Cost-Benefit Analysis of Three Gorges Project
China is working on the controversial Three Gorges project. Are such projects economically justified?
The Three Gorges Project (TGP) in China is the largest hydro project in the world. The project was first proposed by Sun Yat-sen in 1919, and 84 years later, in 1993, the project has started its construction. The TGP has three phases. The first phase is from 1993, when the Yangtze River was diverted, and after it reverted in November 1997, the second phase has started. The second phase is to complete the main body of the dam and open the permanent ship lock for navigation. The whole project would be ...view middle of the document...
2.1.1. The benefit analysis
According to Morimoto and Hope, there were three large positive impacts, EG (economic growth), PG (power generation), and CP (clean power). Beside those, there are other factors that were considered in the CBA. It has been calculated, that the ship locks would increase river shipping from 10 million to 50 million tones annually, which can cut the transportation costs by 30 – 37% (Wikipedia, 2006). In the history of China, the Changjiang River floods once every 10 years in average and it was expected that the TGP could solve the problem effectively because it has a storage capacity of 22 cubic kilometers. The TGP uses clean renewable energy, which would replace the coal-dependent energy generation in China, and that would be a very positive point. In Morimoto and Hope’s CBA model, they pointed out that the benefits also involves economic growth, power generation, clean power, flood control and navigation improvement, after calculation, it has been estimated that the benefit was around 1217 billion RMB in total.
2.1.2. The cost analysis
The cost of the TGP involves market costs and non-market costs. The market costs are obvious, and the non-market costs are the most controversial perspective in the project. In this CBA model, they have developed some new variables, which are the downstream effects, including impacts on downstream fishery, value of the lost archaeological sites. The market costs include the construction cost (417 billion RMB), resettlement cost (93 billion RMB), fishery loss (27 billion RMB), tourism loss (14 billion RMB). The non-market costs are more complicated, in which involves the change of climate, impacts on ecosystem, seawater intrusion, archaeological loss, downstream effect (29 billion RMB), treatments for environmental pollution, etc. Most of the environmental impacts are hard to predict, and they have consequences, in which are hard to be quantified in monetary terms.
2.1.3. The analysis of the CBA model
In the analysis of those variables one can see that the economic growth, power generation, clean power, construction cost, resettlement cost and the archaeological loss are the most influential factors and have the largest impacts on the TGP. In those variables, power generation and clean power can bring ongoing benefits; the construction cost and resettlement cost are only on the construction period. The model estimates that the final values were -114,424 and 1321 billion RMB respectively (Morimoto and Hope, 2001). In this model, other factors were also considered such as the initial proportion of time during which an alternative power generation is not available (P0), initial expected increase in economic output due to increased power supply (EO), annual rate of decline in power generation due to sedimentation (A), etc. So Morimoto and Hope have concluded that the mean and the 95% percentile of the cumulative NPV at the 5% discount rate were positive, whereas the...