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

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Dam proposed for hydroelectric power generation. ... Recreational opps created are minimal. Cheaper alternative sources of energy. Economic evaluation ... – PowerPoint PPT presentation

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Title: 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)
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