1. ENVIRONMENTAL BENEFIT COST ANALYSIS Traditional BCA Decision making without environmental values (too difficult to evaluate, subjective, irrelevant) Modern outlook Decision making with environmental values (new techniques of evaluating environmental impacts) “Social Cost Benefit Analysis” (e.g., World Bank) is a precursor to E-BCA

2. Theoretical Issues Externalities –environmental impacts of economic development –anthropogenic change in land, forest, water flow and wildlife habitat –Pollution of air, land, freshwater and the marine ecosystems Pareto –competitive market equilibrium = Pareto optimal (consumers maximise U and producers maximise . –can not redistribute income or profits without making someone better off or someone worse off. Kaldor-Hicks –Investment project is OK when money value of benefits to gainers >> costs to the losers –Gainers could compensate the losers  net gains. –Theoretically OK, even if there is no mechanism for transfer

3. Principles of asset valuation Historically values not transferred in the market place were considered to be in one of the following classes and excluded from CBA 1. not relevant 2. too difficult 3. subject to too much error. The recent surge in the study environmental economics is grappling with these problems

4. Externalities ENVIRONMENTAL IMPACTS Arise from any economic development Anthropogenic influence Change in land use affecting farming forestry, water flow and wildlife habitat Pollution of air, land, freshwater and the marine environment

5. Pareto Optimality Vilfredo Pareto (1848-1923) Italian Economist. A competitive market equilibrium is Pareto optimal because consumers maximise utility and producers maximise profits. You can not redistribute income or profits without making someone better off or someone worse off.

6. Kaldor-Hicks rule You can proceed with an investment project if the monetary value of the benefits to gainers exceeds the costs to the losers i.e Proceed if the gainers could compensate the losers out of their net gains. Even if there is no legal mechanism by which gainers are made to compensate losers.

7. The mechanics of CBA Work out the time distribution of benefits Work out the time distribution of costs Calculate the annual “net benefit” stream Discount at the appropriate rate to get a net present value. If the net present value is greater than zero the project should go ahead

8. Practical Issues (any BCA) Need the time distribution of –benefits –costs Calculate the annual “net benefit” stream Derive / borrow an appropriate discount rate Compute the net present value. Project viable if NPV > 0 Alternately, use IRR –a measure of the efficiency of capital. –that rate of discount which makes the NPV zero

9. Environmental BCA Need to work out values of environmental amenities –expected to be lost –Proposed to be created E.g., E-BCA of pesticides –Benefits Improved harvest Better quality Lower preoduction uncertainty –Costs Material costs (per acre cost of use etc.) Environmental Cost: leach, accidents Health Hazard: consumers (residues) Public Cost: in use, manufacture, transport

10. Risk and Uncertainty Risks are computable for repeatable events –Car accidents, oil spills, etc –Determine probabilities for different outcomes Risk can be converted to an “expected money value” Insurance is the cost of risk cover Decide whether to take risk or bear insurance cost Uncertainty = no statistically significant historical data available

11. Other common modelling approaches Analytical models –Optimum control –Dynamic optimization –Simulation Empirical models –Econometric models –Forecasting of environmental trends Valuation Models –Surveys –Contingent valuation –Travel cost –Random utility Choice Experiments