Applications of Benefit-Cost/ Cost-Effectiveness Analysis



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Applications of Benefit-Cost/ Cost-Effectiveness Analysis

  • Tuolumne River preservation
  • Lead in drinking water
  • Habitat Protection

“Saving the Tuolumne”

  • Dam proposed for hydroelectric power generation.
  • The “tension”: valuable electricity-loss in environmental amenities.
  • Benefits: hydroelectric power, some recreation.
  • Costs: environmental, rafting, fishing, hiking, other recreation.
  • Question: Should the dam be built?
    • Influential analysis by economist: R. Stavins.

Tuolumne: background

  • Originates in Yosemite Nat’l Park
  • Flows west 158 miles, 30 miles free-flow
  • Many RTE species rely on river
  • Historic significance
  • World-class rafting: 15,000 trips in 1982
  • Recreation: 35,000 user-days annually

The Tuolumne: A nice place

Hydroelectric power generation

  • River’s steep canyon walls ideal for power generation
  • “Tuolumne River Preservation Trust” lobbied for protection under Wild & Scenic
  • 1983: existing hydro captured 90% water
    • Municipal, agricultural, hydroelectric
  • Rapid growth of region would require more water & more power

New hydroelectric projects

  • 2 proposed hydro projects:
    • Clavey River, Wards Ferry
  • 3 year study on Wild & Scenic stalled FERC (Fed. Energy Reg. Comm.) from assessing feasibility of hydro projects.
  • April 1983, FERC granted permit to study feasibility of Clavey-Wards Ferry Project (CWF).

Clavey-Wards Ferry project

  • 2 new dams & reservoirs, 5 mile diversion tunnel
    • Jawbone Dam 175’ high
    • Wards Ferry Dam 450’ high
  • Generate 980 gigawatt-hours annually
  • Annual water supply of 12,000 AF
  • Increased recreational opportunities
  • Cost: $860 million (1995 dollars)

The opposition

  • Historical context: John Muir & Sierra Club lost Hetch Hetchy Valley fight.
  • Dams would damage
    • Fishing, rafting, wildlife populations, wild character.
    • Recreational opps created are minimal
  • Cheaper alternative sources of energy

Economic evaluation

  • EDF economists to evaluate costs and benefits, including environmental costs
  • Traditionally, environmental losses only measured qualitatively. Difficult to compare with quantified $ Benefits.
  • Stavins: “Rather than looking at it from a narrow financial perspective, we believed we could look at it from a broader social perspective by trying to internalize some of the environmental externalities”.

Differences in the CBA’s

  • Stavins’ CBA:
    • Used data from original project proposal
    • Included environmental externalities (mostly in lost rafting and fishing opportunities).
    • Took dynamic approach – evaluated costs and benefits over entire life of project (50 year “planning horizon”), r=10.72%

The costs and benefits

  • Benefits: $188 million annually
    • Electricity benefits: $184.2 million
    • Water yield: $3.4 million
  • Social Costs: $214 million annually
    • Internal project costs: $134 million
    • Lost recreation: $80 million
  • C (214) > B (188)

Tuolumne River: epilogue

  • Clavey-Wards Ferry project dams were not built….partly due to formal CBA.
  • Intense lobbying forced the political decision to forbid project.
  • Pete Wilson was senator.
  • Stavins said: “[Wilson] couldn’t say ‘I did it because I love wild rivers and I don’t like electricity’, but he could do it by holding up the study and saying, ‘look, I changed my vote for solid economic reasons.’”

“Lead in drinking water”

  • Should the EPA control lead contamination of drinking water?
  • Should water utilities be responsible for the quality of water at the tap?
  • Would benefits of such a program outweigh costs?
  • Economic analysis at EPA formed basis for adoption of this rule.

Background

  • Lead in drinking water is byproduct of corrosion in public water systems
  • Water leaves treatment plant lead-free, lead leaches into water from pipes.
  • Factors associated with risk:
    • Corrosivity of pipe material
    • Length of time water sits in pipe
    • Lead in plumbing
    • Water temperature (hotter -> more lead)

Primary issues

  • Evidence of lead-related health effects even from low exposure
  • Tendency of lead to contaminate water in the house
  • Decreasing corrosivity of water, also reap extra economic benefits by reducing damage to plumbing.

Scientific & analytical problems

  • No baseline data on lead levels in tap water
  • High variability in lead levels in tap water
  • Corrosion control is system specific
  • Uncertainty over reliability of corrosion control treatment
  • Corrosion control treatment may change water quality and require further treatment.

Approach

  • Stakeholders: 44% of U.S. population.
  • 2 regulatory approaches:
    • Define a single water quality standard at the tap or at the distribution center, OR
    • Establish corrosion treatment requirements.
  • Compare costs and benefits for each regulator approach

Estimating costs [1 of 2]

  • Source water treatment: for systems with high lead in water entering dist’n system. 880 water systems, $90 million/yr.
  • Corrosion control treatment: either (1) adjust pH, (2) water stabilization, or (3) chemical corrosion inhibitors [engineering judgment] $220 million/yr.
  • Lead pipe replacement: 26% of public water systems have lead pipes; usually best to increase corrosion treatment, $80-370 million/yr.

Estimating costs [2 of 2]

  • Public education: inform consumers about risks $30 million/yr.
  • State implementation: $40 million/yr.
  • Monitoring: (1) source water, (2) corrosion, (3) lead pipe replacement, $40 million/yr.
  • Total costs: $500-$800 million/yr.

Benefits: children’s health

  • Avoided medical costs from lead-related blood disorders: $70,000/yr.
  • Avoided costs to compensate for lead-induced congnitive damage ($4,600 per lost IQ point) $900 million/yr.
  • Offset compensatory education $2 million/yr.
  • Total: $900 million/yr.

Benefits: adult health

  • Avoided hypertension, $399 million/yr ($628 per case).
  • Avoided heart attacks, $818 million/yr ($1 million per event).
  • Avoided strokes, $609 million/yr ($1 million per event).
  • Avoided deaths, $1.6 billion/yr ($2.5 million per death).
  • Total: $3.4 billion/yr.
  • Total (all health): $4.3 billion/yr.

Key uncertainties & sensitivity

  • Current lead level in drinking water
  • Efficacy of corrosion treatment
  • Likelihood of decreased lead in blood
  • Precise link between lead exposure and cognitive damage.
  • Sensitivity Analysis:
    • Costs  50%, Benefits +100%, -30%

Summary of costs & benefits

  • Costs:
    • $500-$800 million/yr.
    • NPV = $4 - $7 billion
  • Benefits:
    • $4.3 billion/yr.
    • NPV = $30 - $70 billion
  • Benefits outweigh costs by ~ 10:1

Reflections on analysis

  • CBA played prominent role in regulation
  • Very stringent rule was adopted by EPA
  • Widespread EPA/public support
  • Quantitative analysis more likely to have impact if:
    • Credibly done and
    • Done early in process

Ando et al: Species Distributions, Land Values, and Efficient Conservation

  • Basic Question: are we spending our species conservation $ wisely?
  • Habitat protection often focuses on biologically rich land
  • Focusing on biologically rich land results in fewer acres of habitat to protect species

Cost-effectiveness Analysis

  • Goal
    • Provide habitat to a fixed number of species
    • No issue of how many species to protect
  • Compare two approaches
    • Acquire cheapest land to provide protection
    • Acquire smallest amount of land to provide protection
  • Why is this an interesting question?

Approach

  • Conduct analysis at county level in US
  • Use average ag land value for price of land
  • Use database of species location by county (endangered or proposed endangered)
  • Assume if land acquired in county where species lives  species is protected

Results

  • Locations for 453 species
  • Blue: cost-min only
  • Yellow: site-min only
  • Green: both

Cost-minimizing Problem

  • Subject to
  • For all iεI
  • where J = {j  j = 1, ... , n} is the index set of candidate reserve sites, I = {i  i = 1, ... , m} is the index set of species to be covered, Ni is the subset of J that contain species i, cj is the loss associated with selecting site j, and xj = 1 if site j is selected and 0 otherwise.
  • min

Conclusions

  • For 453 species
    • Cost per site 1/6 under cost-minimizing
  • Result similar to
    • Santa Clara River Group Project
      • FWS had $8 million from NRDA settlement
      • Wanted to use to buy habitat
      • Chose species rich coastal land
      • Must more bang choosing interior low quality/low price land
    • Ecological Linkages Group Project

Mini-Group Project Hints

  • Try to explain the problem & setup to another person.
  • Solve it without Excel.
  • Computers are dumb – they can only do what we ask them to do.
  • What is our objective? What are we choosing in order to meet it? What are the constraints?

Dealing with Multiple Criteria

  • Consider your first assignment
    • Single Species
    • Efficient way to conserve land, as function of Budget
    • Think of “probability of survival” as function of land conserved.
  • Extend to 2 species with different habitat requirements.
  • Derive efficiency frontier…

The Concept of an Efficient Frontier

  • Bird Prob
  • Frog Prob
  • Attainable Points
  • Efficient Frontier

Excel needs 3 things:

  • An “objective” function cell
    • The thing Excel is trying to maximize (the probability of survival, or total species protected)
  • A “policy” cell or block of cells
    • The thing Excel changes in order to maximize the objective (amount of each site selected).
  • “Constraints”
    • Things that “bound” the problem (Xi≥0, Xi≤100, C ≤ 20,000,000)


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