Applications%20of%20Benefit-Cost/%20Cost-Effectiveness%20Analysis

1
Applications of Benefit-Cost/ Cost-Effectiveness
Analysis

1. Tuolumne River preservation
2. Lead in drinking water
3. Habitat Protection

2
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.

3
Tuolumne background

• Originates in Yosemite Natl 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

4
The Tuolumne A nice place
5
Hydroelectric power generation

• Rivers 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

6
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).

7
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)

8
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

9
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.

10
Differences in the CBAs

• 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), r10.72
• 10.72 40 year bond rate for district

11
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) gt B (188)

12
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 couldnt say I did it
  because I love wild rivers and I dont like
  electricity, but he could do it by holding up
  the study and saying, look, I changed my vote
  for solid economic reasons.

13
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.

14
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 -gt more lead)

15
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.

16
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.

17
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

18
Estimating costs 1 of 2

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

19
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.

20
Benefits childrens 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.

21
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.

22
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

23
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 101

24
(No Transcript)
25
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

26
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

27
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?

28
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

29
Results
Locations for 453 species Blue cost-min
only Yellow site-min only Green both
30
Cost-minimizing Problem
min
Subject to
For all ieI
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.
31
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

32
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?

33
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

34
The Concept of an Efficient Frontier

• Bird Prob

Efficient Frontier
Attainable Points
Frog Prob
35
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 (Xi0, Xi100, C
  20,000,000)