The Effect of Uncertainty and Variability on the Economic Appraisal of the Nura Clean up Project in Central Kazakhstan

Many studies now exist of the Total Economic Value of wetlands. Thesestudies show that they are highly productive ecosystems with many potentialuses. However, some of these uses conflict. Reduced flow from the River Nuraarising from water being diverted could lead to reduced water inflow into inter-nationally important wetlands and consequent catastrophic damage similar tothe Aral Sea. Whilst the economic value of the wetlands is noted in appraisalstudies, it has not been included as a component of cost of water.This paper shows how this could be done, recognising that river flow ishighly variable with long periods of successive droughts. This is modelled as aGeometric Brownian Motion stochastic process, and the presence of potentialeco-system catastrophe as an absorbing lower barrier at which wetland valuegoes to zero. Following Dasgupta and Maler, the shadow price is calculated asthe marginal effect of water flow on the expected present value of ecosystemservices from the wetland, and methods outlined by Dixit enable this to bedone for this particular stochastic process.An estimate of the shadow price for water not getting to the wetlands of0.50 euro (2000 prices) per m3 is obtained, and this is shown to be robust toparameter variations. For this value, a World Bank proposal to use the RiverNura for water supply purposes would be overturned.§ Paper for 9th Biennial World Conference of the International Society forEcological Economics , New Delhi, India, December 2006.‡This paper forms a part of the EU sixth framework TWINBAS project.∗Economics Division, University of Southampton, Southampton, SO17 1BJ, UK. email:[email protected]†BG Chair of Environmental Technology, AIPET, 126, Baytursynov Street, Almaty, 480013,Kazakhstan, email: [email protected]