GLOBAL 12476ENVIRONMENT

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The Incremental CostS Of'Global VEnvironmental Bentefits

Ken King

Working PaperNu'mber 5

UNEP

THE WORLD BANK

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GEF Documentation

The Global Environment Facility (GEF) assists developing countries to protectthe global environment in four areas: global warming, pollution of international waters.destruction of biodiversity, and depletion of the ozone layer. The GEF is jointly implementedbythe United Nations Development Programme, the United Nations Environment Programme,and the World Bank.

GEF Working Papers - identified by the burgundy band on their covers - providegeneral information on the Facility's-work and more specific information on methodologicalapproaches; scientific and technical issues; and policy and strategic matters.

GEF Project Documents -.identified by a.green band - provide extended project-specific information. The implementing agency responsible for each project is identified byits logo on the cover of the document.

Reports by the Chairman - identified by a blue band - are prepared by the.Office ofthe GEF Administrator in collaboration with the three GEF implementing agencies for the

biannual Participants' Meetings.

The Incremental Costs of Global Environmental Benefits

Blank

GLOBALENVIRONMENT

FACILITY

The Incremental Costs of Global Environmental Benefits

Ken King

Working PaperNumber 5

UNEP

THE WORLD BANK

© 1993The Global Environment Facility1818 H Street, NWWashington, DC 20433 USA

All rights reservedManufactured in the United States of AmericaFirst printing October 1993

The views expressed in this paper are not necessarily those ofthe Global Environment Facility or its associated agencies.

ISBN 1-884122-04-3ISSN 1020-0894

The Incremental Costs of Global Environmental Benefits

This paper is the second among a series of GEF Working Papers to deal with the Program for MeasuringIncremental Costs for the Environment (PRINCE). The GEF is a financial mechanism that provides grantsto developing countries for projects aimed at protecting the global environment.

PRINCE was initiated in February 1993 at a workshop held at the Tata Energy Research Institute in NewDelhi. It covers methodological studies, field tests, and dissemination related to the technical issues ofmeasuring incremental cost. This is a concept central to the GEF; the two conventions to which it is linked-the Framework Convention on Climate Change and the Convention on Biological Diversity; and theMontreal Protocol dealing with ozone depletion.

Participating governments provided US $2.6 million from the Core Fund for a three-year program. It buildson existing work concerning the phase-out of ozone-depleting substances and concentrates on theincremental costs of reducing the emissions of greenhouse gases. Parallel work will extend the concept ofincremental costs to the protection of international waters and the conservation of biodiversity.

This paper addresses the need for decision-makers to familiarize themselves with the issues related toincremental costs and global environmental benefits that will shape policies and strategies for financingactions to protect the global environment. This paper is only a survey of these issues; the issues themselveswill form the subject of intensive research in the GEF's PRINCE program.

The other Working Papers currently in the PRINCE series are numbers 4, 6, 7 and 8.

Ken King is Senior Environmental Specialist at the GEF Administrator's Office in Washington, D.C.

Contents

Introduction 1

1 Conceptual Issues 3

2 Analytical Issues 12

3 Policy Questions 16

4 Strategic Issues 20

Appendix I: Examples of Environmental ProtectionIncurring Net Incremental Costs 25

Appendix II: Equity Principles for Resource Transfers 27

vii

Abbreviations

CFC Chlorofluorocarbon

FCCC Framework Convention on Climate Change

GHG Greenhouse gas

ODS Ozone-depleting substances

viii

Introduction

Incremental cost is a central concept in the global Often these conceptual, analytical, and strategic is-environmental conventions. Under both the Frame- sues are mixed. In this paper, chapter 1 outlines thework Convention on Climate Change (FCCC) and the various conceptual difficulties, chapter 2 delineatesConvention of Biological Diversity, developed coun- the analytical issues, chapter 3 reviews the policytries are to meet the "agreed full incremental costs" questions that need to be addressed in relation toincurred by developing countries in complying with incremental cost calculations, and chapter 4 outlinesthe conventions (see Appendix I). There is a similar the strategic implications of these issues for the GEF.obligation under the Montreal Protocol to the ViennaConvention on Substances that Deplete the Ozone The aim of this paper is to explain incremental cost asLayer, where eligible incremental costs will be paid by clearly as possible through examples. Simple illustra-the Multilateral Fund established under the protocol. tions are used not merely as an aid to communication,And for the Global Environment Facility (GEF), which but also as a reminder that many of the features that areis the interim operating entity of the financing mecha- hardest to understand are inherent and do not arisenism of the Climate Change and Biological Diversity solely out of applying the incremental cost principlesConventions, incremental cost is the basis for grant to global, international, or environmental problems.financing. The first illustration is the economic analysis of a

simple project-a dam. Later illustrations elaborateDespite its crucial importance, incremental cost is not on progressively more complex features. After thewell understood due to several reasons: essential concepts have been illustrated, examples of

global environmental issues are introduced. The sim-* The concept itself is a difficult one, especially when plest is ozone layer protection; it is also the one for

linked to incremental global environmental benefits which there is the most practical experience. Some-* The analysis is difficult and the numerical results are what more complex is the prevention or mitigation of

often unreliable, because of the conceptual issues climate change. Unlike ozone depletion, this is not toand inherent data problems be a complete phase-out nor a fully funded operational

* Incremental cost is used to answer different policy program, and involves a long time horizon, long-runquestions, and may not be calculated the same way technical change, and the inclusion of almost everyin all instances sphere of economic activity. Loss of biodiversity

* The conceptual and analytical issues create financ- presents even greater challenges; unlike atmosphericing strategy issues with which they may be con- pollution problems, there are no homogeneous phys-fused. Unless the issues are clearly separated, a ical proxies that can be used for benefits, and no wellstrategy might seem to be implicit in the way incre- developed model and sectoral planning methodolo-mental cost is calculated. gies for meeting the global environmental goals.

Throughout the text, a number of important conceptu-al, analytical, policy, and strategic points are high-lighted. These are labelled "C" for conceptualdifficulties in chapter 1, "A" for analytical issues inchapter 2, "P" for policy questions in chapter 3, and"S" for strategic implications for financial mecha-nisms in chapter 4. These issues do not have the samestatus-some are conceptual, others are observation-al, and some are speculative-but could all be pointsof departure for further research.

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ConceptualIssues

The concepts of incremental cost and incremental (BB). In this case, assuming that the original projectbenefit arise from cost-benefit analysis, where they is itself economic, the analyst needs to estimate thehave well-defined meanings. Certain difficult aspects incremental cost as just the cost of the additionalof these concepts can, however, affect even the sim- pipeline, namely CB, and the incremental benefitplest analysis. These include: the baselines against (the amount by which the benefit would exceed thatwhich the increments are to be defined; the increments which would be obtained without the second pipe-with which we are concerned; the system boundaries line, which is BB). The analyst would recommendof the problem being analyzed; and the sensitivities of investing in a project comprising the dam and boththe estimates of incremental cost and benefit to the pipelines only if the incremental benefit exceededassumptions underlying the analysis. These concepts the incremental cost. This illustrates a basic aspectare complicated further when they are extended be- of incremental cost:yond the economic analysis of projects to financialanalysis. In looking at these conceptual issues here, Cl. There is always a baseline situation against whichparticular attention is paid to cost allocation when incremental costs (and benefits) are estimated orthere are both global and domestic environmental measured.savings orbenefits. Special analytical issues related toglobal environmental benefits mentioned in this chap- This is obvious in the example above; the baseline ister are discussed more fully later. the original project with only the first pipeline. (Even

for the original project there is a baseline-the decep-Let us begin by considering a simple policy question: tively simple "no project" situation. In that case, thewhether to invest in a project, such as a dam (cost CD) total cost of the project is incremental to the cost ofand an associated pipeline (CA) that would supply doing nothing, which is zero.)water to Township A, this supply being the onlybenefit (BA). The analyst would use the techniques of Yet the simplicity of the first example obscures onecost-benefit analysis and recommend funding for the important general point that is brought out moreproject if the estimated benefit BA exceeded the clearly in the second, namely:estimated cost (CD+CA).

C2. The baseline situation is a counterfactual.BaselineNow let us consider a slightly more complex ques- Incremental cost has meaning only in mutually exclu-tion: whether to add a component such as an addi- sive situations; if the enhanced project (the one withtional pipeline (cost CB) to carry water to Township the second pipeline) is undertaken, then the baselineB, the supply of which leads to an additional benefit project (the one with only the first pipeline) is not.

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C3. Because the baseline is counterfactual and not of a technology cannot be determined without refer-explicit or self-evident, it must be specified for the ence to a baseline situation that is being displaced,purpose at hand. and which is specific to the country.

There might be several mutually exclusive options: no The baseline distinction is usually made in projectdam at all, a lower dam, and a barrage. Incremental analysis. But in more complex cases such as GHGcosts and benefits can be calculated between any pairs reduction studies, authors sometimes fail to specifyof these options, and the preferred option will be the a baseline situation. They focus solely on the costsone for which the net benefits are greatest. This lack of and GHG emissions of alternative forms of energyspecificity is seldom a problem in simple project supply, and make recommendations on that basissettings where baselines are usually explicit, but in alone. But costs and emissions of alternativemore complex settings it can lead to ambiguity energy forms are only part of the equation; theunless the relevant baseline is specified in detail. For increments are equally important. These incrementsexample, the Montreal Protocol did not specify a are situation-specific; results may sometimes goprecise baseline for the Multilateral Fund to use for its against the general trend or be counter-intuitive, asfunding; the baseline has been refined by successive can be seen in the following examples:policy interpretations of the Executive Committee.Several very different baselines for a country could * GHG reduction. Sometimes a given amount ofhave been conceived: one could have been the situation financing might abate more GHG if it covered, say,that would have existed if there had been no Protocol; the incremental cost of natural gas-fired poweranother would have existed had the country concerned (displacing the coal-fired power that would other-not joined the Protocol even though every other coun- wise have been supplied) than if it covered thetry had. Clearly the baseline is of importance due to its incremental costs of pollution-free solar energy.effect on incremental cost. The reason in such cases is that for a given cost, one

can obtain a greaternetreduction of GHGs by usingIncrements natural gas (despite the GHGs emitted by naturalIn considering increments, key issues comprise dis- gas) than by using zero-GHG (but high cost) solartinctions between capital costs and operating costs, energy. But the conclusion that natural gas shouldbetween economic costs and financing policy, and be favored over solar energy can only be reachedbetween the actual project and the baseline project. through a calculation of increments in a situation-First, let us recall a distinction for convenience: specific context.

Energy conservation. The costs of abating GHGsC4. Costs can be divided into capital costs (including through energy conservation are frequently misun-other one-time costs such as training) and operating derstood, possibly because two incremental costcosts. calculations are required and because the baseline

situation is seldom explicitly stated. First one mustSurprisingly, options are sometimes compared on the calculate the unit cost of conserved energy (CCE),basis of only one type of cost. One common mistake is which is the demand-side incremental cost per unitto compare only capital costs of energy alternatives. of energy saved. Forexample, the yearly differenceAnother is to fail to distinguish between total costs and between the cost of fluorescent light tubes and theincremental costs, or between total benefits and incre- cost of incandescent bulbs providing the samemental benefits (of reducing, for example, greenhouse lighting service, divided by the annual energygas (GHG) emissions in the energy sector). savings, is the CCE for investing in fluorescent

rather than incandescent lighting. This is usuallyC5. Total costs mustbedistinguishedfrom incremental positive, fluorescent being more expensive. Thencosts; likewise, total benefits must be distinguished one must calculate the incremental cost betweenfrom incremental benefits.Although the total costs and the CCE and the unit cost of supplying additionaltotal benefits of many technologies are known gener- electricity. For the purpose of this example, theically, the incremental costs and incremental benefits CCE is less than the unit cost of additional supply,

4

which makes the demand-side investment the port.' While the identification or mention ofleast-cost alternative. Although the CCE would be incremental costs is not mandatory for such anpositive, the incremental cost of carbon dioxide implicit approach, one should not conclude thatabatement through energy conservation would be incremental costs are not imposed. Indeed, it isnegative. important to understand that the incremental

costs would (implicitly) be borne by developingDistinguishing between total costs and incremental countries (perhaps through incremental but re-costs is important for financial policy if only the payable loan amounts) rather than by donors.incremental costs are eligible for reimbursement. For There should still be an interest in calculatingexample, the costs of energy conservation activities these incremental costs, even if they are to bethat are economic would be ineligible, while the costs self-financed, because the country itself mayof energy conservation activities that go beyond what wish to consider the economic implications of itsis economic would be eligible for reimbursement. commitments or of the conditionality.One needs to consider the system, both with andwithout global environmental protection (the base- The incremental projectline). Thus incremental costs cannot be calculated by The practical significance of the baseline being coun-examining only the costs of the proposed action. terfactual may not be apparent in the example of the

simple dam above, because it is only necessary toIncremental costs and incremental cost obtain engineering cost estimates of the incrementalfinancing component. But consider the case where the altema-Because incremental costs have been closely associ- tive to the originally proposed dam is ahigher dam thatated with financing policy, it is worth recalling that would supply more water. Although the high dameconomic incremental costs are independent of fi- would be more costly than the low dam, it would notnancing policy: have any identifiable incremental component; the

high dam has a unique design-it cannot be built byC6. Incremental costs are imposed on an enterprise simply adding stonework on top of a wall that isor countly by a binding constraint (such as one structurally sufficient for only a low dam. Indeed, indesigned to protect the global environment). The general:existence and size of these economic incrementalcosts do not depend on who pays for them, or on C7. The incremental project is the "difference" be-whether they are explicitly or implicitly financed. tween the actual project and the baseline project. It

may be impossible to identify the incremental projectThe distinction between explicit and implicit fmanc- with any specific component of the actual project.ing of incremental costs can be illustrated in two waysthat have been suggested for protecting the global The analyst has to estimate the costs for both the actualenvironment in developing countries: and the baseline situations. In this example, this could

require separate bids or cost estimates for the low* An explicit way is through financing by the inter- dam and the high dam, since their designs would be

national community of the incremental costs of different. This lack of an identifiable component, suchglobal environmental protection through entities as a piece of hardware, makes the portfolio of anylike the GEF fund set up to finance incremental costs look rather

* An implicit way is through reliance on country nebulous. The portfolio would not, after all, comprisecommitments to take appropriate actions, even in whole projects (such as dams) oreven parts ofprojects,the absence of external grant support. Develop- but only the differences between actual projectsment institutions could reinforce such a strategy (which can be verified, monitored, and audited) andby making global environmental protection a counterfactual situations (about which there could becondition of their lending and development sup- considerable debate).

The acceptability and strategic merit (or lack thereof) of this hypothetical approach are not considered here.

S

Continuing with the example, after the high dam is many will make the problem intractable; choosing toobuilt, its actual cost can be verified and compared with few could risk leaving out an essential element whichtheoriginal estimate. Butthe costof the low dam-the would invalidate the analysis.one not built-remains an estimate. Hence:

Often the system analyzed is a single project. TheC8. In general, the incremental cost remains an benefits of a group of strongly related projects canestimate that cannot be verified. only be realized in full if all the projects are imple-

mented. In sucn a case it is more appropriate to analyzeSince incremental cost cannot always be verified after the entire sectoral program. An example of a sectoralthe fact, separate financing of incremental costs can- program is a least-cost system of dams, pipelines,not be fully audited. and water treatment plants that together would

supply water to a township. There may even beOften the policy question-in this instance, the situations where it is necessary to analyze an evenoptimal dam height-is not framed as neatly as the broader system, such as the national economy. Inchoice between two discrete options, high and low. general, the broader the system considered, the greaterThe analyst could be faced instead with the problem the number of trade-offs that can be considered, andof finding the optimal scale, which is the height that the lower the cost of meeting the overall objective.maximizes net benefits. The optimal scale is reachedwhen incremental costs just begin to exceed incre- What system boundary is used for global environ-mental benefits. With such a continuum of options, mental projects? For the phase-out of ozone-deplet-the final choice will indicate implicitly the analyst's ing substances (ODS), the Interim Multilateral Fundjudgment about the incremental costs and benefits. under the Montreal Protocol supports projects oneAnd while the analyst may be correct in judging the at a time. Thus a system boundary is drawn tooverall project to be economic, the optimal scale capture only the costs and savings to the firm ormay be overestimated, in which case the incremen- firms being targeted in the project. Although thistal investment would be uneconomic, or underesti- system boundary is satisfactory for determiningmated. This would be an economic opportunity reimbursable costs, it has limited use in the selec-foregone. In many instances only one organization tion of projects. This can be seen in the case wherefinances the project, and it may be well satisfied a firm produces substitute chemicals for sale to userwith the overall economics. If the overall rate of industries that in turn sell products to consumers:return is particularly high, there might even be little costs incurred in one sector are passed on in part toconcern for or awareness of the incremental loss. others. Although the cost-effectiveness of a project(Incremental losses may in fact be quite common in to produce a substitute chemical might be comparedthe power sector, where demand has often been to an alternative plant for producing the same sub-overestimated and too much capacity has been stitute, it makes little sense to make such a compar-built.) Thus: ison with a completely different type of project (for

example, one that converts an industry to the use ofC9. "Incremental projects" may be implicit in larg- that substitute), since both types will ultimately beer projects that combine several smaller projects. needed to deliver the required phase-out at theSmaller, uneconomic incremental projects might lowest possible cost.2

not be noticed if they are within large, highlyeconomic projects. But if they were separatelyfund- The system boundary for GHG reduction must oftened, their failure would become highly visible. embrace not just a project, but a sectoral program. In

the power sector, for example, it would be rare to findSystem boundary a simple project-shadow project pair that could beTo draw the right system boundary, it is necessary to analyzed for incremental costs and incremental GHGconsider all the interrelated elements. Choosing too emissions. It might, for example, be geotechnically

2 Country programs for ODS phase-out are produced to demonstrate this interdependence-by showing the strategy that underlies thechoice of projects-but are not used as the basis for resource transfers.

6

possible to construct a 100 megawatt (MW) geother- relatively undeveloped. It may be tempting to devotemalplantthatwouldbelessGHG-polluting,ifslightly relatively large resources to studying such sectors asmore costly, than a coal-fired plant of the same size. energy, simply because powerful analytical tools forBut what if such a coal-fired plant did not constitute such an understanding already exist, even thoughthe realistic baseline? The construction and use of the there may be many more opportunities for environ-geothermal plant would probably involve several mental amelioration in other sectors. It might also besystemboundary elements, because its operating char- more reasonable to draw the boundaries in a com-acteristics would differ from those of coal-fired plants pletely new way-by the type of gas being reduced (inand because it would be built at a different location. the case of GHG studies), by geographic or ecologicalPerhaps a planned 300 MW coal-fired plant would be unit, or by the existing reach of public sector strate-postponed by a year and some small hydropower gies. This subject warrants more research becausedams built in the interim. some response strategies would be much more eco-

nomically efficient than others.The only way to analyze incremental cost is bydrawing a system boundary wide enough to em- Sensitivitybrace all the incremental effects of the actual (geo- Increments are more sensitive than whole projectsthermal) case relative to the baseline (coal-fired) or programs. Using the dam example, let us imaginecase. The power supply program-a sequence of that a separate investor were to finance just thesupply, transmission, and distribution projects with incremental cost of the high dam (compared to theall their capital and operating costs-is the smallest low dam that would otherwise have been built) insystem that could do this. The actual case is then not return for the incremental benefit. The investorjust a single project (such as the geothermal project) would run the risk that the total demand for waterbut the least-cost power supply program meeting a would not exceed what could have been supplied bygiven constraint on the emission of GHGs. Like- the low dam alone, or that it would not exceed it bywise, the baseline is not a shadow project, but the very much. This risk is much higher than the riskbaseline least-cost power supply program drawn up borne by the financier of the baseline capacity (thewithout taking into account GHG emissions. The low dam), because the entire incremental capacitydifference in cost between the strongly constrained would have to go unused before the baseline benefit(actual) program and the unconstrained (baseline) could even be reduced. Therefore:program is the incremental cost of reducing GHGemissions by the difference betweenthe constrained C1i. Incremental benefits are more sensitive to theand unconstrained amounts. outcome of the project than are the total benefits.

In general, contrasting the two programs project-by- In this example of the dam, it is assumed that theproject so as to identify an "incremental project" is not baseline benefit could be readily established; if therepossible. Incremental costresults from many different were any incremental benefit at all, this baselinesubstitutions and shifts in timing; even if the actual benefit would be the value of the capacity of the lowprogram did indeed include the geothermal project, dam. In other situations, even the baseline benefit isthat project could not be paired with a baseline project difficult to establish. If, for example, the baselinethat it had displaced. Thus one should be aware that: investment were in watershed management and the

incremental investment went towards enhancing wa-CIO. The appropriate system to analyze may not tershed management practices, the incremental bene-be the project-it may be the sector, or even the fit would be the difference between the known watereconomy as a whole. captured and what would have been captured without

the enhancement. This could not be readily and reli-The power system is an obvious and relatively simple ably established. In general:example; it will be more challenging to draw anappropriate system boundary for sectors such as land- C12. The incremental benefit is sensitive to baselineuse management, where existing methodologies are assumptions, which are only hypothetical.

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C13. Likewise, the incremental cost is sensitive to Assuming that the costs and benefits are independent,baseline assumptions. Consequently, the incremental they remain unchanged so that the supply of water tounit cost and the cost-effectiveness ratio-the ratio of B does not alter the benefit to A or the cost of the dam,the incremental benefit to the incremental cost-are and vice versa. Both Option 1 and Option 3 areoften extremely sensitive to baseline assumptions. assumed to be economic, and Option 3 is preferred

over Option 1 (the baseline) because the incrementalClearly, any fund that finances only incremental costs cost CB is less than the incremental benefit BB.in the expectation of generating incremental benefitswould have a portfolio with high financial risks. Of Now suppose that the potential beneficiaries in Town-course the incremental risks are just as great when the ship B volunteer to pay for their incremental cost CBfunding for a project comes from a unitary source (for (that is, volunteer to finance only the second pipeline,example, one which finances a high dam-a project which could never be needed by Township A), itthat can be regarded as a baseline investment plus an would leave the beneficiaries A no worse off than ifincremental investment). But the risks are seldom they had gone ahead with Option 1. At the same time,manifest because the incremental investment is mere- the benefits to B would exceed their investment,ly implicit in the total project, which might have an making them better-off than before.attractive overall rate of return. Cushioned by baselineinvestments, the portfolio ofthis single funding source This incremental cost financing offer may be suggest-would carry a much lower risk. ed by the economic analysis, but is not prescribed by

it. In fact, if Township A had the sole right of accessCost allocation to the dam, they would probably use this right toIn principle, one can make the decision to invest in a negotiate a higher contribution from Group B, to helpproject based on unambiguous criteria: if the costs are pay forpart of the dam itself and not just for the secondless than the benefits, investment in the project is pipeline, which would be of no interest to them. Thejustified; however, if the incremental costs of invest- least that A would settle for would be that B pay CBing in an alternative (mutually exclusive) project are (since A would not voluntarily subsidize the pipelineless than the incremental benefits, investment in the for B), and the most A could hope for would be that Balternative project is an even better proposition. pay an amountjustequal to BB (since B would not pay

more than the water was worth to them). If there wereDual financing a large gap between BB and CB (the surplus generatedIf a single organization finances a project and benefits by the incremental investment), there would be amplefrom it, the financing rule is clear. However, when room for negotiation. Within this negotiating win-there is more than one financing body (usually be- dow, A and B would have to negotiate according to acause the benefits can be divided between different variety of other considerations, including principlesgroups willing to share the incremental cost), an of equity and the fact that A already had the right ofexplicit financing policy is needed, detailing what the access to the dam.parties owe. Financing policy follows few strict rules;any allocation of project costs and benefits that would Typically, A and B would split the incremental sur-leave each party better-off would be feasible. It is this plus according to an agreed formula. One possiblenegotiable component that makes cost allocation sub- formula is that B would pay for all the "separable"ject to other (non-economic) criteria. To illustrate, let costs-those uniquely associated with supplying Bus return to the dam example, which has the following (in this case the cost CB of the second pipeline}-andoptions: share with A the "non-separable" cost (CD) of the dam

in proportion to their remaining benefits, namely BB-1. Dam and pipeline to supply Township A; CB and BA-CA respectively. This formula ensures2. Dam and pipeline to supply Township B; that all costs are financed, makes both townships

and better-off as a result of the incremental investment,3. Dam and pipeline to supply both Town- and appears fair. However, within the negotiating

ships A and B. window, there are other possibilities and the cost

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allocation could be determined by other factors and CD+CA+CB-BA, which is the net incremental cost toprinciples. B (the incremental cost less the benefits accruing to

B's cofinancier). By recasting the example in terms ofThe incremental cost financing rule protecting the global environment and extending theLooking at environmental protection, let us suppose reasoning of C14, it is clear that:that there are two beneficiary groups: the countryhosting a global environmental action, or domestic C 15. International financing for only the net incre-partner D; and the world as a whole-the "global" mentalcostofaprojectwith bothdomesticandglobalpartner G. One example of an incremental invest- benefits is the cost allocation rule that requires thement (the analogue of the second pipeline) least amount of internationalfinance.is the extension of a national park (at cost CG) toprotect additional biodiversity with benefit to the Moreover, in the case of joint products, the partyglobal community BG, and with only negligible attempting to restrict its contribution to net incremen-benefits to the host country. If GEF, representing the tal costs is in an even weaker negotiating position thanglobal community's interests, uses incremental cost a party attempting to restrict its contribution to incre-as the cost allocation rule, it would make a grant mental costs (as in C14), because in the joint productequal to CG. But as the example of the dam and case, there is no possibility that the other party wouldpipelines shows, other rules are possible. Therefore: proceed unilaterally.

C 14. There may be many feasible cost allocation The agreed full incremental costs rulerules for projects with global environmental bene- The conventions acknowledge that there will be somefits; using internationalfinancing for only the incre- room for negotiation because the costs will have to bemental costs requires the least amount of global "agreed." One area subject to agreement would be thefunding. netting of savings and benefits which, according to a

strict net incremental cost rule, would be subtractedJoint products and the net incremental cost from the incremental cost.financing ruleA slightly more complicated situation arises when the The implementing agencies of the Multilateral Fundincremental investment provides benefits for both under the Montreal Protocol have some latitude in thisgroups; that is, when there is a"joint product." This can regard. They are obliged only to "take the domesticbe illustrated by the dams again, but this time assuming savings and benefits into account," which means thatthat neither Township A nor Township B would find it the grant made need not be strictly net incrementaleconomic to proceed alone with Option 1 or Option 2 cost. In some cases, the incremental cost is mainly arespectively. They must cooperate to invest in Option known initial capital cost (for example, the cost of3 or there would be no economic project. converting an aerosol plant from the use of chloroflu-

orocarbon (CFC) propellant to the use of liquefiedIn the joint product illustration, neither Option 1 nor petroleum gas (LPG)), whereas the domestic savingsOption 2 could be regarded as a baseline since (by are merely projected amounts based on assumptionsassumption, in this situation) neither is economic. The of future price differences and capital utilization fac-incremental cost and benefit for Option 3 will therefore tors. The agencies acknowledge this asymmetry andbe measured from the zero baseline. The incremental make allowance for the cost of incremental risk bornecost is the total cost (CD+CA+CB) and the incremental by the recipient enterprise.benefit is the total benefit (BA+BB), which exceeds thetotal cost because of the assumption that Option 3 is Cost-effectivenesseconomic. If costs are to be shared, the least that A The presence of two types of benefits and of dualwould settle for is that B pay for all the costs that exceed financing complicates the ranking of alternatives. Thethe benefit to A. This would force A to pay an amount economic rule that incremental benefits should ex-equal to its benefit BA, at which point it is indifferent ceed incremental costs is sometimes represented byto the venture. This minimum contribution from B is supply and benefit curves. A rising supply curve (for

9

example, the unit cost of abating GHGs against the funds expended on a net incremental cost basis, butamount of GHGs abated) may be compared to two may not maximize the total surplus that can bebenefit curves-a domestic one (the value of the generated with the total funds available.domestic benefit per unit of GHGs abated against theamount of GHGs abated), and a global one (the unit This last observation is easily demonstrated by aglobal benefit due to avoided climate change). numerical example. Suppose there are two possible

projects each costing $100. The first reduces GHG byAlthough the supply options can always be arranged 1 ton and produces a joint product worth $95, so thatin ascending order of unit cost and the resulting global the unit abatement cost is $5 per ton. The secondbenefits will lie on a flat or downward-sloping curve, project reduces GHG by 10 tons and produces ajointthere is no reason to believe that the domestic benefits product worth $10, so the unit abatement cost is $9 perwill lie on a downward-sloping or even on a continu- ton. If the value of the GHG abated is $10 per ton, theous curve. This is because the domestic benefits total surplus that can be generated with $100 is higherresulting from joint products will be heterogeneous in the secondproject than in the first- $10 versus onlyand will not, in general, bear any relation to the cost. $5-even though the second is higher up the supplyConsider the following hypothetical cases: the lowest curve for carbon abatement. In general, the ranking ofunit abatement cost for GHG reduction might be projects which maximizes total surplus tinder anassociated with the cultivation of biomass on salt- overall financial constraint will depend on the valuedamaged land, with a medium-sized domestic (joint) assigned to the global benefit-a value which is notbenefit from the ecological restoration. The next high- well established.est unit cost might be associated with switching fromcoal to natural gas in power generation, with a large Project rank is a financial consideration, not an eco-domestic benefit from the spin-off produced by a nomic one. (All the projects for which benefits exceedreduction in acid rain. The most costly abatement costs are economically justified.) Therefore, whereapproach mightbe reducing carbon emissions through there are two or more financing parties interested ina new process for making cement, with essentially different benefits and operating under different finan-negligible domestic benefits. In general: cial constraints, a project ranking that is suitable for

one may not be suitable for the other. In particular, ifC 16. There is no well-behaved relationship between the cost allocation rule is that the global communitytlhe domestic (joint product) benefits and the supply pays only the net incremental cost of a project, their,function. preferredranking of projects will be according to cost-

effectiveness-that is, in an ascending order of netAn alternative way to represent the supply is to first incremental cost per unit of global environmentalsubtract all the domestic benefits (and not just the protection. The host country will have no preferreddirect savings) from the supply costs. The unit ranking, being indifferent among projects for whichabatement cost in this case would be the net incre- they have to pay an amount equal to the benefitmental cost per unit of GHG abated. As before, obtained. Therefore, it is observed that:supply options can be arranged in ascending orderof unit cost, but now there is only one benefit curve, C 17. Selecting projects by cost-effectiveness (forthe global one, presumably a predictable function of example, up the supply curve, in ascending orderabatement. Now every option for which the supply of net incremental cost per unit of global environ-curve is below the benefit curve is economically mental protection) appears to be an economic se-attractive. But the options are not ranked financial- lection rule, but is implicitly a financial policyly; if the curve is misinterpreted as a financial decision. There are many possible rank orders toranking (the options being exercised in ascending choose from, depending on where the financialorder, up the supply curve), a subtle judgment has constraint lies and what the cost allocation rule is.been made about distribution of benefits between The global community would choose ranking bythe two parties. This ranking would maximize the cost-effectiveness if it were to maximize globalglobal benefits available per unit of international benefitsfor (constrained) globalfinancial resourc-

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es. If there were manyjointproducts, and if domes-tic financial resources for poverty alleviation (oreconomic development generally) were constrained,or if another cost allocation rule were used, adifferent rank order would result.

Global environmental benefitsFurther work is needed on the concept of globalenvironmental benefits, which can pose problemsspecific to particular global environmental issues.A clear understanding of benefits is critical foroperational programming and post-project evalua-tion. Some issues, which are treated more fully inthe following chapter, concern the benefits of:

* Mitigating climate change* Reducing emissions where accumulation is the

important parameter (the stock problem and thediscount problem)

X Avoiding catastrophic or irreversible events (the"non-linearity problem")

* Protecting species diversity and cultural heritageX Reducing uncertainty about global environmental

change* Spreading the risks of the responses to global

environmental change• Changing development strategies to protect the

global environment.

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Analytical2 Issues

Since baselines are not in themselves explicit, they istic expectation, given the large number of eco-must be specified for the purpose at hand (C3). This nomic distortions in many countries (and notbecomes an analytical problem, or at least one of only in developing countries). Using it, the ana-interpretation. lyst runs the risk of excluding investments from

funding that would have contributed most to theBaseline solution. These include investments that demon-Even where a baseline has been identified, the analyst strate and model the adoption of appropriatewill often need to interpret and develop it to make it institutions and policies to encourage energysufficiently explicit for a calculation of incremental conservation. These options would be domesti-cost. cally sustainable and globally beneficial once

information is acquired or institutional barriersAl. Baselines should be fully specified. overcome.

C Current trends. A second possible baseline isIn a country study on GHG reduction, for example, "current trends," which incorporates any exist-what does it mean to say that the baseline is "existing ing price and policy distortions. (The Montrealtrends" or "what the country would otherwise have Protocol, for example, assumes that industrialdone?" In the case of the Montreal Protocol, does the strategy and economic policy are not changed.)baseline include the effects of all other countries join- Using this interpretation, the analyst runs the risking the Protocol or only those of the particular country of defining incremental cost too widely; donorsin question? The following considerations apply: may not want to indefinitely subsidize projects

that would be financially attractive even afterEconomic optimum. One possible baseline that economic reform. Such an approach also begsmay appeal to countries that finance the incre- the question of whether or not current trendsmental costs of others is the economic optimum. include the likelihood of economic reform, espe-This constitutes the best that a country would cially when one is forced to use very long timehave been capable of doing for itself. It would horizons, as in GHG studies.mean that investments that moved the country * Equity. With a baseline founded on equity rathertoward the economic optimum and simultaneous- than on reasonable expectation, a country mayly improved the global environment by reducing emphasize that it has the right to develop a certainGHG emissions (such as economically attractive industry at a particular (high) rate of growth toinvestments in energy conservation), would not catch up with the levels in developed countries, toincur costs that could be deemed incremental. provide basic living standards, or to achieve someThis baseline, however, may not represent a real- other goal.

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Each of these interpretations-and there are many unreliable. Since growth is compounding, even aothers-needs to be carefully developed before being small error in the estimated growth rate will have aused as a baseline for incremental calculations. But no large impact over the long run. Third, since base-matter which is specified, it remains counterfactual lines may be used to determine the transfer of(C2) so that: resources, there are incentives for both donors and

recipients to interpret any ambiguities to their ad-A2. Baselines must be estimated or calculated, they vantage.cannot be measured. Although some parametersmight be validated subsequently, the baseline itself Incrementscannot be verified. The problem of projecting actuals-for example,

the actual costs of supplying power in a specificIn the example of the high dam, it might be adequate "greenhouse-friendly" manner-is ultimately lessto obtain bids on the same terms and conditions for the serious since the actuals, unlike the baseline, willlow dam (the alternative or "shadow" project) to one day become known. (Here actuals represent theprovide a baseline for incremental costs and incre- chosen course of action rather than the baseline.)mental benefits. This may not be entirely accurate, The analyst should then consider whether incre-because there are always site-specific factors that mental costs should be financed on the basis ofbecome apparent only during actual construction, and forward-looking estimates or on the basis of liqui-because there may be cost overruns that can be mea- dated expenses. If it is the former, then incrementssured in the actual (high) dam but which can only be are calculated between two sets of projections orguessed at in the alternative (low) dam. estimates; if it is the latter, the actuals will eventu-

ally be known even though the baseline remainsThere is another complication when projecting future hypothetical.baseline situations. Bids may not be meaningful be-cause the original technology and the economics of A4. Calculating increments after the event removesproduction could have changed. For example, if a some, but not all, ofthe uncertainty in the calculation.country is to be compensated for the incremental costof a compressor for the substitute refrigerant hydrof- If, for example, incremental cost is to be financed inluorocarbon-123a (HFC-123a) over the cost of a advance of the investment and operations, then therecompressor for CFC (the technology that would have is always some risk that the projected operation willbeen used had there been no concern about ozone not turn out as predicted. There is a risk that the actuallayer depletion), what is the right price to use for the incremental cost will exceed or be less than theCFC compressor in 2010 when they will no longer be calculated incremental cost, even if the baseline ismanufactured? Clearly, the analyst cannot obtain known. Which party should bear this risk? For exam-realistic bids, but must instead calculate the baseline ple, part of the incremental capital cost of a machinecost using various assumptions about the scale of for recovering and recycling refrigerants from auto-compressor production and the effect of expected mobile air conditioners can be recovered from thetechnological developments on production costs. operational savings in future years (less refrigerant

needs to be bought than otherwise). If the net presentA3. Baselines requiring projections into the distant value of this expected saving is fully deducted fromfuture will be particularly unreliable. the incremental cost to calculate the eligible reim-

bursement, then the enterprise receiving the grantThis statement is based on theoretical, observation- absorbs the risk. If there is more business than expec-al, and strategic grounds. First, in the long run ted, the enterprise has a windfall gain; if there is less,(possibly decades), the main influence on cost is a windfall loss. How is the cost of risk to be deter-going to be technical change. This is very difficult mined? Who should pay for the risk? If the financingto model reliably. Second, even medium-term pro- body makes an advance for incremental costs andjections of economic growth and the demand for subsequently liquidates that advance years later whenpower and other goods have proved to be very the operation is complete, the risk is absorbed by the

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lender rather than by the recipient. (But this may A5. It may be necessary to analyze transaction,reduce the enterprise's incentive to make a profit information, institutional, and market developmentand may increase administrative costs-both of which costs rigorously, and to validate and value the shiftsare issues of strategy.) in development strategy catalyzed by demonstration

projects.At best, the numerical estimates of the baselinemight be adjusted if the baseline had been defined Sensitivity and cost allocationin terms of some observable parameters (such as the Given that incremental calculations are very sensi-level of future operations) that could be verified at tive to baselines (C 11, C 12, C1 3) and that baselinesa later date. But whether financing is done on the are extremely difficult to calculate reliably, the fol-basis of projections alone or on the basis of a lowing can be expected:liquidated advance, the uncertainty in the baselinecannot be entirely removed. A6. Numerical estimates of long-run incremental costs

and benefits are likely to be difficult to make credible.System boundaryAs a rule, a wider system boundary makes the To estimate the net incremental costs of obtaining aanalysis more difficult. Project analysis is simpler global environmental benefit, the analyst needs tothan sectoral or country analysis, although the wid- count the domestic value of the action taken.er analyses may be more realistic. Some tools existfor sectoral analysis (such as least-cost planning A7. Two analyticalproblems will be the valuation ofmethodologies) that could be modified to take ac- domestic externalities and the separation of domes-count of global environmental benefits, either as tic from global benefits.economically valued benefits or as additional con-straints on system optimization. Macroeconomic The domestic benefit will be more difficult to esti-models can also be adapted, for example, to show mate if itis an externality, such as reduced ecologicalthe overall costs of imposing a global environmen- damage due to acid precipitation, than if it is in thetal requirement or constraint within a certain form of a cost saving to the recipient enterprise, suchtime. as reduced fuel bills. And policy responses might be

different in the two cases.If a wide system boundary is accepted (encompass-ing alternative strategies for development), it might Separating benefits is partly a matter of judgment.be possible to regard some projects as catalysts for Consider the example of a research room for testinga shift in strategy, for example, toward an econom- refrigerators. Such a room can have two uses-ically efficient strategy that is compatible with testing refrigerators using no ODS, and testing re-global environmental protection. Such a wide sys- frigerators developed in the normal producttem boundary would have two implications-one development cycle to fill new market niches. If suchfor costs and one for benefits. First, it will be a facility was not previously economically justifiednecessary to estimate incremental costs in a wider and is specifically built to accelerate the adoption ofsense, such as the costs of establishing markets, of non-ozone depleting technology, what proportion ofmaking transactions, of gathering and conveying its benefits should be regarded as domestic?information costs, and of the changing institutions.These costs must be analyzed, rather than casually Global environmental benefitsassumed to be equal to whatever subsidy would A8. Six main analytical problems in calculatingmake a project financially attractive. Second, it will global environmental benefits are: how to valuebe necessary to value the indirect incremental biodiversity, how to separate domestic from globalbenefits, such as the demonstration effects that benefits, how to useproxiesforglobalclimate change,help bring about the shift in strategy. These two how to value a reduction in uncertainty, how to valueaspects provide challenges for valuation and risk-spreading, and how to value demonstrationmeasurement. effects.

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Biodiversity of reducing uncertainty) to repeat it in anotherThere is no agreed way to value biodiversity and unless the circumstances are very different. Theavoided species loss. There is some scientific agree- benefits of repeating it may be limited to the directment on the important areas and the degree of threat, effect of reducing GHGs, a smaller benefit than thebut no consensus on how to make trade-offs. Even if first project yields.biodiversity is not given an explicit "dollar value," thefact that trade-offs will be made will give implicit The analytical challenge is to value the informationvalues. provided. This is currently done implicitly, but a

more systematic approach based on a decision-Separation of benefits analysis framework may need to be explored.The problem of valuation can occur in any environ-mental area; it is particularly difficult in the case of Benefits of spreading riskbiodiversity. In great uncertainty (about climate change and the

effectiveness of responses to it) a reasonable strategyProxies is to hedge among a number of possible negativeSince it is virtually impossible to value the benefit outcomes, such as:of avoided climate change, a number of physicalproxies have been used. In the case of ozone layer * Climate change occurs and does serious damage,protection, the proxy is the ozone-depleting poten- but we have under-invested in abatement and miti-tial (ODP), a relative measure of the ability of a gationchemical to destroy the ozone layer. In the case of * Climate change is not a serious problem and weclimate change, the proxy is the global warming have over-invested in abatement and mitigation.potential. These proxies present a fundamentallyinsoluble problem: without knowing the value of It would be very useful to have some understanding ofozone depletion or climate change as a function of the optimum degree of precautionary investment andtime, one may not be able to rank alternative emis- the composition of that investment. The claim that "nosion profiles and therefore alternative projects that regrets" options exist may need to be examined, sinceare responsible for such emission profiles. The use there may be unacknowledged managerial, transac-of "physical discounting" to answer this is flawed, tional, and even political costs of change.because it makes implicit assumptions about thedamage function (usually that the value of emis- Benefits of demonstrationsions reduction is the same at all times). The prob- The benefits of a demonstration project extend be-lem is most acute when a choice must be made yond the project itself. The benefit is the shift inbetween projects that reduce the emissions of dif- strategy that the project catalyzes. It will be necessaryferent gases (such as carbon dioxide and methane, to value these benefits rigorously if a demonstrationwhich have different radiative forcing effects and effect is to be a convincing justification for interna-different atmospheric residence profiles). tional grant financing.

Benefits of reduced uncertaintyOne of the benefits of a GEF project may be thereduction of uncertainty. There may be uncertaintyabout how successful a certain type of environmen-tal project will be in a developing country, forexample, because of the different institutional struc-tures and ecological regimes. This is the reason thatportfolio diversity is important; if, for example,there has been one project that demonstrates how toreduce GHGs by reducing gas flaring in a develop-ing country, it may not be necessary (for the purpose

15

Policy3 Questions

Analysis of incremental costs and benefits can be incremental costs, it is preferred. In the globalused to answer different policy questions, for which environment arena, there are at least two altema-different interpretations and calculations may be tives: what would have been done with globalrequired. Sometimes policy choices may be made environmental considerations, and what wouldimplicitly (even unintentionally) through the selec- have been done without them. If net incrementaltion of an analytical procedure. Thus the analyst cost (NIC) is defined as incremental cost (IC) lessshould be explicit about the policy question at hand. incremental domestic benefit (IDB), then the selec-The main policy questions concerning the global tion rule is equivalent to requiring that the incre-environment that could be aided by an analysis of mental global environmental benefit (IGB) exceedincremental costs and benefits are: the net incremental cost. Algebraically:

* Which incremental investments are economic? IGB > NIC (rule to ensure economic* How much should an enterprise or country be choice), where

reimbursed by the global community for actionstaken to protect the global environment? NIC IC - IDB

* Can projects be ranked so that they can be imple-mented in descending order of cost-effective- IDB Incremental domestic benefitness? (including cost savings)

* Can projects be sequenced (and combined withappropriate policies) so that the overall program IGB Incremental global benefitcan be achieved at the lowest possible cost?

* Which technologies are worth promoting first? IB IDB + IGB = Total incremental* What resources are needed to finance the actions benefit.

required to protect the global environment?Resource transfers

Economic analysis Funding bodies such as the Multilateral Fund underIn theory, this is simple. Projects (or programs) the Montreal Protocol and the GEF provide devel-whose benefits exceed costs are economic. When oping countries with grants determined on the basisthere are alternatives that are mutually exclusive, of incremental costs. Any decision to reimburse netthe option that yields the largest net benefit is to be incremental costs, specifically the allocation ofpreferred. This option can be selected by comparing costs between two parties (domestic and global), istwo options at a time; where the incremental eco- a matter of financing policy. Cost allocation princi-nomic benefits of one relative to another exceed its ples cannot be derived from the economic selection

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rule; for example, an equally valid rule would be for ranking will reflect the net present value of futurethe global community to pay the cost amounting to benefits per unit invested today. But where somethe global benefit and the domestic party to pay the future benefits are in the form of cash savings thatcost that is incremental to that. can be borrowed against, the present constraint will

be released, producing a different rank order. Sec-Reimbursement policy is not completely arbitrary. ond, if there are two or more financiers interested inAlternative cost allocation rules (the alternative different benefits, the ranking begs two questions:interpretations of agreed incremental costs) can be whose financial constraint is being applied? Andanalyzed in terms of their strategic incentives, distri- whose benefit is being maximized? This secondbutional effects, and other policy constraints. point can be illustrated by the example of a country

with a state-owned smelter acting as a point sourceStrategic incentives will be powerful if incremental for sulphur dioxide (SO2) emissions. It could be thatcost forms the basis upon which grants are deter- there are many independent options for reducingmined. This is because the calculation is problem- emissions of SO2, whose removal is thought to beatic, the baseline is counterfactual (not verifiable), worth $70 a ton in environmental benefits. All theseand the calculated grant is highly sensitive to pre- options will fall under one of the following twoliminary assumptions. categories:

There are frequently other policy constraints that * Energy conservation. A capital investment of$ 100operate. Underthe Multilateral Fund, forexample, the yields energy conservation benefits with a netonly net incremental costs reimbursed are those that present value of $60 to the enterprise, and simulta-meet certain eligibility criteria. Capital and operating neously reduces SO2 by 1 ton.costs are not treated interchangeably, so that a verti- * Scrubbers. A capital investment of $100 in anti-cally integrated enterprise may obtain a different pollution equipment reduces emissions by 2 tonsreimbursement from the total obtained by separate but yields no benefit to the enterprise.companies for the same actions. The rules also pro-duce an asymmetry between new and existing enter- For the country as a whole, the best option is scrub-prises, so that their application also has distributional bers. For an Acid Rain Authority that financed onlyeffects within a country. the net incremental cost of reducing SO2 emissions,

energy conservation seems preferable, because forProject ranking each grant of $200 for net incremental costs, theWhere there is no financial constraint, all economic authority can obtain 5 tons of reduction via energyprojects should be funded according to the selection conservation, but only 4 tons from scrubbers. But forrule described earlier (whereby benefits exceed the enterprise itself, both options are equally attrac-costs) based on a simple economic comparison of tive, since the net benefit (benefit plus grant minustwo options. Where there is a financial constraint, cost) is zero in both cases.say for a company, the desire would be to allocatethe available funds among the viable non-exclusive In considering CO2 reduction financed by the GEFoptions to maximize the benefits. That is, projects or another multilateral body, the logic is the same.would be ordered in terms of their financial merit Countries would be indifferent among all optionsand funded in descending order of merit until funds for which they received a grant equal to the netare exhausted. incremental cost, while the global community would

rank them according to carbon dioxide (CO2) reduc-Project ranking is a financial issue, not an economic tion per dollar. But the world may be better-off withone, and treating economic supply curves as project yet another ranking. Thus the upward-sloping sup-rankings for financing purposes is a fundamental ply curves of CO2 abatement could be interpretederror. First, the ranking chosen reflects the nature of economically-that is, all options that supply abate-the financing constraint. Where the constraint is ment at a cost less than its value are economic. Itliterally a ceiling on investible funds today, the should not be interpreted as a rank ordering-this

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would imply that global finance is limited while There is no suggestion that one or other of the projectsdomestic finance is not, and that the rank order is in the sequence is more financially attractive thandetermined solely by concerns about global warm- another. In fact, the analyst usually chooses to drawing rather than development. The ordering pro- the system boundary around the program rather thanduced for an overall financial constraint is likely to around the individual projects precisely because therebe quite different; furthermore, it is sensitive to the are interdependencies and indivisibilities that renderestimated value of CO2 abatement, which is at project-by-project analysis futile. For example, if onepresent purely speculative. had decided upon a least-cost power supply program

it would make no sense to implement only a selectionFor the most part, cost-benefit ratios alone cannot of projects (say, only the transmission lines) becausebe used to rank projects because reclassifying neg- the benefits of any project can only be realized withinative cost items as positive benefits changes the the system.ratios and hence the ranks, which in turn has distri-butional consequences. This is especially important P2. Unless all the projects identified in the least-costin the context of GHG reduction, where a particular plan are implemented, the resulting prograni will notrank order is often suggested in a rather subtle way make the most effective use ofthe resourcesavailable.(namely, ascending order of net incremental costper ton of CO2 abated, which increases unit abate- Although this is obvious in the case of a least-costment cost). power program, it is also true for a "least-cost"

program for GHG reduction or other types of activ-Ranking will be a critical issue in GHG reduction ities. In fact, unless there is a reasonable probabilitybecause of the large, heterogeneous group of "joint that full funding will be available for a such aproduct" options. Opportunities for GHG reduction program, there may be little point in devising it. Awill arise out of reforestation, energy conservation, better strategy might be to identify a number of low-the ecological restoration of land, and improve- costindependent options-essentially, to do aprojectments to agricultural productivity. If objectives for ranking.poverty alleviation, development, and GHG reduc-tion are to be met simultaneously with limited In the energy sector, there are powerful methodolo-finances, no single agenda can determine the gies for least-cost programming that could be adaptedpriorities. to GHG reduction by adding an emissions constraint

to existing system plans and by re-running the optimi-In phasing out ODS the issue is less serious, because zation. The constrained least-cost minus the uncon-fewer joint products are involved. Where such joint strained least-cost would be the incremental cost ofproducts are present, they consist primarily of cost meeting the constraint. By releasing the GHG con-savings which are easily intemalized by the recipient straint at the margin, one could determine a shadowenterprise. cost for GHG abatement in that system. The greater

challenge though, is to widen the planning to cover allProject sequencing and policy analysis GHGs and all sectors simultaneously, as there may beWhen entire programs are under consideration, the less costly options elsewhere.mutually exclusive options are alternative sequenc-es of projects. Sometimes alternative programs may The analyst's choice of baseline will be crucial; itdiffer only in sequence or timing, with their constit- will also require an implicit judgment on a numberuent projects staying the same. There are incremen- of policy choices. By examining the effect of differ-tal costs associated with favoring one program over ent policy choices on the resulting incremental costanother. Incremental benefits, such as reduced emis- calculation, the analyst can use the least-cost pro-sions of GHGs, may also exist. gramming method to evaluate the policies. This has

been done, in simplified ways, in country programsPl. Project sequencing (a time ordering) is not the for the phase-out of ODS. Alternative sequencessame as project ranking (a merit ranking). and policies lead to different net present values of

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the incremental cost of meeting given phase-outschedules. The numerical results are too sensitive tobe very reliable indicators of the total incrementalcost (or of the expected grant from the MultilateralFund, which is calculated project-by-project ratherthan programmatically).

P3. Least-cost programming methods may be usefultests for alternative policies and strategies.

Technology rankingIf a funding agency wished to determine whichsectors and technologies were the most promisingworldwide, it could analyze the unit abatementcosts (or another similar measure based on netincremental cost per unit of global benefit). Thisapproach would have the same drawbacks men-tioned above for project ranking, particularly in thecase of GHG abatement, which occurred as a jointproduct in heterogeneous sectors. In the case ofODS phase-out, with few joint products and a fewstandard interventions, it might be a useful exercise.The World Bank has in fact examined the unitabatement cost for the typical interventions (recy-cling, conservation, substitution, and alternativetechnology) in a variety of sectors (aerosol manu-facture, fire extinguishing, air conditioning, mobileair conditioning, refrigeration, and solvent use andproduction). Although the calculations provide use-ful models and reference data, the numerical resultswere too sensitive to country-specific data to bereliable benchmarks. For example, the incrementalcost of reducing emissions of ODS through recy-cling is extremely sensitive to assumptions aboutthe use of recycling machines in service and repairshops, which in turn depends on the structure of theindustry in each country and the projected commer-cial prospects of the enterprises.

Resource mobilizationGlobal estimates of incremental cost could be used toguide resource mobilization efforts. At present theseestimates are speculative, given the sensitivity anddata problems. In any case, resource mobilization inthe short run is likely to be constrained more by theavailability of funds and the institutional capacity toinvest wisely.

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Strategic4 Issues

Definitions of incremental cost and incremental global incremental cost is unlikely to be necessary forglobal environmental benefit lie at the heart of resource mobilization.international financing for the protection of theglobal environment. Some of the concepts involved Economic analysismake it difficult to visualize what a global environ- In considering the economic scope for action, re-mental portfolio is; others make it extremely diffi- gardless of the source of finance, key analyticalcult to analyze incremental costs and benefits in a steps will involve specifying baselines, dealingway that would be satisfactory for a successful with the sensitivities, and evaluating and separatingfinancial operation. These conceptual and analyti- the global and domestic environmental benefits.cal issues limit the certainty with which various Yet the result most striking for its strategic implica-policy questions can be answered, and can even lead tions might not be the one that suggests that there areto implicit policy judgments where none were severe limitations on the numerical reliability ofintended. estimates, but that:

An appropriate financial strategy must ensure that the Si. There is enormous scope for action that appearsavailable funds contribute to the protection of the to be both domestically economic andbeneficial to theglobal environment as effectively as possible. The global environment.strategic issues are closely related to the policy ques-tions asked previously: It is widely believed, for example, that there is great

scope for energy conservation in developing coun-* How should the scope and economic cost of the tries, and that the savings that result can reduce the

additional actions required be determined? amount of fossil fuels that would otherwise be* On what should the international contribution in burned and therefore the amount of GHGs emitted.

support of these actions be based? There might even be similar economic scope for* How should projects be selected? biodiversity protection, if it is currently underpro-

tected due to gaps in knowledge or institutionalThe first two questions must be answered to arrive at reasons. If this is indeed so:an estimate of agreed full incremental costs. Only thencan a financing decision be made. Project selection 52. All the net incremental costs of the most cost-will also be a strategic issue as long as funds are effective interventions (if costs and benefits are nar-insufficient to cover all economically justified ac- rowly defined on a project basis) will be negative.tions. Since incremental costs are likely to greatly There are thus no groundsfor transferring resourcesexceed the finance available, an exact calculation of on the basis of net incremental cost.

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It would be equally likely, in such a situation, that Resource transfersthere would be no spontaneous shift to a globally A financing strategy is needed for making grants tosustainable future. Reforms do not occur overnight. cover the agreed full incremental costs of develop-For example, the development banks and develop- ment strategy shifts proposed by governments in thement institutions have had reform on their agendas interests of protecting the global environment. Such afor decades but changes in behavior have only come financing strategy should be effective, efficient andslowly. The economic scoping studies might in- equitable.deed underscore that:

55. Some principles for determining the transfersS3. The most importantfactors in the short run will might create negative incentives that would reducebe the reform of institutions, economic policies, and the effectiveness of the grants, for example:sectoral strategies; and the reduction of informa-tion gaps, market barriers, and transaction costs. * Incentives to destroy the environment. If grantsIn the long run the most important factor will be exceed net incremental costs, a country might betechnical change. able to maximize the rents on its global resources

by making the resources scarce. For example, aIf this is so, the solution would be short-term government could make its rainforest more scarcestrategic shifts and the stimulation of long-run by allowing it to be partially logged. A governmenttechnical change in the right direction. If the latter could also maximize net transfers for GHG reduc-were sufficiently rapid, there might never be occa- tion by maintaining fossil fuel subsidies if transferssion to operate at the margin-that is, where eco- for alternatives were based on financial incremen-nomic trade-offs have to be made. Within this tal costs. In theory, developing countries couldwider (non-project) system boundary, there could maximize their grants under the Multilateral Fundbe positive net incremental costs. These would of the Montreal Protocol by expanding the use ofinclude costs of institutional reform, of short-term ODS to build up high consumption levels by thepolicy dislocations, of transactions, of informa- year 1997, the year stipulated as the baseline fortion, of research and development, of the incre- developing countries in the Protocol. This has notmental risk in adopting new strategies, and of been happening-China and Mexico have eventaking precautionary measures. One challenge voluntarily waived the grace period allowed andwould be to define these costs rigorously and to accepted the tighter phase-out schedule of thedetermine their incidence and timing. Net incre- developed countries. Although this could be due inmental costs should never be regarded just as part to the uncertainty among countries about the"any subsidy necessary to make appropriate exactffmancingprinciplesoftheFundanditsfutureprojects financially attractive," as this would make operations, this behavior mostly reflects environ-the project choices and financing decisions arbi- mental commitment.trary and unclear. Also, because the intended ben- * Incentives to divert resources into persuasion.efit is policy reform, the net incremental cost of a Donors may make the case for baselines that min-strategy shift cannot be perpetual. The other chal- imize the transfers. Recipients may try to convincelenge would be to define rigorously the benefits of others of the soundness of baselines that maximizean induced shift in strategy and to validate that it such transfers. More resources may be devoted toresulted from the activity whose net incremental persuasion and negotiation than to sound analysiscosts were financed (such as a demonstration and the collection of accurate data.project, research work, or market development). It * Incentives to counter economic reform. Reim-may turn out that: bursement for incremental costs in some industries

might subsidize inefficiency. For example, a localS4. The main challenge will be to define the net compressor manufacturer may be able to competeincremental costs and global environmental benefits against imported compressors that are penalizedof shifts in development strategy, rather than of indi- by tariffs only if it obtains a grant from the Multi-vidual projects or even programs. lateral Fund for net incremental costs of producing

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compressors with alternative technology. (A wider costs and benefits would have to be substantiated.system boundary could avoid this. Countries, rath- Positive incremental costs of the strategic shifter than enterprises, could be reimbursed for the wouldmakethecatalyzingprojectaTypell4 projectoption of lowest incremental economic cost, in this eligible for GEF financing.case imports.) * Contingent grants. The GEF could make contin-Incentives to circumvent country eligibility crite- gent grants; for example, grants that would have toria. Multinational corporations could use transfer be partly repaid in the event that the project benefitspricing to divert part of any grant in an eligible more than covered costs. This would allow incre-country to a partner in an ineligible country. (Note, mental risk to be covered. Projects could thus behowever, that the behavior of multinational corpo- provisionally classified as Type II projects, butrations affected by the Montreal Protocol has been converted to Type I later if the evidence supportedexemplary.) The usual precautions will also be it.needed to ensure that international technology trans- * Alternative cost allocation principle. If instead offer is done under competitive conditions. strict net incremental cost financing, the GEF were

to use a cost allocation principle that shared theS6. If the main objective of action is to shift the global surplus between the country and the globaldevelopment strategy, it would be more important to community, national and global project prioritiescatalyze this than to build up a project portfolio would be the same.of marginal importance to global environmental * "Compelling case." As an alternative to bringingprotection. projects within the Type II category, one could

describe a "compelling case" of the sort allowedThis may become a dominant financing issue. The under Type I. Such a case could involve the expec-problem is that many "win-win"3 projects may be tation of a significant strategy shift. Although thereineligible under the funding rules because, suppos- is no danger that such one-time compelling casesedly, they have negative net incremental costs. could justify continuing subsidies, the disadvan-Ineligibility could result in a portfolio of expensive tage is that they may remain descriptive and not beoptions (to illustrate this for GHG reduction, let us subject to the same rigorous analysis as would beconsider the case of remote windmills), while the required under the catalyzing projects describedmajor opportunities (say energy conservation) re- earlier.main unfunded because of local institutional orpolicy problems and because of funding criteria. If only net incremental costs were financed, theConsiderations include: country would receive no net transfer. The country

would thus have no financial incentive to make the* System boundary. This dilemma may be the result desired policy shift-although it may commit itself

of too narrow a system boundary. There may be to do so for other reasons (such as its undertakingsless obvious costs associated with risk, transac- under the FCCC). If, as assumed, there were manytions, information gathering, and market develop- win-win projects, these would need funding in addi-ment. There may also be system benefits beyond tion to the international grant. If these additionalthose of the immediate project, such as demonstra- funds (for the baseline project) were provided by ation effects, the establishment of new markets, the development institution, that institution would havedevelopment of economies of scale, and the stim- (and should exercise) some degree of leverage. Thisulus for technical improvement. Of course, these suggests that:

3 A "win-win" project is one that does not require one objective to be traded off against another. A global environmental project is win-win if the pursuit of domestic benefits also leads to global benefits. An example of a win-win project in energy conservation is an investment in apower system based on fossil fuels that yields not only net domestic benefits (cost savings exceed investment costs) but also global benefits in theform of reduced GHG emissions.4 During the Pilot Phase of the GEF, a distinction was established between Type I and Type 11 projects. A Type I project is essentially awin-win project because it is economic in its own right and therefore a rational investment for a country even in the absence of global environmentalconcerns. A Type II project is not economic because it imposes an economic penalty (an incremental cost) on the country making the investment,and is therefore more appropriate for GEF funding.

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S7. The GEF portfolio should be programmed as an that various general equity principles have been in-increment upon regular portfolios rather than as a voked at one time or another as part of the justificationself-standing one. One role for the 6EF would be to for transfers to developing countries-polluter pays,transform the portfolios of the lending and develop- ability to pay, rights to development, historical respon-ment institutions. sibility for past damage, and so on (see Appendix II).

Because there is no agreed overall accounting of theseDeveloping countries may be less inclined to accept rights and obligations or of subscriptions and entitle-GEF assistance if more conditions are placed on the ments, it may even seem premature to insist too rigidlyFacility's funding. Therefore, to demonstrate that on an equity formula for one particular aspect (theacceptance of the GEF grant is not the cause of the transfer of resources for actions to protect the globaladditional conditionality: environment) when aspects of international burden-

sharing are not well researched. (A systematic explo-S8. The development institutions could make global ration of the political economy of internationalenvironmental protection (for example, compliance burden-sharing would also provide valuable back-with the relevantprovisions of all international envi- ground information for the continuing negotiationsronmental conventions) a conditionfor all their activ- under the FCCC and under the Convention on Biolog-ities, regardless of whether or not the country or ical Diversity.)enterprise concerned accepted GEF assistance forthe net incremental costs incurred. Taking the equity argument for making transfers as a

given, let us consider some specific equity issues thatEconomic efficiency affect the transfer of resources:The issue of economic efficiency has been studiedextensively in the case of the Montreal Protocol. In * Compensation. At present, neither the conventionsgeneral, setting targets for each country is less effi- nor the GEF refer to compensation. Baseline situa-cient than a system of taxes or tradable environmental tions therefore include the damage that will berights. Protocols based on individual sectors and gases caused by climate change, ozone depletion, andmay also introduce inefficiencies, although there may other global environmental problems. Transfers arebe compensating administrative and political factors. intended to reimburse the net incremental costs ofIn any case, this is a convention issue and not an issue actions to protect the global environment that wouldof financing policy. not otherwise occur. They are not intended to com-

pensate for losses that would occur in any case (evenThere may, however, be a choice in the way in which if due to the past environmental practices of donornet incremental costs are calculated for the purpose of nations), nor even to reimburse the costs of mitigat-calculating reimbursement. If reimbursement is re- ing the local impacts ofglobal environmental change.stricted to the enterprise rather than to the country or * Risk. The method of disbursing grants determinessector level, there will be inefficiencies. The problems who bears certain risks. If the GEF makes a grantwith this approach have been demonstrated in the case equal to the net incremental cost (the expectedof the Multilateral Fund under the Montreal Protocol: future benefits of a project minus the known incre-inefficient existing companies may be reimbursed mental capital cost of a project), the recipient im-while start-ups are not, the subsidy may or may not be plicitly bears the risk that the actual benefits will bepassed on to users depending on the market structure less (or greater) than expected. The cost of bearingand government policy, and so on. The proposed incremental risk can be taken into account: thefocus on strategy shift would avoid these problems by benefit scenario could be conservatively construct-concentrating on programs and policies at the country ed, the benefits could be discounted more heavilyand sectoral levels. than the costs, or the GEF could assume the risk by

liquidating an advance at a later date on the basis ofEquity actuals. (This last approach adds administrativeBefore considering principles of equity that might costs and may remove some commercialgovern specific financial transfers, it must be recalled incentives.)

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* Economic costs. Reimbursing financial rather than suffer the same drawback mentioned above byeconomic costs may not be equitable in the sense having no leverage for the policy shift required.that the country may gain a windfall in cases wherethe financial net incremental costs exceed the eco-nomic net incremental costs (for example, becausetaxes are included in the financial costs). Financialreimbursement also creates cross-country incon-sistencies because tax and other policies and eco-nomic conditions differ markedly. There is atrade-off though-financial incentives operate atthe enterprise level and incomplete reimbursementmay hinder the adoption of the appropriate technol-ogy and practices. In the case of the MontrealProtocol, the intention is to ask governments tocontribute at least to the extent of waiving orreimbursing any incremental taxes, and to ignoredifferences due to lost subsidies, lost monopolyearnings, or other distortions.

* Sharing global surpluses. Reimbursing net incre-mental costs effectively appropriates the entire netbenefit of an action to the global community.Alternative cost allocation principles could allo-cate costs more equitably, but are not currentlyused.

Project selection, ranking, and sequencingIf GEF projects are developed through incrementalchanges in regular portfolios (to accommodate globalenvironmental conditionality), the selection will belargely accidental, reflecting the willingness of gov-ernments to shift strategies, to comply with the con-ventions, and to borrow for development projects.

The temptation, however, will be to program self-standing operations, ranking projects according to anindex of cost-effectiveness (net incremental cost perunit of global environmental protection). The mainobjections to this are:

* The system boundary, by excluding strategy shifts,is too narrow

* The implementing agency has no leverage on self-standing projects

* The ranking order is mostly arbitrary, assertingglobal priorities at the expense of all others.

The alternative of least-cost programming can onlybe useful if full funding is provided. If program-ming is divorced from regular programming, it will

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Appendix I

Examples of Environmental Protection Incurring Net Incremental Costs

Countries incur incremental costs when they act in even though the benefits to the region as a wholeways that they would not otherwise to protect the would exceed the total incremental costs. Not all theglobal or regional environment. The country taking solutions to regional problems like these need incurthe action incurs the cost whereas other countries reap net incremental costs; in some cases, the benefits ofsome or most of the benefits. Some examples are: the clean-up in each country exceed the costs in the

same country, but the total benefits might still beProtecting the stratospheric ozone layer enhanced through coordinated efforts. Examples ofIndividually, countries incur incremental costs when regional cooperation include the Mediterranean Ac-phasing out ODS. Yet, if most countries were to do tion Plan, the Baltic Sea Program, and proposals forthis, the world would be better-off because the ozone the Aral Sea, the South China Sea, and the Danubelayer prevents harmful ultraviolet rays from reaching River.the earth's surface. The global community, throughthe Multilateral Fund of the Montreal Protocol, fi- Minimizing the risk of radioactive falloutnances eligible incremental expenditures in develop- This involves regional action to reduce riskratherthaning countries to help these countries meet their to reduce known damage. The only regional examplephase-out obligations under the Protocol. to date is in Europe. Europeans are concerned about

the possibility of another nuclear accident, such asReducing emissions of greenhouse gases Chernobyl, in the eastern part of the continent. AboutCountries that use more expensive substitutes for half of the fifty or so nuclear reactors in Easternfossil fuels, practice energy conservation to a greater Europe and the former Soviet Union are not safelyextent than economically justified, forego some eco- designed and need to be replaced by safe energynomic development, or sequester carbon in otherwise alternatives. Many of the others require significantunwantedreforestation, are incurring incremental costs upgrading in operational procedures, maintenance,for actions that slow global warming or reduce the and safety devices. Replacing some reactors anddamage that it is likely to cause. The GEF, as the upgrading others requires incremental expenditure.interim operating entity of the financing mechanism Not much funding could come from economies infor the FCCC, finances this type of incremental cost in transition, and some of the costs might not even bedeveloping countries. offset economically from the reduced hazard in the

host country alone. The group of seven industrializedConserving global biodiversity countries (G7), meeting in July 1992, therefore agreedThe global benefits of conserving biodiversity often to a program to complement bilateral arrangements inoutweigh the incremental costs involved. In some order to upgrade reactor safety. This program wouldcountries, however, the national benefits from conser- be coordinated by the group of twenty-four develop-vation-such as maintaining fish yields, protecting ing nations andby the EuropeanBank forReconstruc-the revenue from ecotourism, and generating revenue tion and Development. So far though, there isfrom forest products-may not be sufficient to justify incomplete agreement on what the incremental coststhe conservation, in which case net incremental costs are or exactly how much of these would be grant-would be incurred. Again the GEF, acting as the financed by the G7. (Although the G7 countries areinterim operating entity of the financing mechanism not equally at risk, this distributional situation alsoof the Convention on Biological Diversity, finances arises in such truly "global" environmental problemsincremental costs of this type in developing countries. as global warming.)

Preventing the pollution of international Reducing acid precipitationwaterways Acid rain is another regional environmental issue.The costs of preventing the pollution of international There are incremental costs in reducing acid rain (forrivers or regional seas, and the benefits of doing so, example, for removing sulfur dioxide from stack gasmay fall on different countries. Some countries in a or in using low sulfur fuels in preference to high sulfurregion may therefore incur net incremental costs fuels). Benefits (for example, reduced crop and eco-(costs that are higher than the benefits they derive) system damage) generally occur far from the site of

25

the expenditure, although there might also be inciden- coordinated efforts. Yet even when they do impose nettal local benefits of stack gas clean-up (from a reduc- incremental costs on some signatories, that fact alonetion in ash fallout). Many of the acid precipitation has not justified a transfer of resources-in manyproblems are regional or international problems, with cases the polluter-pays principle has been implicit.most of the costs borne in some countries and most of For the same reason, the absence of a financingthe benefits reaped in others, as is the case in Europe mechanism does not imply that there are no netand in much of Asia. (In countries with large land incremental costs, and it may still be desirable tomass, such as China, the costs and benefits may be estimate these costs.largely in the same economy, but there is still adistributional issue to be resolved.) Amongtheothermoreimportantinternationaltreaties

on the environment are:The World Bank is funding an international networkof scientists to map the ecological impact of acid rain * The Convention on International Trade in Endan-in Asia. gered Species of Wild Fauna and Flora (CITES),

Washington 1973Protection of the world's cultural heritage * The Convention on Wetlands of International Im-Just as there are global benefits in protecting biolog- portance especially as Waterfowl Habitat, Ramsarical diversity, there are global benefits in protecting 1971the world's cultural environment. Neither the global * The Convention for the Protection of the Worldbenefit nor the proportion of it which is appropriated Cultural and Natural Heritage, Paris 1972nationally can be easily quantified. Nevertheless, * The Convention on Long-range Transboundarythere are examples of international recognition, con- Air Pollution, Geneva 1979certed international action for restoration or protec- * The Convention on the Control of Transboundarytion, and multilateral funding based at least implicitly Movements of Hazardous Wastes and their Dis-on the notion of grant-financing net incremental costs posal, Basle 1989for agreed global benefits. The United Nations Educa- * The International Convention for the Prevention oftional, Scientific, and Cultural Organization the Pollution of the Sea by Oil, London 1954;(UNESCO) coordinates much of this work. amended 1962 and 1969.

Prevention of the spread of pests and diseaseAlthough not strictly environmental, pest and diseasecontrol share many of the characteristics of globalenvironmental issues. For example, efforts to controlthe spread of locusts in one country will benefitneighboring countries. The country of first contactmight well incur net incremental costs (costs in excessof what it would be willing to spend on pest controlbased on its own projected crop damage) if it were toadopt a control strategy that was regionally optimal.

Other international treatiesApart from the Montreal Protocol and the two recentlysigned but still unratified Conventions on ClimateChange and Biological Diversity, there are about 130multilateral treaties on the environment. Some ofthese are global rather than regional, and many in-volve developing countries. Not all treaties imposeobligations thatrequire net incremental expenditures-some work on the basis of mutual advantage through

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Appendix 11

Equity Principles for Resource Transfers

The following general equity principles have at one Shared surplustime or another been proposed for the transfer of Actions to protect the global environment yield largeresources to developing countries f6r protecting the benefits relative to their cost, and thus provide largeglobal environment: economic surpluses. These surpluses should be shared

with the developing countries that host the actions,Polluter pays and not appropriated fully by the global communityThis principle, sometimes applied to enterprises with- through the net incremental cost principle.in countries, is regarded as both efficient (by internal-izing the externality) and equitable. However, its Environmental impacteffectiveness when applied to countries to deal with Changes in the global environment will have differentglobal environmental problems would be limited by impacts on different countries. Some may experiencethe lack of incentives and enforcement mechanisms. catastrophic flooding and stonn damage, some may

suffer mild ecological and health effects due toAbility to pay increased ultraviolet radiation, and some may evenGenerally, only developed countries are regarded as benefit from, say, warmer weather. Transfers shouldhaving the ability to pay. Recently, however, the recognize compensation for future costs that will bedistinction between developed and developing coun- imposed on countries and not just reimbursementtries has become blurred: there are newly industrializ- for additional actions taken to protect the globaling economies with considerable paying ability, and environment.economies in transition from socialism that are devel-oped (according to many indicators) but have a limitedability to pay. Finer grades of subscription to multilat-eral financing to protect the global environment andfiner grades of eligibility to receive grants have occa-sionally been suggested.

Willingness to payDemand for environmental protection is a function ofincome. Perhaps developed countries, who mightvalue it more, should be willing to pay more forprotection of the global environment.

Historical responsibilityDeveloped countries have benefitted more thandeveloping countries from past emissions of ODSand greenhouse gases, and from the destructionof forests and habitat. Perhaps they should shouldera greater burden of the protection that is nownecessary.

Rights to developmentDeveloping countries have a right to the same level ofdevelopment as developed countries, and until suchequality is reached, countries that are relatively devel-oped should make greater efforts to protect the envi-ronment (or to pay for the efforts made on their behalfby developing countries). Sometimes this principle isexpressed in terms of per capita rights to emissions orresources.

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