Sat, 03 Apr 2004

Ladia Galaska controversy: Reconsidering the costs and benefits of an environmental destruction

Andri Gunawan Wibisana Lecturer Environmental Law School of Law University of Indonesia Jakarta

On March 9, 2004, President Megawati Soekarnoputri finally gave her approval to the Ladia Galaska highway project, expecting that the controversy surrounding the project would finally come to an end.

Indeed, this approval will remove -- but not stop -- the burden of decision making from the executive branch to the court, as currently a lawsuit over the same issue is before the Banda Aceh district court.

Projects, such as Ladia Galaska, are vulnerable to controversy because the decisions concerning these projects typically involve the need to develop and protect the environment. Issues which, unless they are thoroughly addressed, could give rise to public outcry. Unfortunately, this problem has long been aggravated by misunderstandings, which consider that development and environmental protection are two conflicting interests. The proponents of the project, either local or central government officials, have contended that development cannot be halted for environmental reasons (The Jakarta Post, March 9, 2004).

Others argue that the project should go on, since it has been examined by an environmental impact assessment (EIA), and nothing can challenge what has been approved by this assessment.

Controversies over a project proposal involving the development of wilderness have usually stemmed from the application of Cost-Benefit Analysis (CBA) in evaluating the proposal.

Conservationists have argued that in CBA, all consequences are interpreted in monetary value, from which benefits and costs will be aggregated. When it comes to natural and other non-pecuniary assets, however, such interpretation are highly problematic. In this case, CBA is considered as ethically questionable as it monetizes human life, health, safety, and the environment, and calculates these assets as commodities.

On the other hand, economists may argue that what has been valued in CBA is not"life" or "the environment", but people's preferences for changes in the state of their environment, or in the level of risk to their lives. Undoubtedly, preferences will be revealed in terms of money, indicating people's Willingness to Pay (WTP) to secure or prevent such changes and people's Willingness to Accept (WTA) compensation if such changes should occur

However, one should be aware that costs and benefits arising from conservation could be far more difficult to measure than those arising from development. Typically, costs and benefits from conservation are a mix of associated cash flow and non- market benefits. This fact would bias the decision in favor of development because the benefits of development are readily calculable. Consequently, this also means that conservation benefits will automatically be undervalued.

To avoid this bias, CBA needs to take into account the Total Economic Value (TEV) to generate a more comprehensive evaluation, embracing several values namely: Direct use value, for instance value that can be measured from market and survey data; indirect use value, which corresponds to the concept of ecological functions; option value, expressing individuals' WTP to undertake conservation for the future use of environmental services; and existence value, which reveals people's preference for environmental assets unrelated to either the current or future use of those assets.

Has the decision to approve the Ladia Galaska project considered such values? I am afraid the answer would be negative. Apparently, as experts say, the project would incur losses of up to Rp 1.03 trillion due to deforestation, possible floods, landslides and droughts (The Jakarta Post, March 29, 2004).

Of course, as I mentioned earlier, the proponents of the project might argue that such losses are not certain. In this case, we still could pose the question of which party should be held liable if such losses really occurred in the future. I believe no one would dare claim to be responsible for such huge losses. And if there is no party that could be held liable for paying and restoring the damage, the decision would err on the side of safety. Unfortunately, I do not see that the decision to approve the Ladia Galaska project has considered this possibility.

Indeed, life is a gamble. But we can predict which stakes will benefit us the most. And more importantly, we should bear the costs of making a wrong bet -- not other people, let alone future generations.

Another critique of CBA is directed at the use of discount rates related to future costs and benefits. The idea of discount rates comes up as it is assumed that both extra costs and benefits will occur over time. For this reason, the future value is discounted and converted into its present value.

There are at least two interrelated reasons as to why we need to discount the future value.

First, the value of money that we invest today will grow over time because of the presence of a positive interest rate.

Second, owing to the productivity of capital and the diminishment of marginal utility, economists believe that people living in the future will be wealthier than those living today. Thus, the same sum of money will be worth more today than in the future. In this manner, the same marginal unit of damage will be less damaging for the welfare of future generations than for that of the current generation.

Clearly, by employing a discount rate, the cost of serious damage that could occur in the future would be relatively negligible today, depending on the discount rate assigned.

Consequently, discounting would make it difficult for us to justify, say, the conservation of a pristine area such as Leuser ecosystem, to prevent significant damage from occurring in the future. Typically, discounting could lead to an opinion stating that the best thing we can do to avoid damage in the future is to do nothing.

All in all, the presence of economic growth expressed in financial terms does not necessarily mean that the people are environmentally better off. The environment can be degraded although economic growth occurs. In this sense, even though growth occurs, it cannot be said that future generations would be automatically better off environmentally than the current generation.

One should bear in mind that the lower the discount rate, the greater the present value would be. And concerning environmental impact, lowering the discount rate would give more weight to environmental costs, thus making it less likely that projects' potential to create such costs would pass the CBA test.

In this regard, some economists have suggested that a lower discount rate should be employed, closer to zero, for cases that are likely to give rise to the depletion of environmental resources or a catastrophic event, or that would undermine future generation's capabilities to avoid damage.

It is hoped that the judges will thoroughly consider the environmental costs of the Ladia Galaska project when reaching their decision. On the other hand, the President's approval of the project, and arguments contrasting environmental issues with the need for development, do not constitute valid reasons for the judges to uphold the approval.

Already, in the late 1960s and early 1970s, some prominent economists suggested the need to take into account the irreversibility of the development of wilderness areas. They argued that the irreversibility factor should induce decision makers to err on the side of conservation. Thus, waiting for new information concerning the impact of the proposed development and better alternatives to this proposal is more desirable.

Legally, the judges could invoke the precautionary principle, a legal principle recognized by the 1992 Rio Declaration and various environmental conventions that we have ratified, as valid grounds for their decision. Here, the threat of irreversible and serious damage constitutes a legitimate reason to take measures that can prevent such a threat from occurring.

Conversely, the lack of scientific certainty concerning the relationship between the threat and the damaging effects cannot be used as a reason for postponing the implementation of such preventive measures.

Of course, there is an inevitable need to consider also the costs (and the forgone benefits) that would be incurred by taking such measures. This need, however, indicates that we have to reconsider seriously the evaluation of the Ladia Galaska project: this time by incorporating the EIA, CBA, and the precautionary principle into our decision-making process.

The writer is a Ph.D researcher at the Faculty of Law, Universiteit Maastricht, the Netherlands.