High-level Experts Meeting in Tokyo- Addressing the ABS Challenges
8th-9th February 2007, Tokyo, JAPANTheTheEconomic
EconomicAspect
AspectofofABS
ABS--TheTheWays
WaystotoOptimise
Optimisethe
theBenefits
Benefits––
Mikihiko WATANABE, PhD
Senior Consultant
Research and Consulting Division
The Japan Research Institute, Ltd.
watanabe.mikihiko@jri.co.jp
NOTE： Views and opinions in this presentation are those of author’s and do NOT reflect the organisation towhich the author belongs.

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Contents
Contents ofof Presentation
Presentation
1 Objective of the Presentation
2 Economic Factors
3 Economic Tools
4Concluding Remarks211 Objective
Objective ofof thethe Presentation
Presentation■ The objective of presentation isto clarify the economic aspects ABS
so that its issues can be correctly understood.
■ The economic factors are obviously crucial factorsof benefits to be shared.
■ Despite this fact, there exist some misunderstandings
and confusions.
■ This presentation, therefore, tries to clarify
the aspects involved.
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22 2.
2. Economic
Economic Factors
Factors
2.1 Costs■

Cost in general (variable, fixed, and sunk costs)□ Variable cost : Inputs of for the factory, such as materials andlabours, are counted as variable costs.
□ Fixed cost
fixed cost.

: Initial expenditure on factory building itself is a

□ Sunk cost : Sunk costs is defined as a cost incurred in the pastthat will not be affected by any present or future decision. Sunkcosts should be ignored in determining whether or not a newinvestment is worthwhile. A typical example is the fixed costs ofdead stock.
4■

Average cost/Marginal cost

□ Average cost
: For instance, in the automobile factory, theaverage cost should be;(total costs)/(the number of production).

□ Marginal cost
: the marginal cost should be an increase incost that accompanies the increase in one unit of output. It can beobtained by the partial derivative of the cost function with respect
to output;(∂total variable costs)/(∂additional input of production).

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■Transaction costs□ A transaction cost is defined as a cost incurred in making aneconomic exchange. When the exchange system, say, ‘market’ iswell organised, the transaction cost is expected to be low. Typicalcomponents of the exchange system are information, infrastructure,and institutions.
□ Example: An IT company in Tokyo or Beijing.
□ This cost is very important in the context of ABS/certification
options, because the transaction cost becomes higher as
information on the resources becomes vague and unreliable.

6■ Opportunity cost
□ The opportunity cost is defined as a forgone benefit.
□ Example: Suppose that you are an undergraduate student
about to graduate. You have two options; obtaining the job orcompleting postgraduate study. When you choose postgraduate
study, the tuition fee will be a ‘direct’ cost. In addition to thedirect cost, you have to bear opportunity costs. If you havechosen obtaining the job, you must have obtained the salaries.
The salaries that must have been obtained (i.e. foregone salaries)
are the opportunity cost of choosing postgraduate study.
□ This cost is very important in the context of ABS,
because we have to bear higher opportunity cost
as the ABS process are time-consuming.
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■ Valuation of the Costs□ Valuation of the costs is not always easy.
□ Regarding costs in general and average/marginal costs, it is easy.
You can calculate them from expenditure and production function.
□ In contrast, regarding the transaction costs, they can hardly becalculated/evaluated, despite the fact that the notion is widelyaccepted.
□ Furthermore, regarding the opportunity costs, the valuation
methods are under development.
□ The opportunity of costs caused by delay of ABS can beevaluated by the foregone benefits, which may be obtained by, forinstance, R&D of pharmaceuticals from biological and genetic
resources. Evaluation methods are, however, underdevelopment.
8Figure 1Vague

The level of informationin situ

Researches
Prospecting

Clear
ex situIdentificationof Attribute of
the Resources

enormous costs

Inputting the data into
the sofisticated computersystems

originsource(legal provenance)
commodity

complicated but
traceable by electronicformat

infomration becomes
electronic format

non-commodity

Process A

Process B

MTA can guarantee
compliance

Process C

Considering Costs

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Coststransaction cost

general cost

opportunity cost
Processes from A to C

10

Process A has to bear relatively high transaction costs andopportunity costs, because resource users have to seek theproviders and have negotiate to have a legal access to theresources. Seeking and negotiating processes explicitlyand implicitly require costs and the costs are expressed astransaction costs. In addition, as negotiation takes time,
especially users have to bear opportunity costs that are
the foregone values of the future possible development ofproducts.
Process B has to bear costs in general, because the products
are still underdevelopment. In addition, costs formanagement occur from here.
Process C has to bear costs in general, such as managementof the information and the maintenance of theequipments. In addition, there appear the opportunity
cost again when the resources are commercialised through11R&D.

2.2 Benefits■ The notion of benefit can be classified into two
categories; for individuals and for the society as a whole.
■ For individuals, benefits are of revenues.
■ For the society as a whole, a typical benefit isconsumers’ surplus.
■ In the context of ABS, as the Bonn Guidelines hasclassified, there are monetary benefits and nonmonetary benefits.

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priceAequilibrium
price E

Suppy curveS(ｘ)Demand curve

D(ｘ)

MON

demand/supply

consumers' surplus； AME13How do we evaluate the benefits?
Evaluation of benefits are not easy.
We have to calculate the values of theresources.

Valuation Methods

14 Direct use value
Consumptive
ProductiveNon-consumptive

 Indirect use value Option value Bequest value Existence value

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Effects on Production Approach(Production Function Methods)

Methodology:(market prices of the products developed fromnatural resources) ×(possibility of success ofdevelopment) × (the number of species)
Advantages: Prices do exist.
Credibility: high (with conditions)
Limitation(s) : 1) possibility is controversial 2) thevalues are those of the past
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Replacement Cost/
Preventive Expenditure Approach

Methodology:
When some entity is functioning to prevent theenvironment from some damages, the entity isthough to have a value of replacing thedamage
Advantages: Valid for negative phenomenon(e.g.
pollution)
Credibility: low - intermediate
Limitation(s) : Damage should be valued.
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Contingent Valuation Method/
Conjoint Analysis

Methodology:
Stakeholders are asked to state or choose
the amount of Willingness to Pay (WTP) for
conserving, in general, the pristine
environment.
Advantages: Concrete figures will obtained anyhow.
Credibility: Depends on the subject to be asked.
Limitation(s) : Bias exists.
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Travel Cost Method

Methodology:
When someone is visiting some place (e.g. anatural park), he/she is asked how often
he/she visits the place and how much he/she
spends the travel costs.
Advantages: Concrete figures will be obtained.
Credibility: intermediate
Limitation(s) : No distinction between theresources in the place.
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Hedonic Pricing Method
Methodology: The typical usage is for values in realestates. Suppose there is a beautiful park in frontof house A and there isn’t in front of house B. A
difference in the real estate price is C. There are
the number of D houses. The value of the park = Cx D.
Advantages: Concrete figures will be obtained.
Credibility: highLimitation(s) : Statistics needed.
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Expected Values

Success
In situ

Identification

Values exist but
they depend on the methods.

of Commercilisation

Values can be seen.

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3.
3. Economic
Economic Tools
Tools
Cost-benefit ‘thinking’Decision Criterion (criteria)

Cost-benefit
Analysis

CostEffectiveness(CBA)

AnalysisOtherCriteria(CEA)

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3.1

Cost-Benefit Analysis (CBA)■ Cost-Benefit and Cost-Effectiveness analyses are of thecriteria by which economic efficiency of activities is estimated.
■ In CBA, both benefits and costs are evaluated and compared.
■ CBA are classified into two categories: financial appraisal andeconomic appraisal.

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Table 1
Financial Appraisal
For whom?

Economic Appraisal

Firm/Entrepreneur

Nation as a whole

Objective of analysis

Profitability

Efficiency in social investment

Elements of benefits

Revenues

Social welfare(e.g. consumer’s surplus)

Elements of costs

Expenditure

Opportunity costs/ expenditure

Criteria
Evaluation

Absolute

Relative

FIRR>interest rate

EIRR>opportunity

costofinvestment

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Criteria for CBA

t=T1∑（Bt - Ct）（１+r）-t ＞

0

t=0

2

t=T=T

∑Bt （１+r）-t / ∑Ct（１+r）-tt=0

3

t＞ 1

t=0

Internal Rate of Return; IRR≧

interest rate/ opportunity costof investment

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■ Regarding economic appraisal, criterion is a relative one,so one activity cannot be decided whether or not it
satisfies the economic efficiency.
■ Table 2 shows a hypothetical case of building highways
for public infrastructure. In Table 2, option 2 will bechosen by criterion of economic appraisal of CBA.

Table 2Options

Contents of the activities

IRR1

Highway 1

17%

2

Highway 2

25%

3

Highway 3

8%

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3.2

Cost-Effectiveness Analysis (CEA)■ CEA is used when the benefit is qualitative. The benefit isqualitative and a target of activities clear. In other words, CEA isused when benefit cannot be evaluated and/or when evaluation
itself of the benefits is meaningless.
■ Table 3 shows a hypothetical case of tackling with climatechange in which three policy options are available. In Table 3,option 2 will be chosen, considering cost-effectiveness.
Table 3
Options

Contents of the policy

Cost per 1 ton CO2
equivalent reduction

1

Introduction of solar energy$122

Methane capture in the disposal centre$33

Introduction of oil in stead of coal

$827

3.3
3.3 Summary
Summary ofof Criteria
Criteria ofof CBA
CBA andand CEA
CEA
CBA

CEA

Financial Appraisal

Economic Appraisal

Elements required

Costs, benefits

Costs, benefits

Costs

Absolute/relativeAbsolute

Relative

Relative

Applicability to ABS

Possible, regarding

Some difficulties

Possible

costs
Notes

Difficulties

in Difficulties

in Risks to underestimate

evaluating benefits in evaluating benefits in of benefits
situ situation

a whole process

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3.4
3.4 Other
Other factors
factors necessary
necessary forfor decision
decisionmakingmaking■ Discounting■ Purchasing-Power-Parity (PPP)■ Monetary shares as ‘nuisance’ or‘disturbance’ for a community29

4.4. Concluding
Concluding Remarks
Remarks
Factors
Factors ofof optimisation
optimisationt=T-t∑{Bt・（A/100） - Ct}（１+r）

Providercountryt=0+t=T-t∑{Bt・（100-A/100） - Ct}（１+r）
t=0> 0
A： share of the benefit

Usercountry30

1 Valuation of the resources is a key to know theoptimisation point, because values are thefundamental factors of benefits.
2 Benefits are always attached to the costs. The
optimisation depends on the relationship between
costs and benefits.
3 Some adhere ‘the share’ of the benefits. However,delay of access makes the stakeholders lose thewhole benefits to be shared. The whole cost-benefitvalues will deteriorate as the opportunity costs
emerge.
4 The loss is worse for providers, when PPP isconsidered.
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Thank you very muchfor your listening.

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