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Mortality Risk Valuation for Air Quality Policy by pptfiles

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									Mortality Risk Valuation for Air Quality Policy
Alan Krupnick, PhD Senior Fellow and Division Director Resources for the Future NERAM V, October 17, 2006

Value of v Life Statistical
 The “value of life” is a religious/ethical concept – not economics  The value of statistical life is an expression of preferences for reducing risks of death (in monetary terms)

Value of Statistical Life
 VSL = The willingness to pay for mortality risk reduction / risk reduction  VSL = $100/(1/10,000) = $1 million  # deaths averted * VSL = mortality benefits EPA’s VSL = $6 million (2000$)

(IEC, 2001)

Policy Context
 Government regulations are often very costly to society and deliver benefits of very different types and quantities  So need a way of identifying those that deliver the greatest bang (buck) for the buck, i.e., are efficient  Other factors matter at least as much: equity, legality, political

Cost-Benefit Analysis is…
A technique for comparing the utility to society of the benefits of an action against the cost to society of that action. The preferences of people for both the benefits and the “costs” are expressed in monetary terms.

Many major applications of benefit-cost analysis (BCA)
 Social cost of Electricity (e.g., U.S., Europe (EXTERNE))
 Japanese role

   

EXTERNE: Social cost of Transportation, CAFÉ U.S.: BENMAP, OMB and EPA guidance Chinese: ECM (World Bank) U.S. Regulatory Impact Analyses of regulations

How to measure these preferences
 Add up savings to economy
 Cost-of-illness (medical costs, productivity loss), human capital approach

Willingness to pay (WTP) approaches:  Observe choices – revealed preferences  Asks people questions -- stated preferences
 Contingent valuation, Conjoint analysis
 Hedonic price methods: wage-risk trade-off.

Problems with Revealed Preference (Labor Market Studies) applied in air pollution context

• Accidental not cardiopulmonary deaths • Relatively healthy and young population, not older unhealthy population • Lots of unobserved reasons for wage differentials

Example of Stated Preference Survey
 Co-principles: Alan Krupnick, Maureen Cropper, Anna Alberini, Nathalie Simon  Funding from USEPA, Health Canada, MITI  Implemented in U.S., Canada, Japan, UK, France, Italy and Korea. China almost done  Publications: Journal of Risk and Uncertainty, 2002; JEEM, 2004. Others planned

Percent of "Yes" responses by bid value: Canada Study

Percent

80 70 60 50 40 30 20 10 0 100 225 750 1100

5/1000 (wave 1) 1/1000 (wave 2)

Bid Value (Can. $)

Percent of "Yes" responses by bid value: Canada Study
72.56 80 70 60 49.25 50 Percent 40 30 20 10 0 100 225 Bid Value (Can. $) 750 5/1000 (wave 1) 1/1000 (wave 2) 1100 19.32 19.67 38.1 25.95 42.96 66.87

Percentage of "Yes" Responses by Bid Value--US Study
72.86

80
63.46

70 60
43.79

50
Percent

43.79 42.07 35.17

40 30 20 10 0 70 150
Initial Bid 24.2

12.89 5/1000 (wave 1) 1/1000 (wave 2)

500

725

Percentage of Yes responses by bid -Japan
77% 75% Percentage of “Yes” Responses to the Initial Payment Questions

80% 70% 60% 50% 40% 30% 20% 10% 0%

55% 50%

49%

47% 36% 27% 18%

32%

2, 500

W ave1 5, 000 10, 000 20, 000 W ave2 40, 000 yen

Key Findings
 Results are credible. Pass external scope test and internal validity tests  VSL for current risk change is 3-10X smaller than the “standard” value of $6 million.  Age and mental and physical health status matter

Mean VSL By Country and Study ($US Figures obtained with PPP Conversions)
China Shanghai Chongqing Canada Hamilton Ontario U.S. Entire country Japan Shizuoke UK Bath France Strasbourg Italy 5 cities

Current 5/1000 $US (Millions)

1.33

1.28

0.93

1.54

0.66

1.17

4.56

2.28

WTP (as a% of Average Household Income Age Effect (>70) 5/1000?

4.71%

7.27%

1.00%

1.45%

0.81%

1.59% 7.71% 3.50%

(-)b

(-)b

(-)

(-)c

(-)

(-)c

(-)c

(-)

Conceptual Foundation
 Economics: Consumer sovereignty as a social goal Capturing individual preferences
 For private risk reduction  For public risk reduction

For Private Risk Reduction
Life Cycle Model (effect of age on WTP)  Older people
 have fewer years left (-)  view life years left as more precious (+)  are in worse health
 You have to pay me to live longer! Complementarity of health with consumption (-)  Especially sensitive to approaching mortality (+)

 It’s an empirical question

For Public Risk Reduction
 Most individuals (even the elderly) WTP more to save younger people’s lives than older people’s lives.

EPA’s Departure from Its Standard Practice
 Its 2003 Regulatory Impact Analysis (cost-benefit analysis) for “Clear Skies:”
 EPA made a distinction between the monetary value of reducing mortality risk to the elderly (over 70) and to other adults  Specifically, $3.8 million per “statistical life saved” for the elderly and $6 million for others  In supplementary analysis: ~$275,000 per life year saved * # life years saved  VSLY approach

The Backlash
 “Our parents and grandparents built America into the strongest nation on earth; they are not worth just two-thirds of us.” Representative Tom Allen (D.Maine)  “EPA will not -- repeat not -- use an age adjusted analysis for decision making with Clear Skies or any other program or regulatory effort.” Christine Todd Whitman, EPA Administrator

Waxman/Allen Amendment:

SEC.418. None of the funds provided in the Act may

be expended to apply, in a numerical estimate of the benefits of an agency action, monetary values for adult premature mortality that differ based on the age of the adult.

The Current Situation
 Other countries doing age-adjustments:
 Canada (VSL 25% lower > 65)  EU (VSL declines with age)

 EPA swore off the senior discount.  But, some at EPA again proposing “primetime” use of value of a statistical life year (VSLY)

Figure 1. WTP as a Function of Age
WTP at age x relative to WTP at age 40

180 160 140 120 100 80 60 40 20

DeShazo and Cameron, 2004 (both ages) Johannesson et al., 1997 (blip) Hammitt and Liu, 2004 Leitner and Pruckner, 2006a Chestnut et al., 2004 (USA) Krupnick et al., 2002 Alberini et al., 2004 (pooled) Krupnick et al., 2006 (pooled) Strand, 2004 Tsuge et al., 2005

0 0 20 40 60 80 100
Age in years

Guria et al., 1999

Summing up
 Findings are messy, but it is clear that based on preferences, VSL could be constant for all or lower for elderly.  But preferences don’t change proportionally to life-expectancy, so don’t use VSLY  We shouldn’t expect, nor use one VSL for all situations, including age, income, gender, race, public goods vs. private goods, cause  But efficiency isn’t everything and as a society we can make choices to act as if one size fits “all” or to override efficiency

Thank You

Table 4. Summary of Clear Skies Initiative Benefits Based on USEPA VSLs and VSLs
Benefits of Reduced Mortality (2000$, billions, undiscounted) Age Group Reduced Annual Fatalities in 2010 Constant Value of Life (EPA 2003) Senior Discount (EPA 2002) Value Based on AgeIndustry Fatality Risk VSL Estimates Value Based on Industry Fatality Risk VSL Estimates VSLY Based on EPA’s Constant VSL

Base Estimates – Long-Term Exposure:

Adults, 18-64
Adults, 65 and older

1,900
6,000

12.0
37.8

12.0
23.8

11.9
22.9

10.1
36.0

11.5
15.9

Alternative Estimates – Short-Term Exposure: Adults, 18-64 Adults, 65 and older 1,100 3,600 6.9 22.7 6.9 14.3 6.9 13.7 5.8 21.6 6.7 9.5

Key Issues
 Whose preferences matter?
 The elderly themselves?
 Utilitarianism: Let view of individuals matter

 Society in general? (and what does this mean?)
 Rawls’ Veil of Ignorance: preferences if you did not know your state

 The “commodity” to be valued
 Private good (benefit enjoyed exclusively by individual)  Public good (benefit enjoyed by public)

VSL vs. VSLY
 “One size fits all” VSL  treats elderly the same as others  VSLs that vary by age  from literature that finds “discounts” for elderly  VSLY  assumes “discounts” for the elderly proportional to life expectancy

Goals for the Krupnick et al Survey Program
 Estimate annual individual WTP over next ten years for private risk reductions of:
 5/1000 over the next ten years,  1/1000 over the next ten years,  5/1000 starting at 70, over the following ten years

 For people over 39 (one-third over 60)  For people in all states of physical and mental health

Features
 Developed from focus groups/one-on-ones  Extensive risk communication and testing  In-person on computer self-administered, 30 minutes

or over internet (WEB-TV)
 Extensive visual, auditory aids and simple keypad  Abstract risk reduction method, payment vehicle  Double-bounded dichotomous choice to elicit bid

Differences Between U.S. and Canada Surveys and Samples Category Canada Administration In-person; self administered on computer; voice-over Sample size Wave 1: 630; Wave 2: 300 Sample health Age Content 40-75 Base survey U.S. Web-TV; limited voiceover 600 600 Worse than Canada 40+ Minor adjustments

Survey Outline
Basic demographics and health background

Examples and exercises in interpreting risks
Examples of averting behaviors and their risk reductions WTP questions Each respondent gets three WTP questions (or two if over 65): contemporaneous then latent Debriefing questions and more demographics

Survey Outline
Basic demographics and health background

Examples and exercises in interpreting risks
Examples of averting behaviors and their risk reductions WTP questions Each respondent gets three WTP questions (or two if over 65): contemporaneous then latent Debriefing questions and more demographics

Baseline Risks and Age

Basic Structure of WTP Questions

1st WTP Question 2nd WTP Question 3rd WTP Question

WAVE 1 5 in 10,000 10 in 10,000@70 5 in 10,000@70

WAVE2 10 in 10,000 5 in 10,000@70 10 in 10,000@70

Basic Structure of WTP Questions
External Scope test

1st WTP Question 2nd WTP Question 3rd WTP Question

WAVE 1 5 in 10,000 10 in 10,000@70 5 in 10,000@70

WAVE2 10 in 10,000 5 in 10,000@70 10 in 10,000@70

Government support for pollutionrelated policy research
 US EPA budgets for epidemiology and monetary valuation  Support for CAFÉ in Europe  China and the ECM effort by World Bank  Current support by METI

EPA’s Traditional Use of the VSL
 One VSL (currently ~$6 million)  Its 2003 Regulatory Impact Analysis (cost-benefit analysis) for “Clear Skies:”
 EPA made a distinction between the monetary value of reducing mortality risk to the elderly (over 70) and to other adults  Specifically, $3.8 million per “statistical life saved” for the elderly and $6 million for others  In supplementary analysis: ~$250,000 per life year saved * # life years saved  VSLY approach

Role for Benefit-Cost Analysis (BCA) in Regulatory Decisions
 Benefits exceed costs (Reagan Administration)  Benefits justify the costs (Clinton Administration)  Benefits and costs are to be considered (Superfund site remediation)  Benefits can be considered but costs cannot (National Ambient Air Quality Standards under U.S. Clean Air Act) BCA a tool not a rule

Externalities
 Externalities arise when economic activity affects third parties who have no influence on the activity=>market or government failure  Not all third party effects are externalities: e.g. damages to property during a car accident.

Table II-1: A sample of externalities assessed in studies of electricity generation. Health Materia Crops Forests Amenity ls 2/ Mortality Morbidit Timber Other y PM10 Y Y Y n.e. n.e. n.e. Y SO2 1/ Y Y Y Y Y Y Y NOx 1/ Y Y Y Y Y NA n.e. Ozone Y Y Y Y Y NA n.e. Mercury NA NA n.e. n.e. n.e. n.e. n.e. and other heavy metals Water pollutants 4/ Noise n.e. n.e. n.e. n.e. n.e. n.e.

EcoSystems n.e. Y Y n.e. ?

Y

n.e.

NA

n.e.

n.e.

n.e.

n.e.

AM

n.e.

BCA Strengths
 Accounting framework (array advantages and disadvantages) 
     Transparency Comprehensiveness Ignorance revelation and uncertainty Accountability Comparability

 Normative – provides a “stopping rule”
 Based on preference satisfaction and aggregation of individual changes in well-being into benefits and costs

Real Limitations
 Equity not taken into account  Lack of comprehensiveness  Difficult in practice

Experience with BCA in Regulatory Design
(Morgenstern, 1997)

 All Regulatory BCA’s studied “ended up improving the rules;” attribution to the BCA itself is difficult
 Guided development of rules  Added/eliminated/adjusted alternatives  Supported decisions

 Wide range of quality

Steps for Environmental/Energy BCA Analysis (change in…)
Emissions  Concentrations  Effects Pop Costs CEA WTP Benefits

BCA

Newer Empirical findings: Stated Preference

 Hammitt and Graham (2002): WTP lower for older group  Chestnut et al (2004): Age generally not significant; sometimes WTP lower for >74 group  DeShazo and Cameron (2005): WTP falls with age

New Wage Hedonics Literature
 Aldy and Viscusi: Inverted U-shape ($9.9 million for 35-44 year olds, $3.8 million for 55-62)  Kneisner, Viscusi and Ziliak: VSL statistically same from 37-65  Evans and Smith: VSL larger for 57-62 group than younger

The Effect of Age on WTP
The effect of age on WTP
400 350 300 Median WTP 200 (2000 US $) 150 100 50 0 0 20 40 Age WTP_US I WTP_CAN 60 80 100 250

Nature of Deaths to be Valued in Air Pollution Context
 Daily time series analysis of PM and mortality rate by city (Schwartz et al):
 affects >65 years old  affects those with lung and heart disease

 Cross-section analysis on PM and 8- and 16-yr survival for 550,000 individuals (Pope et al)
 assumes proportional hazard  affects those with cardiopulmonary disease


								
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