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Applications of Benefit Cost Analysis

Applications of Benefit Cost Analysis. Tuolumne River preservation Lead in drinking water. “Saving the Tuolumne”. Dam proposed for hydroelectric power generation. Benefits : hydroelectric power, some recreation. Costs : environmental, rafting, fishing, hiking, other recreation.

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Applications of Benefit Cost Analysis

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  1. Applications of Benefit Cost Analysis Tuolumne River preservation Lead in drinking water

  2. “Saving the Tuolumne” • Dam proposed for hydroelectric power generation. • Benefits: hydroelectric power, some recreation. • Costs: environmental, rafting, fishing, hiking, other recreation. • Question: Should the dam be built? • Influential analysis by economist, Stavins.

  3. Tuolumne: background • Originates in Yosemite Nat’l 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. Hydroelectric power generation • River’s 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

  5. 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).

  6. 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)

  7. 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

  8. 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”.

  9. Differences in the CBA’s • Stavins’ CBA: • Used data from original project proposal • Included environmental externalities (mostly in lost rafting and fishing opps.) • Took dynamic approach – evaluated costs and benefits over entire life of project (50 year “planning horizon”), r=10.72%

  10. The costs and benefits • Benefits: $188 million annually • Electricity benefits: $184 million • Water yield: $1.6 million • Internal costs: $134 million annually • External costs: $80 million annually • Total costs: $214 million annually • C > B

  11. Tuolumne River: prologue • Clavey-Wards Ferry project dams were not built • 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.’”

  12. “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? • An economic analysis at EPA showed benefits outweighed costs by 10:1. • Analysis formed basis for adoption of this rule.

  13. 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 -> more lead)

  14. 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.

  15. Scientific & analytical problems • No baseline data on lead levels in tap w. • High variability in lead levels in tap w. • Corrosion control is system specific • Uncertainty over reliability of corrosion control treatment • Corrosion control treatment may change water quality and require further treatment.

  16. 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

  17. Estimating costs [1 of 2] • Source water treatment: for systems with high lead in water entering dist’n system. 880 water systems, $90 million/yr. • Corrosion control treatment: either (1) adjust pH, (2) water stabilization, or (3) chemical corrosion inhibitors [engineering judgement] $220 million/yr. • Lead pipe replacement: 26% of public water systems have lead pipes; usually best to increase corrosion treatment, $80-370 million/yr.

  18. 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. • Annulization over 20 yrs @ r = 3%.

  19. Benefits: children’s 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.

  20. Benefits: adult health • Avoided hypertension, $399 million/yr. • Avoided heart attacks, $818 million/yr. • Avoided strokes, $609 million/yr. • Avoided deaths, $1.6 billion/yr. • Total: $3.4 billion/yr. • Total (all health): $4.3 billion/yr.

  21. 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%

  22. 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

  23. 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

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