow such bargaining.
65
6.H2020
66
H2020
Industrial Leadership: This pillar aims to speed up development
of the technologies and innovations that will underpin
tomorrow's businesses and help innovative European SMEs to
grow into world-leading companies.
It consists of 3 specific policies:
1."Leadership in enabling and industrial technologies"
2. “Access to risk finance"
3. "Innovation in SMEs"
"Leadership in enabling and industrial technologies"
Will provide dedicated support for research, development and
demonstration and, where appropriate, for standardisation and
certification, on information and communications technology
(ICT), nanotechnology, advanced materials, biotechnology,
advanced manufacturing and processing and space.
Emphasis will be placed on interactions and convergence across
and between the different technologies and their relations to
societal challenges. User needs will be taken into account in all
these fields.
“Access to risk finance"
Will aim to overcome deficits in the availability of debt and
equity finance for R&D and innovation-driven companies and
projects at all stages of development.
Together with the equity instrument of the Programme for the
Competitiveness of Enterprises and small and medium-sized
enterprises (COSME) (2014-2020) it will support the
development of Union-level venture capital.
69
"Innovation in SMEs"
Will provide SME-tailored support to stimulate all forms of
innovation in SMEs, targeting those with the potential to grow
and internationalise across the single market and beyond.
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The EU climate and energy package - up to 2020
Policy objectives
- reducing greenhouse gas (GHG) emissions
- securing energy supply and supporting growth
- competitiveness and jobs through a high technology
- cost effective and resource efficient approach
3 headline targets: 20-20-20
- 20% GHG emission reductions relative to emissions in 1990
- 20% share for renewable energy sources
- 20% savings in energy consumption compared to projections
+ additional targets for energy used by the transport sector
Internal Energy Market
regulatory framework to drive the creation of an open, integrated
and competitive single market for energy which promotes the
security of energy supplies
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The way to stay on a path of SD:
(i) set prices to reflect social costs
(ii) set thresholds (targets) for key indicators
(iii) use improved measures of social welfare
(iv) make enterprises adopt sustainability as a corporate goal.
A Project Proposal: Building a SDI at firm/industry level
Sustainable Development Indicator (SDI) at the firm level
which would provide investors in private and public sector
projects with a screening tool for their investment choices
indicating whether the outcomes of the strategies pursued by the
underlying firms are in line with sustainable development.
The characterization of corporate performance measures as SD
compliant recognizes the shift in investors’ attitudes towards
more environmentally sustainable investment projects and at the
same time identifies and rewards those private and public
corporate agents who choose to align their strategies with what
consumers and society at large perceive as sustainable and
welfare-enhancing.
Published Books