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Cost benefit analysis for environment Paper

Words: 2943, Paragraphs: 33, Pages: 10

Paper type: Analysis , Subject: Environment

So it is essential to specify clearly the question and issues and then focus the economic analyses on delivering value added information to improve decisions on them. Moreover, there must be proportionality in determining the type and level of economic analysis needed. Section 2 demonstrates the importance of careful analysis of the costs of proposed measures. It can help clarify and firm up the trade offs and issues which should help frame and target any benefits valuation study so that it can best aid decisions on them.

But this subject gets relatively little treatment and discussion in the academic environmental economics literature. Section 3 reviews recent practice in the application of benefit valuations for cent reviews of the environmental programmer for the water industry and preparation for the implementation of the Water Framework Directive (WED). Section 4 then draws on this experience to highlight major challenges for the valuation of environmental benefits.

The most important outstanding challenges concern how to address income constraints (challenge 1 1) and cover an overall programmer of measures and schemes (10), especially where a policy comprehensively covers many wide ranging measures; while providing full information on the likelihood of each of the impacts arising so hat respondents can properly perceive and value them (challenge 6). It is not clear whether even the best practice Stated Preference (SP) techniques can overcome all of these conflicting challenges.

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But the alternatives cannot measure up to these challenges and in fact fare worse. Section 4 concludes that it is necessary to tackle adequately all the challenges. It suggests a way forward. This includes using in-depth elicitation to specify and clarify the impacts in question followed by a contingent valuation survey of a larger more representative sample of beneficiaries. This river should cover a whole programmer and the individual schemes within it. The survey and analysis should include validation and cross checks that the valuations given are plausible and valid.

For example, it should include a follow up question to check that the respondent is really willing to forego goods or services they could purchase with their stated sum. Challenges for Applying Cost-Benefit Analysis and Valuation of Environmental Benefits to aid environmental decision-making in practice Introduction The Environment Agency has long been a strong supporter of environmental economics. Along with the Swedish Environmental Protection Agency, we are the public bodies that are institutional subscribers to the European Association for Environmental and Resource Economists (RARE).

We sponsored a session at Eraser’s conference in Southampton in 2001 3 and have sponsored Envenom in 2007 and 2008. We have for four years given an annual prize for Masters dissertations that apply economic analysis to a practical environmental policy issues. In this vein, this paper highlights lessons and challenges for the environmental economics community for the practical application of Cost- Benefit analyses and benefit valuations so that they can best aid environmental decision-making in practice.

It draws on experience of applying economic analysis to various environmental issues ranging from global matters such as climate change to local matters such as water management. 5 Outline Section 1 draws on an earlier paper that set out key value added contribution that economics provides to aid decision-making. Section 2 demonstrates the importance Of careful analysis Of the costs Of proposed measures. Section 3 reviews recent experience with the application of valuations of environmental benefits in the specific case of the periodic reviews of the environment programmer for the water industry.

This included carrying out about 440 Cabs for the appraisal of the environmental improvements in the review of the water industry in 2004. Section 4 then draws on this experience to set out major challenges that the environmental economics community needs to overcome so that valuations of environmental benefits can best aid environmental decision-making in future. Annex Ill gives a glossary of complex economic terms used in economic appraisal and defines policy terms and acronyms referred to in this paper. 1.

Contributions of Economics to aid Environmental decision-making Economics can make the following fundamental contributions to aid environmental decision-making: Environmental economics focuses on market failures, which are the primary rationale for considering government intervention. II Economics is fundamentally concerned with analyzing the trade-offs that decision-makers face in practice. It addresses the important opportunity costs of environmental protection options in that the resources used for implementing the options could be used to yield other benefits.

Ill Economics focuses on analysis at the margin of the actual choices that decision-makers actually face in selecting between the options. Economics’ law of diminishing returns reflects the fact that there are increasing constraints to achieving the greater levels of environmental improvements. This means that it will become increasingly more important to analyses the opportunity costs and trade-offs, as the public demands greater environmental improvements.

IV Economic appraisal aims to reflect the intensity of the preferences of all – or a representative sample of – individuals affected by the options. V Economic appraisal aims to specify comprehensively and systematically impacts of options without omissions or double counting. VI Economics focuses on creating incentives for better environmental management. Moreover, it examines what incentives are created by options for the affected parties and how they might then respond to them.

This can then help ensure that the measures will achieve the desired objectives and avoid unintended consequences. The Government Economic Service (GEES) strategic plan 2008 – 2011 stresses the difficult economic conditions for the UK and the world and that there is increasing pressure on global resources and the environment. This makes economic advice and analysis particularly important. Thus the GEES stress that “it will be important that rigorous cost-benefit analysis informs choices on spending to ensure value for money and effective delivery’.

Stages of an Options Appraisal In line with Ham’s Green Book (HEM Treasury (2003)) and Impact Assessment procedures, an appraisal Of policy options usually comprises: A Identify and assess the market failure problem (or opportunity) to specify clearly the question and issues. This involves an assessment of the risks of environmental impacts arising and the scale, nature and significance of these impacts and the rationale for intervention. B Specify objectives (in terms of improving A) and appraisal criteria. C Identify and appraise options for tackling the problem.

This involves: I Assess the costs of the options ii Identify and analyses key trade offs iii Assess and value the benefits of the options D Compare the costs and benefits to inform which is the best option E Evaluate the implementation of the selected option regarding its actual costs and its benefits and effectiveness in tackling the problem (or opportunity) and, if there remain significant residual problems, then reiteration Of the appraisal to assess additional options to tackle them. Costs are defined as the costs of measures or actions taken to help achieve the objective.

They include the opportunity costs of any resources used (in terms of their being used for alternative purposes). This can also include environmental costs and benefits of these actions. Benefits are defined as the improvements in people’s welfare from achieving the objectives. This includes the environmental benefits of achieving environmental objectives. Evidence “based” policy proposals must involve a careful estimation of their costs and consideration of whether these exceed the benefits for the policy to be worthwhile.

A notable failure to conform to these requirements is recent EX. policies to promote bio fuels. “Evidence driven” policy proposals should go further and apply all the above elements of appraisal to ensure that the policy proposals are driven by the significance of the environmental problems (A) and then assess the trade offs and costs and benefits of options for tackling them to seek the most efficient worthwhile option (B-? E) – the Water Framework Directive is a good case in point that aims to do this.

Importance of Proportionality we must examine the costs and benefits of possible appraisal options to determine the appropriate form and level of economic appraisal. The benefits depend on the significance Of the options and the trade offs facing decision-makers. We then need to focus the economic analysis on delivering value added information to improve decisions on the question and issues. Carrying out studies and surveys for the valuation of environmental benefits can be particularly expensive and time cons mining.

Therefore this question f proportionality is particularly important here. Assessing environmental benefits involves qualitative, quantitative and monetary assessment, with each being an essential building block for the next stage (see Figure 1). This should start with scoping the impacts and uncertainties for the options and trade offs and systematic qualitative description of the nature and sign efficacy of these impacts using a simple Appraisal Summary Tablet and then quantification of these impacts.

There are dangers of going mechanically to demand just the monitored outputs. Promotion of Cabs must work through these essential building blocks (see Pig ) so that they can be build on the normal scientific and technical assessments and integrate CAB considerations at an early stage and in a tailored way in the normal appraisal and decision-making process and actually influence and aid decision-making (egg in screening options etc).

Figure 1: Essential Building Blocks for Assessing Environmental Impacts Since the costs of the appraisals rise substantially as you move along this spectrum of analyses, we should start with the qualitative step. Where the initial assessment shows that the impacts and outstanding trade offs are significant, then it may be worthwhile quantifying them and then valuing them in monetary terms often approximately using benefits transfer or more accurately through original valuation studies where such additional analyses would yield value added information to aid decisions.

Table 1 summarizes the mixed application of qualitative, quantitative and monetary assessments used in England and Wales for specific major environmental impacts. This raises the question of how to combine the qualitative assessment with monetary valuations. This usually involves providing a summary Benefit:Cost ratio or Net Present value for monitored teems plus a qualitative description of other non-monitored impacts which leave it to decision-makers to determine whether they are sufficiently significant to alter the conclusion based on the B:C ratio.

It also highlights recent developments in applying these methods which shows the gradual increase in the quantification and monetary valuation of some impacts -? most notably in Department for Transport (Daft)’s ANTA refresh. This shows how more in-depth appraisal methods and monetary valuation can well evolve. Table 1: Appraisal of Environmental Impacts: Current practice Impact/Area Assessment Technique used Qualitative

Quantitative Monetary valuation Water (water quality, water resources, Water Framework Directive (WFM, Water industry periodic reviews in 2004 (PROP) and 2009 (PROP) Economic regeneration Heritage, archaeology and landscape Environmental priorities for local stakeholders in PROP (egg impacts on tourism and economic development) Costs and impacts on bills (scrutinized by Afoot and Environment Agency) Non-use benefit (regarding Impacts on natural habitats and Biodiversity) from water quality improvements and low flow alleviation (Environment Agency (chic) based on old studies in 1994, 2000 and 2002).

WED in 2008 based on ewe survey (NEAR (2007) Bathing water quality Informal recreation Angling Boating, cannoning Commercial fisheries including shellfishes Amenity impacts on property prices Traffic congestion Carbon emissions Air Quality Ecosystems Noise impacts Social Impacts Competitiveness Health Ambient concentration maps Source distribution Exceeded of critical levels Life years lost (for Particulate Matter) Deaths brought forward (for 502) Cardiovascular hospital admissions Respiratory hospital admissions Crop yield Materials damage Building soiling Marine Environments O Food provision Raw materials Leisure and recreation Nutrient cycling

Premeditation of waste Climate Regulation Resilience and resistance Disturbance prevention and alleviation Cultural heritage Education and research Ecosystems 1 Food Freshwater Fuel wood Fiber Climate regulation Disease regulation Water regulation Water purification Pollination Recreation Aesthetic Educational Natural habitat enhancement Flood Risk Management Disruption of road and rail networks Environmental impacts through first cut of handbook to apply ecosystem services approach (EFFETE (2007) benefits of natural habitats absorbing air pollute ants Recreation (visitors) nutrient capture fish nursery stocks (Compost 2008) Has at gig risk flooding Socially deprived Has at risk of flooding Has of ABA habitat. Propose MAC scoring + weighting for significant Non-monitored impacts (egg local amenity, recreation) properties (domestic and commercial) People (dread/stress and mortality risks) Natural habitat improvements valued by applying ecosystem services approach (EFFETE (2007)) Equity re incomes Agricultural land take Climate change Carbon sequestration Costs sensitivity analysis re optimism bias Diverse impacts of Transport schemes: ANTA 1998 Description + scalar assessment of major/minor (etc) significance categories systematically defined Air quality

Landscape Heritage Biodiversity Water quality Physical fitness Severance Accessibility Economic regeneration Tones CA Costs, exchequer costs Operating costs Time savings Accidents/mortality/injuries Accessibility option values ANTA Refresh 2008 As above Wider Economic benefits As above + some E valuation evidence for Reliability Journey ambiance Regeneration Air quality (ambient levels and Has exposed) Carbon (@ Shadow price of carbon) Noise The following sections review experience of applying economic analysis to aid environmental decision-making over the last 30 years. Section 2 examines practical application of cost analyses. This mainly concerns stage CIA in an options appraisal.

Section 3 examines practical experience of valuing environmental benefits. This mainly concerns stage Xiii in an options appraisal, but can be relevant to stage A in demonstrating the significance of the environmental impacts to justify considering options to tackle them. 2. Analysis of Costs Analysis of the costs of proposed measures is a most important element of a Cost-Benefit Analysis for the assessment of the options (stage CIA in Section 1 above). It should be carried out first before a valuation of environmental benefits is conceived for the options appraisal stage C. It can help frame and target any such subsequent study to value the benefits of options (stage Xiii).

Importance of Costs This see ounce can focus attention on the costs of the measures and then highlight the correct key question of whether these costs are worthwhile. This can help avoid philosophical debates about whether it is possible to value some environmental impacts which involve individuals’ subjective views. Such debates tend to generate more heat and emotive debate than helpful light to aid decisions. Fact of the matter is that some decision has to be made on the available options. Doing nothing implies a zero value to the environment. Eliminating the impacts implies an infinite valuation. Neither of these extremes is likely to be valid or helpful.

Public decision-makers require a balanced assessment of the views and preferences of (a representative sample of) the affected people on the costs, impacts and outcomes for the available options (see Section 3). Thus the SEC’s Water Framework Directive (WFM)12 helpfully first focuses on a cost-effectiveness analysis to estimate and scrutinize the costs of achieving an environmental objective and target (egg good status) and variations of this targeted. It then asks whether these costs are disproportionate which then entails comparison of costs with the benefits. But first estimating the costs can highlight and drop cases where costs are clearly too high.

This can then enable the arduous, costly and time consuming Cabs (see section 4) to focus on those truly marginal cases where it is not clear whether or not the costs are worthwhile. Focus on key trade offs and sectors and pressures affected This cost analysis can identify the key trade offs and options on which difficult decisions need to be made and hence where Cabs could usefully aid such decisions. It can highlight the key pressures and sectors on which we need to Ochs the policy and economic analysis. For example, analysis of the costs of WFM measures shows that the costs of fully achieving WFM targets would be high and disproportionately expensive.

It highlights that the following are the most significant pressures for which the control costs are highest: water resources, water quality pressures regarding phosphates and Ammonia Chemicals (Priority Substances and Priority Hazardous substances). It shows that the costs of achieving good status under the WED could most significantly affect the following sectors with highest cost first: water industry, agriculture rots. Moreover, the cost analysis shows that existing separately binding CE statutory requirements (egg Urban Waste Water Treatment Directive, Nitrates Directives, Habitats Directive etc) make up a significant portion of these costs for the water industry and agriculture.

These already agreed binding Statutory requirements require cost-effectiveness analysis to determine how to achieve them at least cost – not Casabas since a CAB would only be a valid consideration in any infraction proceedings regarding these statutory requirements if the Directive in question specifically allows for flexibility in implementation with respect to consideration of costs and benefits. We need to focus economic resources on doing Cabs of new policies, including any new CE measures (egg measures to achieve fully the WFM objectives), which will entail overcoming some major fundamental challenges (see Section 4). Focus on key Decision-makers For an economic appraisal to be most useful requires clarification of what decision it is helping to inform and who makes the key decisions on the trade offs in question.

Thus Figure 1 shows that almost all of the decisions on WFM measures in England and Wales are made at national rather than local or seminal level. In the case of agriculture, flood risk management and CE cohesion Funds, it is the national tax payer that might be paying for the measures; so HEM will play a major role in determining these matters. Hence these would involve national decisions as to the overall sums involved, but regional and local decisions as to the allocation of these sums. For the water industry and PROP, the bills are paid by water customers at water company (close to regional) level. But any decision on bills will still be made nationally within in an essentially overall national process (the periodic reviews).

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This sample essay is completed by Harper, a Social Sciences student. She studies at the University of California, Santa Barbara. All the content of this paper is just her opinion on Cost benefit analysis for environment and should not be seen as the way of presenting the arguments.

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