Applications of Benefit-Cost/ Cost-Effectiveness Analysis

1.Tuolumne River preservation2.Lead in drinking water3.Habitat Protection

“Saving the Tuolumne”Dam proposed for hydroelectric power generation.The “tension”: valuable electricity vs. 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, Stavins.

Tuolumne: background

Originates in Yosemite Nat’l ParkFlows west 158 miles, 30 miles free-flowMany RTE species rely on riverHistoric significanceWorld-class rafting: 15,000 trips in 1982Recreation: 35,000 user-days annually

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 & Scenic1983: existing hydro captured 90% water

Municipal, agricultural, hydroelectric

Rapid growth of region would require more water & more power

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).

Clavey-Wards Ferry project

2 new dams & reservoirs, 5 mile diversion tunnel

Jawbone Dam 175’ highWards Ferry Dam 450’ high

Generate 980 gigawatt-hours annuallyAnnual water supply of 12,000 AFIncreased recreational opportunitiesCost: $860 million (1995 dollars)

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

Economic evaluation

EDF economists to evaluate costs and benefits, including environmental costsTraditionally, 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”.

Differences in the CBA’s

Stavins’ CBA:Used data from original project proposalIncluded 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%• 10.72% = 40 year bond rate for district

The costs and benefits

Benefits: $188 million annuallyElectricity benefits: $184.2 millionWater yield: $3.4 million

Social Costs: $214 million annuallyInternal project costs: $134 million Lost recreation: $80 million

C (214) > B (188)

Tuolumne River: prologueClavey-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.

Background

Lead in drinking water is byproduct of corrosion in public water systemsWater leaves treatment plant lead-free, lead leaches into water from pipes.Factors associated with risk:

Corrosivity of pipe materialLength of time water sits in pipeLead in plumbingWater temperature (hotter -> more lead)

Primary issues

Evidence of lead-related health effects even from low exposureTendency of lead to contaminate water in the houseDecreasing corrosivity of water, also reap extra economic benefits by reducing damage to plumbing.

Scientific & analytical problems

No baseline data on lead levels in tap waterHigh variability in lead levels in tap waterCorrosion control is system specificUncertainty over reliability of corrosion control treatmentCorrosion control treatment may change water quality and require further treatment.

Approach

Stakeholders: 44% of U.S. population.2 regulatory approaches:

Define a single water quality standard at the tap or at the distribution center, OREstablish corrosion treatment requirements.

Compare costs and benefits for each regulator approach

Estimating costs [1 of 2]1. Source water treatment: for systems with

high lead in water entering dist’n system. 880 water systems, $90 million/yr.

2. Corrosion control treatment: either (1) adjust pH, (2) water stabilization, or (3) chemical corrosion inhibitors [engineering judgement] $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.

Estimating costs [2 of 2]

4. Public education: inform consumers about risks $30 million/yr.

5. State implementation: $40 million/yr.

6. 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 lead-related blood disorders: $70,000/yr. Avoided costs to compensate for lead-induced cognitive damage ($4,600 per lost IQ point) $900 million/yr.Offset compensatory education $2 million/yr.Total: $900 million/yr.

Benefits: adult healthAvoided 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 waterEfficacy of corrosion treatmentLikelihood of decreased lead in bloodPrecise link between lead exposure and cognitive damage.Sensitivity Analysis:

Adjusting parameters leads to a range of costs and benefits.

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 ~ 10:1

Reflections on analysis

CBA played prominent role in regulationVery stringent rule was adopted by EPAWidespread EPA/public supportQuantitative analysis more likely to have impact if:

Credibly done andDone early in process

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 landFocusing on biologically rich land results in fewer acres of habitat to protect species

Cost-effectiveness Analysis

GoalProvide habitat to a fixed number of speciesNo issue of how many species to protect

Compare two approachesAcquire cheapest land to provide protectionAcquire smallest amount of land to provide protection

Why is this an interesting question?

Approach

Conduct analysis at county level in USUse average ag land value for price of landUse database of species location by county (endangered or proposed endangered)Assume if land acquired in county where species lives species is protected

ResultsLocations for 453 speciesBlue: cost-min onlyYellow: site-min onlyGreen: both

Site minimizing vs. cost minimizing

Cost-minimizing Problem

jJj

j xc

Subject to 1

iNjjx

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

Cost minimizing much more efficient that site minimizing

Total cost savings of about 80%

Result similar to:Santa Clara River Group Project“Ecological Linkages” Group Project

Mini-Group Project HintsTry 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?

Multicriteria Analysis:The Concept of an Efficient Frontier

LBV Prob

Frog Prob

Attainable Points

Efficient Frontier

Excel needs 3 things:

1. An “objective” function cell1. The thing Excel is trying to maximize (the

probability of survival)

2. A “policy” cell or block of cells1. The thing Excel changes in order to

maximize the objective (amount of each site selected).

3. Constraints1. Things that “bound” the problem (Xi>0,

Xi<100, C <20,000,000)