ENVIRONMENTAL BENEFIT COST ANALYSIS - PowerPoint PPT Presentation

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ENVIRONMENTAL BENEFIT COST ANALYSIS

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ENVIRONMENTAL BENEFIT COST ANALYSIS Traditional BCA Decision making without environmental values (too difficult to evaluate, subjective, irrelevant) – PowerPoint PPT presentation

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Title: ENVIRONMENTAL BENEFIT COST ANALYSIS


1
ENVIRONMENTAL BENEFIT COST ANALYSIS
  • Traditional BCA
  • Decision making without environmental values
  • (too difficult to evaluate, subjective,
    irrelevant)
  • Modern outlook
  • Decision making with environmental values
  • (new techniques of evaluating environmental
    impacts)
  • Social Cost Benefit Analysis (e.g., World Bank)
    is a precursor to E-BCA

2
Theoretical Issues
  • Externalities
  • environmental impacts of economic development
  • anthropogenic change in land, forest, water flow
    and wildlife habitat
  • Pollution of air, land, freshwater and the marine
    ecosystems
  • Pareto
  • competitive market equilibrium Pareto optimal
    (consumers maximise U and producers maximise ??.
  • can not redistribute income or profits without
    making someone better off or someone worse off.
  • Kaldor-Hicks
  • Investment project is OK when money value of
  • benefits to gainers gtgt costs to the losers
  • Gainers could compensate the losers ? net gains.
  • Theoretically OK, even if there is no mechanism
    for transfer

3
Principles of asset valuation
  • Historically values not transferred in the market
    place were considered to be in one of the
    following classes and excluded from CBA
  • 1. not relevant
  • 2. too difficult
  • 3. subject to too much error.
  • The recent surge in the study environmental
    economics is grappling with these problems

4
Externalities
  • ENVIRONMENTAL IMPACTS
  • Arise from any economic development
  • Anthropogenic influence
  • Change in land use affecting farming forestry,
    water flow and wildlife habitat
  • Pollution of air, land, freshwater and the marine
    environment

5
Pareto Optimality
  • Vilfredo Pareto (1848-1923) Italian Economist. A
    competitive market equilibrium is Pareto optimal
    because consumers maximise utility and producers
    maximise profits. You can not redistribute income
    or profits without making someone better off or
    someone worse off.

6
Kaldor-Hicks rule
  • You can proceed with an investment project if the
    monetary value of the benefits to gainers exceeds
    the costs to the losers i.e
  • Proceed if the gainers could compensate the
    losers out of their net gains.
  • Even if there is no legal mechanism by which
    gainers are made to compensate losers.

7
The mechanics of CBA
  • Work out the time distribution of benefits
  • Work out the time distribution of costs
  • Calculate the annual net benefit stream
  • Discount at the appropriate rate to get a net
    present value.
  • If the net present value is greater than zero the
    project should go ahead

8
Practical Issues (any BCA)
  • Need the time distribution of
  • benefits
  • costs
  • Calculate the annual net benefit stream
  • Derive / borrow an appropriate discount rate
  • Compute the net present value.
  • Project viable if NPV gt 0
  • Alternately, use IRR
  • a measure of the efficiency of capital.
  • that rate of discount which makes the NPV zero

9
Environmental BCA
  • Need to work out values of environmental
    amenities
  • expected to be lost
  • Proposed to be created
  • E.g., E-BCA of pesticides
  • Benefits
  • Improved harvest
  • Better quality
  • Lower preoduction uncertainty
  • Costs
  • Material costs (per acre cost of use etc.)
  • Environmental Cost leach, accidents
  • Health Hazard consumers (residues)
  • Public Cost in use, manufacture, transport

10
Risk and Uncertainty
  • Risks are computable for repeatable events
  • Car accidents, oil spills, etc
  • Determine probabilities for different outcomes
  • Risk can be converted to an expected money
    value
  • Insurance is the cost of risk cover
  • Decide whether to take risk or bear insurance
    cost
  • Uncertainty no statistically significant
    historical data available

11
Other common modelling approaches
  • Analytical models
  • Optimum control
  • Dynamic optimization
  • Simulation
  • Empirical models
  • Econometric models
  • Forecasting of environmental trends
  • Valuation Models
  • Surveys
  • Contingent valuation
  • Travel cost
  • Random utility
  • Choice Experiments
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