Cost-Benefit-Analysis as a Tool for Impact Assessment

Transcription

1 Cost-Benefit-Analysis as a Tool for Impact Assessment EPOS Summer School 19 June, 2008 Benjamin Görlach Benjamin Görlach Federal Environment Agency

2 Overview Part I: CBA as a tool for impact assessment General introduction: Cost-Benefit Analysis CBA vs. other types of economic appraisal Impact on decision making, limitations Part II: CBA how is it done? Identifying impacts Calculating benefits from uses to values Cl Calculating lti costs Aggregation issues Part III: Application EPOS Summer School, Berlin, 19 June

3 Contents Part I Cost-Benefit Analysis defined Rationale for CBA CBA and other types of economic appraisal Impact on decision making, limitations EPOS Summer School, Berlin, 19 June

4 Cost-Benefit Analysis defined Comparison of costs and benefits of an activity (project, policy ) Benefits := increases in human wellbeing Costs:= reductions in human wellbeing Wellbeing understood as aggregated personal utility If benefits exceed costs, the activity is beneficial overall and should be pursued Comparison carried out in monetary terms EPOS Summer School, Berlin, 19 June

5 Cost-Benefit Analysis defined Comparison of costs and benefits: Annual costs and benefits summed up for the relevant subset of population Costs and benefits discounted and summed up over time Net present value = sum of discounted benefits sum of discounted costs If NPV > 0 (or Σ C disc > Σ B disc or B-C-ratio > 1), an activity is beneficial overall EPOS Summer School, Berlin, 19 June

6 Why CBA for decision making? Ensure efficient use of scarce resources: If benefits exceed costs, undertaking a project / policy is a good investment for society If benefits exceed costs, NOT undertaking a project / policy actually represents a loss of welfare Justify policy interventions Better understand (translate / communicate) the impacts of a project / policy Address market failures (esp. externalities) Quantify trade-off between different policy objectives Flag up soft issues EPOS Summer School, Berlin, 19 June

7 Examples: Stern & Sukhdev Recent examples of economic studies used to flag up soft issues: 2006 Stern Review on The Economics of Climate Change COPI study with information on costs of action 2008 report on The Economics of Ecosystems and Biodiversity by Pavan Sukhdev et al. pure COPI study Neither qualifies as CBA in the strict sense EPOS Summer School, Berlin, 19 June

8 CBA and the environment Next to infrastructure and health, environment has become a predominant field of application for CBA No markets for environmental goods and services, hence no market price Necessary to infer individuals valuation of environmental goods and services through monetary valuation methods EPOS Summer School, Berlin, 19 June

9 Key assumptions for CBA Three key tenets underlying CBA: 1. Individuals preferences are what matters for choosing a certain path of action 2. Individuals preferences can be aggregated to reflect the preferences of society 3. Individual preferences are reflected in individual willingness to pay (or to accept compensation) i.e. CBA rooted in standard neo-classical welfare economics EPOS Summer School, Berlin, 19 June

10 CBA to what does it apply? CBA applied at multiple levels: Discrete projects - e.g. infrastructure projects (roads, dams etc.) Discrete, well-defined policy measures Packages of policy measures Test / setting of policy objectives Origin of the tool is project appraisal application at policy level relatively recent EPOS Summer School, Berlin, 19 June

11 CBA when can it be applied? Ex-ante CBA (predominant): Will the expected benefits of a policy / project exceed (justify) the expected costs? How to design a project / policy so that costs are minimised and benefits maximised? Ex-post CBA (rare breed): Have the benefits exceeded / justified the costs? Did expected benefits and costs materialise? EPOS Summer School, Berlin, 19 June

12 CBA & other types of economic appraisal Economic appraisal: policy evaluation based on monetary measurement of impacts well-defined: CBA and CEA hybrid forms: partial CBA, MCA, ad-hoc less-defined: e.g. Cost of Policy Inaction Required / frequently used: NL, UK, N, DK Popular in Commission i Impact tassessment Widely practiced in the US (> 25 yrs) EPOS Summer School, Berlin, 19 June

13 CBA & other types of economic appraisal Other instruments in environmental policy using monetary valuation methods: Compensation payments, environmental liability (e.g. Exxon Valdez, 1989) Assessments of external costs (e.g. UK studies on social cost of carbon) Environmental accounting, green GDP Value of everything (e.g. Constanza 1997) EPOS Summer School, Berlin, 19 June

14 CBA & other types of economic appraisal Level of accuracy needed COPI studies project-level CBA policy-level l l CBA env. liability env. externality studies env. accounting Objective: Stimulate t awareness Justify Advise on Determine policy policy choice actual intervention or design payments EPOS Summer School, Berlin, 19 June

15 Limitations to economic appraisal Ethical objections to monetarisation; Objectives other than efficiency (justice); Doubts / reservations about methodology e.g. suspected bias towards aspects that can be easily monetised; Economic appraisal seen as constraint for decision making (allegation of black box or truth machine); Cost and time for monetary valuation; Lack of experience, expertise & experts EPOS Summer School, Berlin, 19 June

16 CBA in real life Textbook CBA: Some impacts in verbal- qualitative terms only Some impacts uncertain Some impacts quantified, but not monetised Few impacts monetised (original valuation or benefit transfer) Trade-off to be resolved by decision makers All (relevant) impacts known and covered All equally certain All impacts quantified in monetary terms, with original valuation All costs and benefits properly discounted Most beneficial option can be identified Real-life CBA: EPOS Summer School, Berlin, 19 June

17 Example: the German Climate Package German climate policy package (Meseberg) Consisting of 29 individual measures for all areas except those covered by EU ETS Intended to achieve 30%-reduction of greenhouse gas emissions by 2020 Broad lines decided by cabinet in August 07 CBA carried out for 17 (of 29) measures EPOS Summer School, Berlin, 19 June

18 Example: the German Climate Package Costs: defined as discounted annual investment costs for the private sector and program costs for public authorities Benefits: fossil fuel savings due to better energy efficiency and use of renewables no calculation of environmental benefits Results expressed in total and per ton of CO 2 reduced EPOS Summer School, Berlin, 19 June

19 Example: the German Climate Package Measure Annual Annual fossil Abatement investment cost fuel saving cost (bn ) (bn ) ( / t CO 2 ) CHP support 0,003-0,3 12,9 Renewable energy supp. 5,55 4,2 27 Energy saving ordinance 8,43 10,3-47 Etc SUM 31 36,3-26 Result: Annual investment of 31 bn vs. annual savings of 36 bn i.e. net benefit of 5 bn across all measures EPOS Summer School, Berlin, 19 June

20 Actual impact on decision making Economic appraisal: popular p in rhetoric, yet actual use & impact appears limited; E.g. Impact Assessments in the EU and MS: Economic analysis (i.e. CBA) advocated as main framework for analysis in MS guidance However: little monetary information used mainly for economic aspects, much less for social & environmental aspects EPOS Summer School, Berlin, 19 June

21 Actual impact on decision making Mismatch between policy and academia: Research interest in refinement of methods, less interest in impacts and practicability Policy interest in standardised methods, clearcut messages, single big number Mirrored in available guidance material: focus on valuation methods, less on practical aspects, shortcuts & simplification (exception: work on benefit transfer) EPOS Summer School, Berlin, 19 June

22 EPOS Summer School, Berlin, 19 June