Transcript Applications of Benefit Cost Analysis

Applications of Benefit-Cost/
Cost-Effectiveness Analysis
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Tuolumne River preservation
Lead in drinking water
Habitat Protection
“Saving the Tuolumne”
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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?
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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
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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
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Municipal, agricultural, hydroelectric
Rapid growth of region would require more
water & more power
New hydroelectric projects
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2 proposed hydro projects:
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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).
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Clavey-Wards Ferry project
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2 new dams & reservoirs, 5 mile
diversion tunnel
Jawbone Dam 175’ high
 Wards Ferry Dam 450’ high
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Generate 980 gigawatt-hours annually
 Annual water supply of 12,000 AF
 Increased recreational opportunities
 Cost: $860 million (1995 dollars)
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The opposition
Historical context: John Muir & Sierra Club
lost Hetch Hetchy Valley fight.
 Dams would damage
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Fishing, rafting, wildlife populations, wild
character.
 Recreational opps created are minimal
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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.
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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
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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%
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• 10.72% = 40 year bond rate for district
The costs and benefits
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Benefits: $188 million annually
Electricity benefits: $184.2 million
 Water yield: $3.4 million
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Social Costs: $214 million annually
Internal project costs: $134 million
 Lost recreation: $80 million
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C (214) > B (188)
Tuolumne River: epilogue
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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.
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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:
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Corrosivity of pipe material
 Length of time water sits in pipe
 Lead in plumbing
 Water temperature (hotter -> more lead)
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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.
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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.
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Approach
Stakeholders: 44% of U.S. population.
 2 regulatory approaches:
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Define a single water quality standard
at the tap or at the distribution center,
OR
 Establish corrosion treatment
requirements.
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Compare costs and benefits for each
regulator approach
Estimating costs [1 of 2]
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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, $80370 million/yr.
Estimating costs [2 of 2]
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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 leadrelated blood disorders: $70,000/yr.
 Avoided costs to compensate for leadinduced congnitive damage ($4,600
per lost IQ point) $900 million/yr.
 Offset compensatory education $2
million/yr.
 Total: $900 million/yr.
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Benefits: adult health
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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:
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Costs  50%, Benefits +100%, -30%
Summary of costs & benefits
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Costs:
$500-$800 million/yr.
 NPV = $4 - $7 billion
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Benefits:
$4.3 billion/yr.
 NPV = $30 - $70 billion
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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:
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Credibly done and
 Done early in process
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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
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Cost-effectiveness Analysis
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Goal
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Compare two approaches
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Provide habitat to a fixed number of species
No issue of how many species to protect
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
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Results
Locations for 453 species
Blue: cost-min only
Yellow: site-min only
Green: both
Cost-minimizing Problem
min
 c x
j j Subject to
jJ
x
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j Ni
j
1
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.
Conclusions
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For 453 species
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Cost per site 1/6 under cost-minimizing
Result similar to
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Santa Clara River Group Project
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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?
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Dealing with Multiple Criteria
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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.
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Extend to 2 species with different
habitat requirements.
 Derive efficiency frontier…
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The Concept of an Efficient Frontier
Bird Prob
Efficient Frontier
Attainable Points
Frog Prob
Excel needs 3 things:
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An “objective” function cell
The thing Excel is trying to maximize (the
probability of survival, or total species
protected)
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A “policy” cell or block of cells
The thing Excel changes in order to maximize
the objective (amount of each site
selected).
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“Constraints”
Things that “bound” the problem (Xi≥0,
Xi≤100, C ≤ 20,000,000)