EIA; shadow pricing, externalities, social CBA

Environmental impact analysis

Environmental Impact Assessment (EIA) is a systematic study to identify, predict, evaluate and mitigate the positive and negative effects of a proposed project on the physical, biological, social and cultural environment before decisions are taken. In Nepal, it is required by the Environment Protection Act, 2019 and Environment Protection Rules, 2020: IEE for smaller projects and full EIA for larger ones (for example hydropower above 50 MW, roads in sensitive areas).

Steps

1. Screening: decide whether IEE or EIA is needed.
2. Scoping: identify key issues and prepare the terms of reference.
3. Baseline study of existing environment.
4. Impact identification and prediction (checklist, matrix, network, overlay).
5. Evaluation of significance and comparison of alternatives.
6. Mitigation measures and Environmental Management Plan.
7. Report preparation, public hearing and review.
8. Approval, monitoring and auditing.

Shadow pricing

A shadow price is the true economic (opportunity) cost or value of a good to society, used when the market price is distorted by taxes, subsidies, controls or monopoly.

• Unskilled labour in a country with unemployment has a shadow wage lower than the market wage.
• Imported goods are valued at border (CIF) prices, with a shadow exchange rate if the official rate is unrealistic.
• Taxes, duties and subsidies are transfer payments and are removed.

Market externalities

Externalities are side effects of a project on people not involved in it, not reflected in market prices.

• Negative: pollution from a factory, noise, loss of farmland.
• Positive: a road increases land value and trade for nearby people. In social CBA they are valued and included.

Market imperfection

Markets are imperfect when prices do not show true cost or value because of monopoly, government control, lack of information, taxes or subsidies, and restricted entry. Then market prices cannot be used directly in economic analysis, and shadow prices are needed.

Social cost benefit analysis

SCBA evaluates a project from the viewpoint of the whole society. It uses shadow prices, includes externalities and intangible effects and excludes transfers, discounted at a social discount rate. The project is accepted if the economic NPV is positive and $B/C > 1$ (or EIRR is above the social discount rate).