This paper presents findings from a study completed in May 1998 by WWF-Indonesia
and EEPSEA to assess the economic value of damage caused by the 1997 fires
and haze. The work was carried out by EEPSEA and WWF staff and academic
researchers in Indonesia, Malaysia and Singapore, with methodological advice
from international experts. The study covers the period August - December,
1997. A book-length version of this report ("Indonesia's Fires and
Haze: The Cost of Catastrophe") was published by ISEAS and IDRC in August,
1999. Copies can be obtained from ISEAS
or IDRC.
EEPSEA is a development cooperation program supporting research and
training in environmental economics in 10 SE Asian countries. Established
in 1993, its current sponsors include Canada (IDRC & CIDA), Sweden
(Sida), MacArthur Foundation, and the Foreign Affairs Ministries of Denmark,
Holland, and Norway.
WWF is dedicated to protecting the world's wildlife and wildlands. The
largest privately supported international conservation organization in
the world, WWF has sponsored more than 2,000 projects in 116 countries
over the past 36 years. WWF directs its conservation efforts toward protecting
endangered spaces, saving endangered species, and addressing global threats.
Damages excluded: long-term health damages, reduced crop productivity,
aesthetic value of reduced visibility, avertive expenditures, accidents,
loss of life, evacuations, loss of confidence by foreign investors.
A) General Considerations
All values are:
a) Calculated first in local currency.
b) In present value terms. (i.e. many losses occur one time only; others
recur. Income streams or environmental services that could provide recurring
benefits are converted to a one-time only [present value] equivalent.)
c) In net terms. (i.e. damages are net benefits foregone. Net benefit
= gross value of the foregone good or service minus the cost of producing
or extracting it. This is equivalent to value added; or profit minus normal
rate of return to capital; or economic rent.)
d) Attempt to approximate consumer surplus foregone, rather than actual
expenditures. (e.g. some people were able to obtain medical treatment or
evacuate an affected area. Other people were similarly affected but were
unable. Actual expenditures for treatment are therefore extrapolated to
the entire affected population.)
In cases where it was not feasible to conduct new surveys, the benefit
transfer (BT) approach were used. This involves the transfer of values
from existing studies to the new study site, with appropriate adjustments
for the size of the affected area, income levels and other factors.
Various BT values and other adjustment factors are mentioned below.
These are derived from various sources, including World Bank and the ADB
Workbook on Economic Evaluation of Environmental Impacts (1996).
Wherever possible, BT values were a reality-checked against local conditions.
Valuation is not appropriate or adequate for depicting the significance
of some damages. Some of these issues are:
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Magnitude of damage relative to ability to bear its cost: wealthy people
can sustain larger losses than very poor people, so dollar figures are
not necessarily a good measure of suffering.
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Valuing loss of life is difficult and controversial. In this study, we
assume that such losses are significant but incalculable.
In some cases, anecdotes or boxes about critical damage incidents
will supplement the aggregate values in the final report.
B) Estimation Methods for Haze Damages
This section outlines a common methodology prescribed for the three
country studies. Methods were adapted to local conditions and data availability
in each country during application; the adjustments are described in detail
in the country reports.
The period covered was August 1 - October 31, 1997. In principle, the
study should compare the situation with and without haze. In practice this
involved a comparison of August-October, 1997 to a normal August-October.
The values used here were either: (a) Aug-Oct, 96; (b) average of Aug-Oct
over the past 5 years; or (c) projected trend of Aug-Oct over past 5 years,
depending on what was most appropriate in a given case.
Care was taken to separate the effects of the haze from those of the
drought and the ASEAN financial crisis.
1. Short-term Health Costs: Adjusted Cost of Illness Approach
Three steps to obtain an adjusted COI are outlined below:
a) Estimate treatment cost
(i) Estimate hospital and clinic admissions for haze-related ailments
per 10,000 population for Aug-Oct 97. Use haze-related ailments as defined
by each country's health service. If there is no such definition, use the
Malaysian definition: upper respiratory ailments, asthma, bronchitis &
conjunctivitis.
(ii) Estimate same for Aug-Oct 96 or average of Aug-Oct. over previous
5 years.
(iii) Subtract ii) from i) to get excess admissions.
(iv) Adjust for affected but untreated population. The ratio of untreated
to treated case varies from country to country but is in the range of 3
or 4 to 1. The ratio for each country can be found in standard health sector
studies by WB or ADB.
(v) Adjust for treatment costs beyond hospital visits (mainly medicines).
As per (iv), there is a standard adjustment factor that varies by country.
(vi) A shadow price i.e. add the value of any government subsidies for
treatment. Alternatively, use the price of a visit to a private clinic.
(vii) If necessary, extrapolate to area outside that where hospital
data were collected (use visits per 10,000 ratio in (i)).
(viii) If possible, get cross-section data on affected & unaffected
areas as a check on time series in (i).
(xi) get adult/child breakdown on hospital data. This will not be used
in valuation of treatment costs, but in estimating lost workdays below.
These steps were modified for individual countries, depending on data
constraints. For Singapore, they were followed largely as outlined. In
Malaysia, data on hospital/clinic admissions were matched with pollution
levels to produce a dose-response function. This was extrapolated to areas
of Malaysia where data on admissions were unreliable. The dose-response
function was also transferred to Indonesia, where a map of cumulative haze
intensity was overlaid on a population map to estimate the number of people
exposed to haze pollution of various levels.
b) Estimate workdays lost
Use hospital/clinic visits by adults (men & women) as a proxy for
workdays lost. Adjust visits to workdays lost by a factor suggested by
local doctors.
If feasible, adjust for any double counting, if people frequently go
first to clinic and then to a hospital on the same day for the same sickness
episode. This would not necessarily affect treatment cost, but would affect
workdays lost.
Multiply each workday lost by the average or minimum daily wage (depending
on which is most suitable in a given country. Say which one you used.)
Do this for all adults, male & female. (If employees continue to receive
wages while home sick, workdays lost are considered a loss to employer.)
c) Adjust COI for discomfort (to approximate WTP)
Add (a) treatment cost + (b) workdays lost to get (c) cost of Illness
(COI).
Cost of illness has been found to seriously underestimate total damage
from an illness, as measured by an individual's willingness to pay (WTP)
to avoid it. (This is because in spite of treatment and sick leave, the
individual still suffers discomfort.) The ratio of WTP to COI varies with
the ailment. Some ranges of values can be found in ADB Workbook (1996),
p. 188. For asthma, it is about 2:1.
This adjusted COI, for lack of a better term, is the value to be used
for short- term health damages. These are the short-term health damages
only. Long-term, cumulative damages are not valued.
d) Haze-related Production Losses: These could include rural
& urban activities such as reduced crop yields resulting from reduced
sunlight. In practice, the only losses measurable were: a) foregone profits
in Malaysia from fishing due to reduced visibility (fishing days foregone
multiplied by expected profit per day); b) reduced industrial & commercial
activity due to the 10 day state of emergency on Kuching (% of GNP foregone).
e)Tourism Losses: Estimate reduced tourist arrivals from non-ASEAN
sources (to control for effect of 97 ASEAN economic crisis): compare Aug-Oct
97 to normal Aug-Oct.
4. Airline and Airport Losses: To obtain the losses incurred
from airport closures due to poor visibility, one would need data on canceled
flights, expressed in mileage lost, multiplied by the airline's average
profit per mile. To this should be added any profits foregone from operation
of the airports themselves.
C) Estimation Methods for Fire Damages
The estimation methodology consists essentially multiplying the
area burned in August - December, 1997 and multiplying those by per hectare
values for various vegetation types and land uses. The per hectare values
are taken from existing data on Indonesia and, failing that, from comparable
ecosystems elsewhere with appropriate adjustments. Economic damages are
in net terms (i.e. profit foregone, not total revenue foregone). Discounting
of future costs was done at a rate of 10%.
1. Area Burned: Estimates are based on a total area burned of
5 million ha., distributed as follows: 20% forest, 50% agriculture/plantation,
30% other (unproductive). These figures are derived primarily from satellite
mapping studies of Sumatra and Kalimantan by the National University of
Singapore's Centre for Remote Imaging, Sensing and Processing (CRISP),
with adjustments by EEPSEA and WWF for areas burned outside those provinces.
2. Timber: Timber values take into account estimates of timber
stock by the government of Indonesia, as well as growth estimates of forests
and net international prices. A net price of $50/m3 was used. This was
cross-checked with an alternative estimation method based on land values
and found to yield consistent results.
3. Agriculture: Two key variables that enter into this calculation
are the agricultural land value and the production lost in terms of years
of output. Differences in productivity between plantations and smallholdings
were factored in. We have assumed that, after burning, full agricultural
productivity would be re-established in 3 years, with partial productivity
being re-established in years 1 and 2 after the burns. This is consistent
with average productive cycles of mixed crops (combination of annuals and
perennials and tree crops).
4. Direct Forest Services: A Benefit Transfer approach was used,
drawing on average world values of tropical rainforest ecosystems, applying
them only to the forest area in the sample (i.e. 1 million ha.). The principal
source was Costanza et al (Nature, 1997). Values for culture, timber
and climate control/regulation and genetic resources were removed to avoid
double counting with independent estimates described elsewhere. This yielded
a net value lost of $530/ha./yr. It was assumed that non-timber forest
products would be re-established over a period of 5 years.
5. Indirect Forest Services: A similar procedure to that described
for Direct Forest Services was applied and yielded a net value lost of
$1481/ha./yr. It was further assumed that the losses applied only to the
area 'effectively burnt' of forest which, consistent with the 'combustion
factor' in CRISP estimates, was 50% of actual forested area. It was assumed
that indirect forest services would be re-established over 2 years.
6. Biodiversity Losses: The approach used here is to value capturable
biodioversity from Indonesia's perspective. It is not the full value of
international value of biodiversity. The figure takes a value of $300/km2/yr.
as an average of values found from various studies of willingness to pay
to preserve tropical rainforest of various qualities.
7. Fire Fighting Costs: This includes all documented costs for
fire-fighting beyond normal year's expenses. It includes contributions
of personnel and cash from within and outside Indonesia.
8. Carbon Release: Carbon dioxide and methane emission estimates
in the CRISP study were increased by the ratio of total area burned (5
million ha.) to area assessed by CRISP (4.56 million ha.). Such emissions
increase global warming, which in turn is assumed to cause economic damage.
Previous studies for the Intergovernmental Panel on Climate Change have
put a value of up to US$30 on the damage caused by a ton of carbon emitted;
figures up to this amount are commonly used in international negotiations.
In this study, a conservative figure of $10/ton was used.
FURTHER INFORMATION
A book length report is available from: bookshop.iseas.edu.sg/index.html
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Copyright 1997 © International Development
Research Centre, Ottawa, Canada
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dglover@idrc.org.sg
| 20 January 2003