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ABSTRACT The paper focuses on indirect environmental consequences, namely the environmental consequences of the production of project inputs. In addition, we introduce the term 'avoided environmental consequences', i.e. the environmental consequences associated with diversion of production factors from alternative use. The former are always relevant, while the avoided consequences are only relevant in cases involving fully-employed production factors that would otherwise be used in production. The inclusion of indirect and avoided environmental consequences may considerably affect the outcome of traditional project evaluation. In this paper it is suggested how the indirect and avoided environmental consequences may be described using the input-output system in combination with environmental coefficients.
Introduction
There is a long tradition for practical project evaluation to be based on the assumptions and results of theoretical welfare economics, welfare being assumed to be a function of the utility the individuals derive from consumption of marketable goods and environmental quality (see, for example, Pearce & Nash, 1981, and Johansson, 1993). Changes in environmental quality are an integral part of the welfare economic foundation of project evaluation and should be taken fully into account.
In traditional practical project evaluation, economists usually omit to take into account the indirect environmental consequences of the project under evaluation. Moreover, 'avoided environmental consequences', a term introduced in this paper, are never considered in such analyses. Indirect environmental consequences can be defined as environmental consequences not directly connected with the project production process, i.e. environmental consequences of producing the project inputs; environmental consequences of the use and disposal of the products of the project; environmental consequences of multiplier effects in cases of Keynesian unemployment.
Avoided environmental consequences can be defined as the environmental consequences resulting from the diversion of resources from alternative uses in cases of full employment.
The first two types of consequence are normally very thoroughly described in life cycle analysis, but rarely in traditional practical economic project evaluation. As the description of multiplier effects is not an integral part of traditional project evaluation, the environmental consequences connected with these effects are not described. Similarly, avoided environmental consequences connected with the opportunity costs of projects are never taken into account.
In this paper we concentrate on the environmental consequences of producing inputs to the project and on the...