Assessing Costs and Benefits of Environmental Policies & Regulations How do we quantify costs? How do we quantify benefits?

Whose costs and benefits? Recall cookbook: want to account for all significant costs and benefits. Also recall Tuolumne study – many environmental costs excluded, costs of dam still outweigh benefits (lesson: if you don’t have to rely on non-use values, then don’t) Important to include costs & benefits over time – use NPV formulation (or E[NPV] if uncertainty).

Costs Direct costs Eg, equipment purchases Indirect costs Eg, consumers forced to buy lower quality low emission vehicles (LEV’s) Q, LEV’s Price.... Subsidy Loss from mandate

Costs (cont) Lower productivity associated with requiring water based instead of oil based paints Administrative and compliance costs

Benefits: Types of values Market values: Commodities traded in markets or values directly reflected in markets Usually from direct-use Often “derived demand” Recall, markets ignore externalities; may misrepresent public good Non-market values Commodities that have value to humans, but whose value cannot be measured within a market. Includes Use and Non-Use Values

Use vs. non-use values Use values Value from consumption of a good Current use, expected future use, possible use Direct health impacts Non-health impacts (e.g. smell) Damage to ecosystems: pollution degrades performance Non-use values Measurement is controversial Existence value, altruistic value, bequest value

Examples Market values 1 mbf Douglas Fir 1 ton SOx in RECLAIM 1 ton halibut in Alaska Red cockaded woodpecker in south Pharmaceutical potential of natural compounds Non-market values Sea otters on south coast Air/water quality Strong swell off Coal Oil Point Oil spill off Spain Yosemite Nat’l park Golden trout in Sierras

Measuring demand Revealed preference Observe a real choice in market; infer value E.g. Value of living near urban open space: Compare housing prices w/ and w/o urban open space. Hedonics, Travel Cost, Household production Stated preference Ask people (survey) how much they value environmental goods E.g. Would you accept a $0.05 increase in gas price to require double-hull oil tankers? Contingent valuation

Some examples of measuring demand Demand for park recreation Channel Islands MPA Demand for health risk reductions Seeps off Coal-Oil Point Morbitity Mortality Using Benefits Transfer Methods

Example: Nat’l park fees Yosemite National Park charges $20 entrance fee, 3 million visits. Want to use bus to eliminate cars in the Valley to improve recreational experience. Want to increased fee to pay for bus ($10 million per year). Will increase to $30 pay for bus? Wrong calculation: $10*3 million = $30 mil

Change in nat’l park entrance fee Demand for Park Visits $ Q Q DE F Revenue before fee increase: ODEF O Entrance Fee

Change in nat’l park entrance fee Demand for Park Visits $ Q Q 20 Q D AB E CF Revenue after fee increase: OABC O Entrance Fee

Change in nat’l park entrance fee Demand for Park Visits $ Q Q 20 Q D AB E CF Will a fee increase from $20 to $30 pay for the bus system? ABCO-DEFO > $10 mil? O Entrance Fee

Human health values How estimate monetary value of changes in health from environmental change? 2 steps: (1) environmental change to health impact, (2) change in health to $$ [where possible]. Distinguish between mortality (death), morbidity (illness) Often disaggregate according to: age, sex, physical condition, etc…

Mortality Crude mortality rate = # deaths per time/relevant population…interpreted as probability of dying. How will change affect probability of dying? In expectation, how many more people will die (or how many fewer will die) Total value = $/life * lives. Lead in water: $2.5 million per death avoided, 2.5*622 = $1.6 billion.

Morbidity (sickness) Chronic or acute, degree of impairment, type of symptom “restricted activity days”, “bed disability days”, “work loss days”, “symptom days” Clean Air Act: protect individuals from adverse health effects. Lead: $1 million/non-fatal heart attack, $628/case reduced chance of hypertension

Benefits transfer approach See Rosenberger & Loomis, The application of existing information & knowledge to new contexts Useful when collecting primary data and analysis is impractical (cost or time) 3 important features 1. Policy context must be well-defined 2. Data must meet certain criteria 3. Study site and new site should correspond

Example: Orange County Oil Spill Oil tanker spills at Huntington Beach, 2001 Beaches in southern Orange County closed for month+ Big loss: lost beach recreation days Benefits transfer: value of lost beach recreation days at other beaches

Sample of other studies:

Policy context Identify extent and type of impacts from proposed action Identify affected population Identify data needs of assessment Type of measure, kind of value, degree of uncertainty, etc.

Study site data requirements Make sure study site data & analysis technique are sound Study site analysis contains details (for comparison) of physical & socioeconomic characteristics, & reports statistics

Correspondence between sites Similar expected change in resource quality and quantity. Markets in two sites are similar; demographics are similar. Condition and quality of environmental good is similar.

Limitations of benefit transfer Quality of original study The more primary studies, the better. Primary data vs. summary statistics (may limit ability to conduct new analysis). Characteristics of sites may differ, Assumptions made in original study that do not apply.

Approaches to benefit transfer Value transfer Point estimate(s) from study site Identify change, translate into physical impact (e.g. use), identify applicable study sites, select (range of) benefit measures, calculate $ value. Function transfer Demand or benefits function from study site. Identify change, translate into physical impact, identify applicable study sties, determine if demand function available, adapt demand (benefit) function to fit new site.

Next 2 lectures Revealed Preference Hedonics Travel Cost Household Production Stated Preference/ Constructed Markets Contingent Valuation