Decision Support for Environmental Policy by RG

VIEWS: 52 PAGES: 51

									Decision Support for Environmental Policy
• Chapter 5

1

Background Problem
• The ancient challenge: design public programs that improve private individuals’ welfare • We need a method to measure individual gains and losses to decide impacts to society • This method is called Benefit Cost Analysis (until recently: “Cost-Benefit-Analysis”)
2

Chapter Objectives
• Summarize the rationale for and uses of benefitcost analysis (BCA) • Explain the economic principles used for conducting a BCA. • Describe the steps for computing the net present value of policies. • Identify methods to account for benefits, costs, and time. • Discuss issues that affect both benefits and costs. • Describe the advantages and limits of BCA.
3

Why measure benefits and costs?
• One person’s benefit can be another’s loss. • BCA’s aim is to improve the general welfare, not any special interest welfare. • BCA is the government’s equivalent of a private business’s profit and loss statement. • BCA measures net return to a wider group: society as a whole (or large segments of society).
4

Definition of BCA
• BCA evaluates overall economic merits of public actions by translating positive and negative effects into a common denominator, usually dollars.

• Proposed U.S. legislation in 1990s would have expanded the role of BCA by requiring its use in the design of environmental regulations (ongoing debate).
– BCA Supporters: Its use leads to informed economic decisions. – BCA Opponents: Its use reduces flexibility in policy design. Slows things down. Costs a lot.

5

What BCA Does
• A BCA organizes information to promote rational policy analysis. • A BCA can be used to supply information needed for three important kinds of decisions – Simple ranking of actions – Optimal size or scale or programs – Optimal timing or sequencing of decision elements.
6

What BCA Does
• Formal use of BCA started in the U.S. in 1930’s for federal water projects • BCA has seen hundreds of applications since then, especially in last 5-10 years • Decision rule: If sum of benefits > sum of costs, action should be adopted (if the goal is economic efficiency).

7

A few special features of BCA:
• For private revenue, BCA substitutes benefit to society. • For private cost, BCA substitutes opportunity cost (of not allocating scarce inputs to other
activities).

• For profits, BCA uses benefit minus cost.

8

How BCA is Used
• For Design, Implementation and Review of policies – Ex Ante Analysis: looks forward to ask about benefits and costs of actions net yet taken. – Ex Post Analysis: looks backward by asking how well existing programs have performed.
• Analyzes history of benefits and costs to review accuracy of previous ex ante analyses. • Revises old analyses where mistakes are discovered.
9

Economic Principles of BCA
• Three important challenges assigned to BCA
– Defining policy goals – Scope of analysis (accounting for which people are affected by a policy) “Stakeholder identification” – Identifies incremental impacts of a policy.

10

Policy Goals: What ends are served by government action?
• Economic Efficiency: For a program to be economically efficient, total benefits must exceed total costs, regardless of who benefits and who loses. • Equity: BCA can help design programs for which benefits > cost to groups society says deserve to receive benefits or pay costs. (“social weights”) • Administrative Ease • Multiobjective goals: BCA can account for different weights assigned to different goals.
11

Scope of Analysis in a BCA (“Stakeholder Identification”)
• Accounting stance: defines which affected people have standing.
– Major classes of gainers and losers are identified. – National accounting stance: all taxpayers of a nation – More limited accounting stances for more limited public programs:
• local • regional

• Wider scopes: (e.g. greenhouse gas control proposals): – International – Intergenerational

12

Incremental Analysis
• Efficiency gains in policy through incremental analysis: avoids all or nothing analysis; considers added benefits v. added costs • Example: endangered species
– 100 % and 0% survival probability are all-ornothing proposals – Percents in the middle are likely to produce programs with larger net benefits.
13

Incremental Analysis
• Equimarginal principle (EMP): considers added benefits and costs from one more policy unit • MB = MC for max. efficiency by expanding scale or scope
• Scale: Number of stakeholders affected by proposed policy • Scope: Geographic coverage of proposed policy

• For policies that re-allocate resources over multiple uses:
– (net)MBi = (net)MBj for max efficiency for all competing uses of a single scarce resource
14

Example for EMP:
% survival benefits (million $) 5 6 9 15 22 28 33 costs (million $) 0 1 55 60 65 70 75 80 0.5 3 3 6 9 7 18 6 31 5 53
15

marginal benefits (million $)

marginal costs (million $)

50

0.5 2.5 6 9 13 22

Example for EMP with Resource Re-allocation
Trout Stocked (000's) 1 2 3 4 5 6 7 8 9 10 Marginal Benefits (10,000 dollars) Truckee Carson Walker 7.75 7.7 7.65 7.6 7.55 7.5 7.45 7.4 7.35 7.3 7.5 7.49 7.48 7.47 7.46 7.45 7.44 7.43 7.42 7.41 10 9.5 9 8.5 8 7.5 7 6.5 6 5.5

If only 5000 trout are available, how should they be allocated? How about 10,000? 15,000?

16

17

18

Incremental Analysis (cont.)
• With and Without Principle: measure benefits and costs with the program compared to without it (not before and after)
– Baseline policy defined (without program) – Alternative policy is compared (with program) – Use of before and after assigns benefits and costs to a program that may have occurred even without it.
• Example: Flood control before & after dam, when there is insufficient precipitation to cause a flood with or w/o dam…(so “the dam prevented flood” would be an incorrect statement) 19

Incremental Analysis (cont.)
• Timing
– Question: can net benefits be increased by delay – Example: Wait with fish stocking until drought is over to increase survival rates

• Sequencing
– Changing the order of new program elements can matter – Example: Perform river restoration before stocking fish to increase survival rates
20

Ten steps to net present value
• Background question: should we enact some particular policy or program
– With a known set of program elements – That produces benefits and incurs costs in a known time sequence

• Or should we maintain the status quo and do nothing new at all?
– Simple yes/ no situation – Not a choice amongst multiple programs – Not a question of optimal scale
21

Policy Example:
• Proposed policy: Remove Derby Dam on the Truckee River downstream of Reno • Status Quo: Don’t do it.

22

Reno

Pyramid Lake

Fallon

23

Remove Derby Dam
• Benefits:
– More water to Pyramid – More / better spawning runs for cui-cui – More food for Lahontan cutthroat trout – Better fishing – More attractive / better river recreation (ex: Rafting from Reno to Pyramid)

24

Remove Derby Dam
• Costs:
– No more irrigation water from Truckee to Fallon ag. community
• Reduced harvests (Prim. Alfa-Alfa) • Reduced revenues to Fallon farmers

– Less water for Fallon National Wildlife Refuge (FNWR)
• Reduced habitat for water fowl • Reduced hunting and bird watching opportunities
25

BCA Step 1: Scoping
– Define proposed action and services it produces
• Remove Derby Dam

– Identify ways it could be carried out
• Simple: Divert River temporarily, take out dam, reroute river back into original bed

– Select range of relevant decisions
• Not really an issue here: It’s either all or nothing

– Choose accounting stance (stakeholders)
• • • • Fallon farmers Local Truckee River Recreationists / Outfitters Bird watchers, hunters (At FNWR) Payute tribe (Own fishing rights to Pyramid lake)
26

Step 2: Identify benefits per unit
– Priced services (e.g. hydroelectric power, irrigation water): requires using market prices – Unpriced services (e.g. environmental regulations that save lives, endangerd species, recreation): requires estimating wtp.
• WTP is often hard or expensive to measure. (Special field of Resource Economics: “Valuation of Nonmarket goods”)
27

Step 4: Measure output quantity
– E.g. acre feet water used for crops – E.g. visitor days of wildlife watching from wildlife habitat – E.g. lives saved or lengthened through regulation that controls environmental pollution (see ch 16) – E.g. environmental risk reduced through stricter workplace safety regulation (see ch 17)
28

Steps 2 & 4 Example
Benefits
Year Truckee River Public Recreation
Quantity visitor days 1 2 3 4 5 10,000 12,000 16,000 20,000 30,000 Price $/visitor day 30 30 40 50 50

Truckee outfitters
Quantity rafting trips sold 100 150 200 250 300 Price $/ticket 120 120 140 140 160

Payute / Pyramid fishing
Quantity fishing licenses sold 8,000 9,000 9,000 10,000 14,000 Price $/license 8 8 10 12 15

29

Step 3: Costs per unit
• Step 3: Measure cost per unit (C’s)
– Inputs purchased to support a project or program
• e.g., trees planted • e.g., acres riparian habitat improved

– All other benefits displaced by the program
• e.g., higher goods’ prices from environmental regulations • e.g., reduced chemicals’ effectiveness from safety regulations.
30

Step 5: quantity of inputs
• Measure quantity of inputs (I’s), i.e. physical resources used to support carrying out the proposed policy (PLUS displaced benefits)
– E.g. acres owl habitat set aside – E.g. fish ladders installed to support recovery of endangered fish population – E.g., conservation measures subsidized to give irrigators incentives to conserve water.
31

Step 3 & 5 Example
Costs
Year Dam Removal Fallon Agriculture
Price ["C"] $/ac-foot lost

FNWR
Quantity ("I") Price["C"] visitor days lost $/vistor day lost (hunting & bird watching) 50 120 200 200 200 40 40 40 40 40

Quantity Price Quantity ("I") construction days $/construction day irrigation water lost acre-feet 1 2 3 4 5 80 40 10 0 0 15,000 15,000 12,000 12,000 12,000 5,000 10,000 10,000 10,000 10,000

40 40 40 40 40

32

Step 6: Gross benefits by period
Benefits
Year TR Public Rec. Truckee outfitters Payute / Pyramid fishing Quantity Price Quantity Price Quantity Price visitor days $/visitor day rafting trips sold $/ticket fishing licenses sold $/license 1 2 3 4 5 10,000 12,000 16,000 20,000 30,000 30 30 40 50 50 100 150 200 250 300 120 120 140 140 160 8,000 9,000 9,000 10,000 14,000 8 8 10 12 15 376,000 450,000 758,000 1,155,000 1,758,000 Gross benefits by period

Ex. Year 1: 10,000*30+100*120+8000*8=376,000
33

Step 7: Gross costs by period
Costs
Year Dam Removal Fallon Agriculture FNWR Quantity Price Quantity Price Quantity Price construction days $/construction day irrig. water lost $/ac-foot lost visitor days lost $/vistor day lost acre-feet 1 2 3 4 5 80 40 10 0 0 15,000 15,000 12,000 12,000 12,000 5,000 10,000 10,000 10,000 10,000 40 40 40 40 40 50 120 200 200 200 40 40 40 40 40 1,402,000 1,004,800 528,000 408,000 408,000 Gross costs per period

Ex. Year 1: 80*15,000+5000*40+50*40=1,402,000
34

Step 8-10: Net benefits by period, discounted net benefits, and NPV
Year 1 2 3 4 5 Gross benefits by period 376,000 450,000 758,000 1,155,000 1,758,000 Gross costs per period 1,402,000 1,004,800 528,000 408,000 408,000 Net benefits per period -1,026,000 -554,800 230,000 747,000 1,350,000 NPV: Discounted NB (r = 7%) -958,879 -484,584 187,749 569,883 962,531 276,700

Ex. Year 1:-1,026,000*(1/(1+0.07)) = -958,879 Year 2: -554,800*(1/[(1+0.07)^2])= -484,584 etc

35

Sensitivity Analysis: Different interest rates
Year 1 2 3 4 5 Net benefits per period -1,026,000 -554,800 230,000 747,000 1,350,000 NPV: Discounted NB (r = 7%) -958,879 -484,584 187,749 569,883 962,531 276,700 Discounted NB (r = 5%) -977,143 -503,220 198,683 614,559 1,057,760 390,639 Discounted NB (r = 10%) -932,727 -458,512 172,802 510,211 838,244 130,018 Discounted NB (r = 15%) -892,174 -419,509 151,229 427,100 671,189 -62,165

36

Two net-benefit streams with equal NPV (see table p. 105)

37

Concentrated costs, diffuse benefits

Diffuse costs, concentrated benefits

Note: These annual values are already discounted!

38

NPV quiz, example 1
$ NB 5 5 5 5 5

r =0.06

Project A
year -5 -5 -5 -5 -5

$ NB

5

5

5

5

5

r =0.06

Project B
year -5 -5 -5 -5 -5

39

NPV quiz, example 2
$ NB 5 5 5 5 5

r =0.06

Project A
year -5 -5 -5 -5 -5

$ NB

5

5

5

5

5

r =0.08

Project B
year -5 -5 -5 -5 -5

40

NPV quiz, example 3
$ NB
0 0 0 0 0 0 0 0 0 0 year

r =0.06

Project A

$ NB

3

3

3

3

3

r =0.06

Project B
year -3 -3 -3 -3 -3

41

NPV quiz, example 4
$ NB
0 0 0 0 0 0 0 0 0 0 year

r =0.06

Project A

$ NB

5

4

3

2

1

r =0.06

Project B
-1

year
-2 -3

-4

-5

42

Solution ex.1:
Project A
r= Year 1 2 3 4 5 6 7 8 9 10 0.06 NB -5 -5 -5 -5 -5 5 5 5 5 5 NPV= discounted NB -4.72 -4.45 -4.20 -3.96 -3.74 3.52 3.33 3.14 2.96 2.79 -5.32 r= Year 1 2 3 4 5 6 7 8 9 10

Project B
0.06 NB 5 5 5 5 5 -5 -5 -5 -5 -5 NPV= discounted NB 4.72 4.45 4.20 3.96 3.74 -3.52 -3.33 -3.14 -2.96 -2.79 5.32

43

Solution ex. 2:
Project A
r= Year 1 2 3 4 5 6 7 8 9 10 0.06 NB 5 5 5 5 5 -5 -5 -5 -5 -5 NPV= discounted NB 4.72 4.45 4.20 3.96 3.74 -3.52 -3.33 -3.14 -2.96 -2.79 5.32 r= Year 1 2 3 4 5 6 7 8 9 10

Project B
0.08 NB 5 5 5 5 5 -5 -5 -5 -5 -5 NPV= discounted NB 4.63 4.29 3.97 3.68 3.40 -3.15 -2.92 -2.70 -2.50 -2.32 6.38
44

Solution ex. 3:
Project A
r= Year 1 2 3 4 5 6 7 8 9 10 0.06 NB 0 0 0 0 0 0 0 0 0 0 NPV= discounted NB 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 r= Year 1 2 3 4 5 6 7 8 9 10

Project B
0.06 NB 5 5 5 5 5 -5 -5 -5 -5 -5 NPV= discounted NB 4.72 4.45 4.20 3.96 3.74 -3.52 -3.33 -3.14 -2.96 -2.79 5.32

45

Solution ex. 4:
Project A
r= Year 1 2 3 4 5 6 7 8 9 10 0.06 NB 0 0 0 0 0 0 0 0 0 0 NPV= discounted NB 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 r= Year 1 2 3 4 5 6 7 8 9 10

Project B
0.06 NB 5 4 3 2 1 -1 -2 -3 -4 -5 NPV= discounted NB 4.72 3.56 2.52 1.58 0.75 -0.70 -1.33 -1.88 -2.37 -2.79 4.05

13.13

-9.08

46

Reno flood control example

47

Butler Ranch Retention Basin/ Regional Park (currently “Bella Vista” Property)

48

Turn “Bella Vista” area into flood retention basin / Regional Park • Benefits:
– 700 acres of regional recreation – Values of homes in vicinity of Park will approve

• Costs:
– Build Basin / Park – Forego residential development (about 1000 to 1500 homes)
49

Closer Look at Benefits
• Regional Park:
– – – – Sports fields (baseball, soccer) Walking / jogging trails (6 miles) BBQ / picnic sites (4 sites) Kids playground

• Home values:
– Currently about 6000 homes w/in 1 mile of Park – 2500 more to be built in next 3 years
50

Closer Look at Costs • Park / Basin construction
– Straightforward – simply measured in construction days / year

• Foregone development:
– 1000 to 1500 homes NOT built – These homes would have been built w/in next 5 years
51


								
To top