The Three Gorges Dam is an amazing construction, with major benefits for the Chinese people. However, like any large project, it also has large costs and risks.

As revealed in PD198, I was lucky enough to visit the Three Gorges Dam in October. It was a fantastic experience. The group I was with (led by Professor John Langford and Dr Yongping Wei from Melbourne University) was able to get amazing access to the dam and the organisation that built and operates it. The Three Gorges Corporation was a remarkably generous host, particularly its Vice President, Dr Fan Qixiang.

I’ll never forget my visits to the top of the dam wall and to the operating room for the hydro-electric power station, nor my ride on the reservoir in a large boat. The sheer scale of the dam is staggering. The dam wall is 2.3 km long, and its top is 180 m high above the rock base. The reservoir is about 660 km long and averages 1.1 km wide.

Being an economist, my natural tendency is to think about the dam from the perspective of a Benefit: Cost Analysis (BCA). Here is a summary of what seem to be its main benefits, costs and risks.

(Of course, it’s too late for a BCA of the dam to be useful. I’m just using the Three Gorges Dam to illustrate BCA-style thinking about a large, complex project.)

Benefits

(a) Flood prevention. This is seen by the Chinese as the biggest single benefit. Last century, major floods on the Yangtze led to losses of tens of thousands of lives, disruption and dislocation for many millions of people, and massive losses of production and infrastructure.

(b) Electricity generation. It’s the largest power station in the world. At full capacity, the dam generates around 22,000 MW of electricity. This alone will be sufficient to cover the dam’s full financial costs within a decade or so of reaching full operating capacity.

(c) Reductions in CO₂ emissions. According to one estimate, the dam avoids 100 million tonnes of CO₂ emissions per year (plus reductions in other air pollutants). If these emission reductions are valued at $30 per tonne, this benefit is worth $3 billion per year.

(d) Enhanced navigation of the river. From 2004 to 2007, 200 million tonnes of goods passed through the ship locks. It is estimated that transport costs have been reduced by 25% compared to trucking.

Benefits (b), (c) and (d) would be relatively straightforward to quantify in dollar terms, so long as their predicted levels were accurate. Benefit (a) is more challenging, of course. Economists use the “value of a statistical life” concept, inferring the value of life from the costs that people are willing to bear to reduce their own risks of dying, or the additional risks they are prepared to take in return for financial compensation. This approach is not without debate, but it is at least a useful starting point. The benefits of avoiding the temporary movement of millions of people might be possible to estimate with a survey-based approach, including a non-market valuation component.

Costs

(a) The financial cost of dam construction. This was something of the order of $15 billion.

(b) The financial cost of resettling around 1.2 million people to new accommodation so that they weren’t inundated or endangered by the dam. This also cost around $15 billion. It was interesting that the Chinese spent about as much on this as on constructing the dam itself.

(c) Social costs. In the west, we view forced movement of people of such a scale with amazement, perhaps even more so than the dam construction itself. But in China this is by no means the only example of such mass movements of people. The cost of the inconvenience of moving would be high, but it should be remembered that without the dam, that cost would be even higher as many more people would be forced to move due to floods. The main social cost specific to building the dam is the permanent loss of connection to the particular places where these people grew up, and loss of connection to particular communities of people. Someone said to us that it was mainly the older people who felt this, which seems plausible to me. Given that China is urbanising at a rapid rate, it’s likely that many of the younger affected people would have moved anyway, at their own expense, sooner or later.

Including this cost in a BCA would require it to be estimated using non-market valuation studies.

(d) Environmental impacts. Any construction of this scale is bound to have environmental impacts. In 2008 Scientific American magazine published an article about the dam using language like “environmental catastrophe” and “environmental cataclysm”. While the reality of serious environmental impacts is officially acknowledged, I reckon that article is particularly unbalanced, and includes some rather woolly thinking. They really needed a BCA framework to help them think through the issues in a more logical and balanced way.

Likely environmental costs include extinction of endemic species from the area that has been inundated (there are 57 endangered plant species growing in the region that may be adversely affected to some extent) and loss of fish species by changing the physical environment and reducing the ease of migration (there are 25 endangered fish species in the river, mainly due to over-fishing). The biggest challenge we would face in trying to include these impacts in a BCA would be estimating how many species would actually be lost. Even in the Scientific American article, which leans very much towards a negative perspective, it is pretty clear that we have very little idea what has been lost, or will be lost, due to the dam.

(e) Loss of archeological sites. According to http://china.org.cn/english/culture/66021.htm, artifacts present in the area that was inundated included prehistoric cultural relics dating back to the Old Stone Age more than two million years ago, and cultural sites of ancient dynasties from the Xia Dynasty (21st Century BC to 16th Century BC) to the Qing Dynasty (1644－1911). Huge quantities of archeological material were moved before the dam was filled, but no doubt much is now deep under water. And archeologists say that a moved artifact is not as valuable or informative as one that remains in situ.

Risks to the benefits

(a) Landslides and sedimentation. Sedimentation is a risk to most dams. Over time, it reduces the capacity of a dam to do what it was built for. There have been a number of significant landslides reported, contributing to this sedimentation. However, the Three Gorges Corporation said to us that the rate of sedimentation so far has been less than predicted.

(b) Earthquakes. The region is subject to earthquakes. It has been suggested that the weight of water in the dam may cause an increase in the frequency of quakes, or that a major earthquake might cause the dam to fail. That would potentially be an almost unthinkable tragedy, given the millions of people who live downstream.

(c) Water quality. Building the dam provided an impetus for authorities to improve the quality of water that leaves settlements and cities upstream of the dam. Nevertheless, problems with water quality remain a risk. When we were there, the water quality appeared to be pretty good, but this is something that typically fluctuates.

Quantitatively weighing up all these positives, negatives and risks would be exceptionally challenging. Nevertheless, organising our thoughts using the framework of benefits, costs and risks is helpful.

If it is true that the revenue from electricity is sufficient to cover the project’s financial costs, then an overall assessment would come down to whether the benefits of reduced flooding, reduced CO₂ emissions and enhanced navigation are sufficient to outweigh the costs of social, environmental and archaeological losses, allowing for the three risks.

I don’t have a good feel for the risks, but I know that they were studied intensively before the dam was approved, so presumably they are not excessive. If that’s true, my hunch would be that the benefits are easily sufficient to outweigh the costs. But I’d readily concede that that’s just one person’s partially informed judgment.