Transcript Cost-benefit analysis (2)

Module 6
Costing, assessing and selecting
options and measures
Country-led environmental and climate
change mainstreaming
Linking policy, costing and budgeting
Mainstreaming of environment and
climate change in policies, strategies &
programmes
Identification of environmental
integration and climate change adaption
& mitigation options
Costing, assessment and selection of
options
Resource allocation: Integration of
environmental and climate change
(adaptation & mitigation) measures in
budgets
2
Tools for costing and assessing
environmental and climate change options
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Common types of costs
e.g. removal of
subsidies
costs e.g. training,
recruitment, …
e.g. protected areas
costs e.g. salaries,
recurrent costs…
e.g. sanitation
facilities
costs e.g.
construction,
ongoing operations…
Reform
measures
Transitional
costs
Management
measures
Operational costs
Infrastructure
measures
Capital costs
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Valuing the environment: statedpreference methods
• Stated-preference approaches
- Contingent valuation
• Asking respondents how they would behave if a
‘market’ existed: ‘Willingness to Pay’ (WTP) and
‘Willingness to Accept Compensation’ (WTA)
- Choice experiment method
• Questionnaire based on choice over pairs of attributes
• Responses analysed with statistical model
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Valuing the environment: other
approaches
• Revealed-preference approaches
- Hedonic pricing method
• Relationship between housing market prices and
environmental attributes
• Production-function approaches
- Environment valued as an input to the production of a
market-valued good or service, e.g. effects of increased
ozone on agricultural crops
- Ecosystem service valuation models
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Many services are public goods
Economic
Valuation
Spiritual &
religious
Aesthetic
?
Difficult or
impossible
?
Flood/Fire
regulation
Disease regulation
?
?
Water purification
?
Climate regulation
Freshwater
?
Genetic Resources
Recreation &
tourism
Fiber
Food
Source: Based on Mayaux (2006)
Environmental
economy
?
?
?
Easy
?
Classical economy
?
Economic Value ($)
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Cost-benefit analysis: identifying
costs and benefits
Environmental and CC adaptation/
mitigation measures
Costs: extra costs incurred compared with the ‘businessas-usual’ scenario, reduced economic growth opportunities
Benefits:
-Avoided damage and losses
-Extra developmental benefits compared with ‘businessas-usual’ scenario
-Energy cost savings
-Sales of carbon credits
-Positive environmental and related health/livelihoods
outcomes (including health expenditures savings)
-Strategic and competitive advantage (e.g. organic
products)
Can you
think of
some
examples?
For environmental measures, internalisation of externalities is a
MUST, but can often be complex to achieve
[risk of simplification in detriment of environment]
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$400
0
Public Net
Private
NetPresent
PresentValue
Valueper
perhectare
hectare
198
199
7
9
$1,000 to $3,600
Mangrove: $91
$-5,400 to $200
Shrimp Farm: $2000
Value
(per hectare)
Coastal
Protection
(~$3,840)
$2000
0
Net: $2,000
(Gross $17,900
less costs of
$15,900)
Fishery nursery
Source:
Less
subsidies (($70)
UNEP
$1,700)
Timber and NonMangrove Conversion
Pollution Costs (timber products
$230)
($90)
Restoration (Shrimp Farm
Mangrove
Source: Millennium Ecosystem Assessment;
Sathirathai and Barbier 2001
$8,240)
Cost-benefit analysis (1)
• Cost-benefit analysis (CBA):
• Quantifies all the costs and benefits (*) of an intervention
(with benefits including both ‘positive’ benefits and
avoided losses) over the entire lifetime of the intervention
• A ‘discount rate’ is applied to all costs and benefits to
represent ‘preference for the present’ or simply the
opportunity cost of capital -> calculation of ‘present value’
• The higher the discount rate, the smaller the present value
• The further away in the future, the smaller the present value
• Significant controversies over the ‘right’ discount rate for
assessing long-term options
(*) Actually the ‘incremental’ costs and benefits, i.e. the difference in costs/benefits
between a ‘with intervention’ and a ‘no intervention’ scenario
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Cost-benefit analysis (2)
Outputs of cost-benefit analysis:
Cost-benefit ratio (CBR)
Ratio of costs to benefits calculated
at their present value (the smaller,
the better – should be <1)
Net present value (NPV)
Benefits minus costs calculated at
their present value (the larger, the
better)
Internal rate of return
(IRR)
The discount rate at which NPV = 0
A measure of the ‘benefitgenerating power’ of the option or
intervention (the larger, the better)
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CBA example: wind farm (1)
•
•
•
•
•
•
•
•
Small-scale wind farm in scenic area
Initial construction costs: $750,000
Construction time: 1 year
Annual maintenance costs: $5,000
Life-span on project: 15 years
Dismantling and site restoration costs: $35,000
Market value of electricity produced: $150,000/yr
Results of contingent valuation study (visual impact):
• Mean annual compensation demanded:
$25/household
• 2,000 households affected
• Discount factor: 6%
• Annual costs: $55,000 ($25 x 2000 + $5000)
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Source: Hanley et al (2013)
Year
Discount factor
(1.06)-t
0
1
1
0.9433
2
Present
value of
benefits ($)
Costs
($)
Present
value of
costs ($)
0
750,000
750,000
150,000
141,495
55,000
51,881
0.8899
150,000
133,485
55,000
48,944
3
0.8396
150,000
125,940
55,000
46,178
4
0.7921
150,000
118,815
55,000
43,565
5
0.7472
150,000
112,080
55,000
41,096
6
0.7049
150,000
105,735
55,000
38,769
7
0.6650
150,000
99,750
55,000
36,575
8
0.6274
150,000
94,110
55,000
34,507
9
0.5918
150,000
88,770
55,000
32,549
10
0.5583
150,000
83,745
55,000
30,706
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0.5267
150,000
79,005
55,000
28,968
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0.4969
150,000
74,535
55,000
27,329
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0.4688
150,000
70,320
55,000
25,784
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0.4423
150,000
66,345
55,000
24,326
15
0.4172
150,000
35,000
14,602
Total discounted
Benefit
s ($)
1,394,130
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1,275,779
Cost-effectiveness analysis
• Costs valued in monetary terms, and benefits quantified in
‘physical’ units over the entire lifetime of the intervention;
a discount rate is applied to both
• Allows calculating unit costs, as the ratio of total discounted
costs to total discounted benefits obtained
• The obtained unit costs support:
• comparison of several options
• comparison with ‘benchmark costs’ for similar interventions
• CEA suitable where difficult to assign monetary value to
benefits
• But requires identifying a single, all-encompassing measure of benefits
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Illustration of CEA: Global GHG
abatement cost curve
Source: McKinsey (2009), Exhibit 8, p. 17
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Example: land-based mitigation
options
Significant
mitigation
potential
for
developing
countries
Atmosphere
CO2
CH4
N2O
CO2
Forests
Net sink (tree
biomass + soil
organic matter)
Typically costeffective and
requiring low
upfront
investment
Peatlands
Largest & most
efficient
terrestrial store
of carbon
biomass
Grasslands
Net carbon sink
if not degraded
Improved ecosystem
management also
supports adaptation
Cultivated
systems
Both a sink and a
source of GHGs,
net balance
depends on
cultivation
methods
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Basis for private
sector decision
making
Financial and economic analysis
• Both CBA and CEA support:
• financial analysis: considers the ‘monetary’
costs and benefits (or equivalent) accruing to
parties directly concerned by a project or
programme, at their ‘face value’
• economic analysis: broadens the analysis to
more accurately reflect costs and benefits to
society
Basis for public
sector decision
making
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Complementary tools
• For the assessment of robustness and the
integration of uncertainty, CBA/CEA can be
combined with:
• the use of multiple scenarios (e.g. ‘no change’ scenario
and various climate change and development
scenarios)
• sensitivity analysis (i.e. testing of the effect of changes
in scenario assumptions on the CBR, NPV, IRR or unit
costs)
• risk analysis (-> risk probability analysis includes the
probability of occurrence of various cost and benefit
outcomes in calculations... assuming probabilities are
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known)
Tools for prioritising and selecting measures
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Supporting decision making
• CBA/CEA support the financial and economic
assessment of options
• They help identify measures that offer the best ‘value
for money’ – a key aspect in situations of budgetary
constraints
• Other types of assessment and other criteria
(e.g. technical, social, environmental) are
required to fully inform decision makers
• Must take into account pro-poor implications
Multi-criteria analysis (MCA) helps
integrate various criteria
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Multi-criteria analysis (1)
• An approach to decision support that uses
more than one criterion to assess performance and
rank various options or interventions
• The term actually covers a wide range of methods
• Typically:
• various options or interventions are assessed against a predetermined set of criteria
• qualitative ratings or quantitative scores are given
• rules are then applied to rank options/interventions
• Numerical scores can be added up to calculate a total score
(with the possibility of applying different weights to different
criteria)
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Multi-criteria analysis (2)
• MCA is a useful complement to CBA/CEA
• Allows combining financial/economic criteria with
technical, environmental and social ones
• It can be used on its own, or in combination with
CBA/CEA:
MCA before CBA/CEA
MCA after CBA/CEA
Allows reducing the number of
options to which CBA/CEA is
applied
CBA/CEA helps eliminate
financially or economically
unviable options, then MCA
allows for final selection based
on extra criteria
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Multi-criteria analysis: example
• How to analyse environmental consequences of
integrated farming vs organic farming
• Possible criteria:
• Emissions of NH3 at air causing acidification
• Losses of NO3- causing groundwater pollution
• Losses of biocides causing toxicity issues
Potatoes
Nitrates
(kg/yr)
Ammonia
(kg/yr)
Biocides
(kg/yr)
Integrated farming
4.1
0
0.4
Organic farming
5.3
1.0
0
(hypothetical ex)
We need weighing and criteria to make a decision!
Source: Kroeze and Fortuin (nd)
Multi-criteria analysis: example (2)
• Criteria have different dimensions
e.g. cost, deposition levels, area of damage
• Criteria differ in weight
e.g. critical loads for acidification may be exceeded
to a larger extent than targets for eutrophication
• Weights depend on ‘vision’
e.g. some problems may be prioritised over others
• Qualitative and quantitative information
Source: Kroeze and Fortuin (nd)
Example of MCA grid
Option
Effectiveness
Cost
Technical
feasibility
Social &
cultural
acceptability
Env’l
impacts
Total
score
Option 1
Option 2
Option 3
Option 4
Scores: from 1 (poorest performance) to 4 (highest
performance). As far as cost is concerned, a scale should be
established, with scores corresponding to a given cost range or
cost/unit range.
Adapted from USAID (2007), Exhibit 12, p. 25
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Example of MCA grid (2)
Objective
Weights
Project
option 1
Project
option 2
Project
option 3
Reducing flood damage
x3
4
3
5
Reducing extension of
flooded area
x2
5
3
0
Gaining land for
agriculture
x1
3
2
-2
Maintaining
groundwater level
x1
-3
-2
0
Securing livelihood of
fishery communities
x1
-4
-3
2
Preserving biodiversity
x2
-3
-2
-1
2
1
4
Total score
Turning words into action
Costing, assessing and selecting
environmental and climate change adaptation
& mitigation options and measures
What can be done and what are the
institutional and capacity needs in
your country/sector of responsibility?
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Recap –
Key messages
• Cost-benefit analysis and cost-effectiveness
analysis support the identification of financially and
economically viable adaptation and mitigation
options/measures
• Help prioritise actions based on financial/economic
criteria
• Multi-criteria analysis, used alone or in combination
with CBA or CEA, supports the assessment and
prioritisation of options based on multiple criteria
• Technical, environmental and social criteria can be
considered alongside financial/economic ones
• Pro-poor implications must be taken into
consideration when prioritising measures
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Key references
• Economics of Climate Adaptation Working Group (2009)
Shaping climate-resilient development:
a framework for decision-making. Climate Works Foundation, Global
Environment Facility, European Commission, McKinsey & Company,
The Rockfeller Foundation, Standard Chartered Bank & Swiss Re.
Available from:
http://www.mckinsey.com/clientservice/Social_Sector/our_practices
/Economic_Development/Knowledge_Highlights/Economics_of_clim
ate_adaptation.aspx
• MDG Needs Assessment Tools:
http://www.undp.org/
• World Bank – Economics of Adaptation to Climate Change web
pages: http://climatechange.worldbank.org/content/economicsadaptation-climate-change-study-homepage
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References
•
Hanley, N; Shogren, J and White, B (2013) Introduction to Environmental Economics.
2nd edition, Oxford University Press: Oxford.
•
Kroeza, C and Fortuin, K (nd) Multi Criteria Analysis. Environmental Systems Analysis
presentation, Wageningen University, The Netherlands.
•
Mayaux, P (2006) Millennium Ecosystem Assessment: overview of findings. Institute
for Environment and Sustainability, Joint Research Centre; Ispra, Italy. Presentation
made at AIDCO, Brussels, 26 June, 2006 (Dejeuner su l’herbe conferences).
•
McKinsey & Company (2009) Pathways to a Low-Carbon Economy: Version 2 of the
Global Greenhouse Gas Abatement Cost Curve. Available from:
http://www.mckinsey.com/globalGHGcostcurve
•
MillenniumProject (2004) Millennium Development Goals Needs Assessment
Methodology. Available online from: http://www.unmillenniumproject.org/ [Accessed
20 February 2013]
•
UNDP MDG Needs Assessment Tools, available from:
http://www.undp.org/content/undp/en/home/librarypage/povertyreduction/mdg_strategies/mdg_needs_assessmenttools/mdg_needs_assess
menttools.html
•
USAID (2007) Adapting to Climate Variability and Change: A guidance manual for
development planning. United States Agency for International Development,
Washington, DC. Available from: http://pdf.usaid.gov/pdf_docs/PNADJ990.pdf
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