Chapter 7: Costing Methodologies
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7.4 Issues in Estimating Costs
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7.4.2 Income and Other Macroeconomic Effects
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7.4.2.3 Employment
This section deals with the valuation of employment impacts on a project basis. If a project creates jobs, it benefits society to the extent that the person employed would otherwise not have been employed or would have been employed doing something of lower value. Conversely, if the project reduces employment there is a corresponding social cost. These benefits depend primarily on the period that a person is employed, what state support is offered during any period of unemployment, and what opportunities there are for informal activities that generate income in cash or kind. In addition, unemployment is known to create health problems, which have to be considered as part of the social cost.
A physical measure of the extent of the employment created is therefore an important task of any project assessment in an area where there is unemployment. The data that have to be estimated are:
- number of persons to be employed in the projects;
- duration for which they are employed;
- present occupations of the individuals (including no formal occupation); and
- gender and age (if available)
This physical information can be used in the multi-attribute selection criteria discussed in Section 7.2.1 (Box 7.1). In addition, however, it is possible to place some money value on the employment, or to deduct from the payments made to the workers the value of the benefits of the reduced unemployment. Before considering the framework for such an evaluation, it is important to set out the theoretical reasons for arguing that unemployment reduction has a social value. In neoclassic economic analysis, no social cost is normally associated with unemployment. The presumption is that the economy is effectively fully employed, and that any measured unemployment results from matching the changing demand for labour to a changing supply. In a well-functioning and stable market, individuals can anticipate periods when they will be out of work, as they leave one job and move to another. Consequently, the terms of labour employment contracts, as well as the terms of unemployment insurance, reflect the presence of such periods, and there is no cost to society from the existence of a pool of such unemployed workers. However, these conditions are far from the reality in most of the developing and some of the developed countries in which the GHG projects will be undertaken. Many of those presently unemployed have poor prospects of employment.
In these circumstances, therefore, it seems entirely appropriate to treat the welfare gain of those made employed as a social gain. For developed economies this welfare gain is calculated as follows (Kirkpatrick and MacArthur, 1990):
a. gain of net income as a result of a new job, after allowing for any unemployment benefit, informal employment, work-related expenses, etc.; minus
b. the value of the additional time that the person has at his or her disposal as a result of being unemployed and that is lost as a result of being employed; plus
c. the value of any health-related consequences of being unemployed that are no longer incurred. To calculate the social benefits (the unemployment avoided as a result of the project), the welfare cost ((a) minus (b) plus (c)) has to be multiplied by the period of employment created by the project.The above method can also be applied to obtain employment benefit estimates for projects in developing countries (see, e.g., Markandya, 1998).
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7.5 Specific Development Stages and Mitigation Costs (Including Economies in Transition)
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7.5.1 Why Developing Countries Have Special Problems in Their Mitigation Strategies
The term “developing countries” covers a wide variety of countries with distinct differences in their economic, political, social, and technological levels. The group of countries termed “least developing countries” have very little basic infrastructure, the “newly industrialized countries” have a structure closer to that of the developed countries, and others lie between these two extremes. Almost all developing countries have a relatively low level of GHG emissions per capita at present, but large countries like India, China, and Brazil will soon become very important in terms of their contribution to total global emissions. It is therefore important to understand how these countries might participate in globally cost-effective policies.
Mitigation costs in a country depend critically on the underlying technological and socioeconomic conditions. Studies that assess these costs make assumptions about current and future socioeconomic development patterns and the potential to implement climate change mitigation policies. Developing countries exhibit a number of specific complexities that are of major importance to costing studies. Data are limited, exchange processes are constrained, markets are incomplete, and a number of broader social development issues are potentially important for future GHG emissions, such as living conditions of the poor, gender issues, and institutional capacity needs. Some of these difficulties arise particularly in relation to land-use sectors, but can also be important in relation to the energy sector and transportation.
To sum up, a number of special issues related to technology use should be considered for developing countries as the critical determinants for their climate change mitigation potential and related costs. These include current technological development levels, technology transfer issues, capacity for innovation and diffusion, barriers to efficient technology use, institutional structure, human capacity aspects, and foreign exchange earnings. The methodology of most current mitigation cost studies was developed on the basis of approaches originally designed for the market-based economies of developed countries. The application of these methodologies in a developing countries context typically poses special problems relating to data, sectoral coverage, activity projections, and assumptions about markets, behaviours, and policy instruments. A simplified application of these methodologies in developing countries can lead to a number of inaccuracies in mitigation studies:
- Major GHG emission sources and drivers for future emission can be overlooked. This is especially relevant for the land-use sectors.
- Mitigation studies may focus on specific technical options that are not consistent with national macroeconomic policy contexts and broader social and environmental policy priorities.
- The technical potential of specific options, for example electricity saving options, may be overestimated because consumer behaviour and power market failures are not captured.
- The impacts of using different policy instruments cannot be assessed because the studies do not include any information on national institutional structure, taxes, and other regulation policies and various technology promotion programmes.
- Implementation issues, including institutional and human capacity aspects and local market development, are not represented. (...)
