Applications of Benefit-Cost / Cost-Effectiveness Analysis

1. Applications of Benefit-Cost/ Cost-Effectiveness Analysis Tuolumne River preservation Lead in drinking water 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 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. The Tuolumne: A nice place

5. 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

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 CBA’s • 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”), r=10.72% • 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) > 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] 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.’”

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 -> 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] • 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 judgment] $220 million/yr. • 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: 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.

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 ~ 10:1

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 iεI where J = {jj = 1, ... , n} is the index set of candidate reserve sites, I = {ii = 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 (Xi≥0, Xi≤100, C ≤ 20,000,000)