Tools for CBA
The term cost and benefit analysis (CBA) covers a broad range of methods that have been developed to enable decision-makers to meet the aims above in an objective, transparent, and consistent manner. The traditional approach to CBA can be simply defined as “the formal assessment of the costs and benefits of implementing an action A compared with an alternative option, action B, to achieve defined objectives.” The costs include not only any financial expenditure but also a measure of the impact of a particular approach. In order for the positive and negative aspects for each option to be compared directly they are often converted to common units. In traditional CBA the common unit is money. The effect of changes to costs and benefits over time is often discounted to reflect the changing value of money (i.e. money that can be spent today has a greater value than money spent tomorrow, the day after, or next year).
The output from a CBA is a cumulative sum of discounted costs and benefits for one or more options. The decision-maker can therefore assess a course of action according to the result of the benefits minus the costs for each option. Where the benefits exceed the costs the decision maker may conclude that the course of action is supported by CBA. In the case of more than one option, the decision-maker could opt for:
· The option that maximises the positive differences between benefits and direct costs.
· The option that maximises the positive differences between benefits and wider costs and impacts.
The economic basis for using traditional CBA is outlined in both consumer welfare theory and producer welfare theory a discussion of which is beyond the scope of this outline, but is considered in the general economics text books such as Hanley and Spash 1994 (see key documents below). A big problem for the application of this type of methodology to environmental issues involves the quantification of environmental impacts and benefits in monetary terms. In attempting to understand this economists have categorised the factors used in CBA into:
· Private or internal factors. These are impacts and benefits that already have a direct relationship to the economic market place. For example, all capital and operational costs for a remedial option.
· Public or external factors. These are impacts and benefits that must be converted into monetary value because the relationship to the economic market place is subjective. For example, the value of each human life saved as a result of a remedial action.
It is important to recognise that some economists have questioned the suitability of valuing Public Factors such as the environment in terms of monetary value for the following reasons (Mulberg 1996 – see key documents below):
· Environmental resources are social and cannot be allocated on an individual basis. They are not ours to buy and sell.
· In some cases the consumption of environmental resources can be delayed or unknown, for example, landfills installed now may cause a pollution problem in 50 or 60 years time that cannot be adequately predicted.
· Environmental resources have absolute quantity limits since they are extremely difficult to manufacture. The economic market breaks down in times of scarcity, for example, the rationing of foodstuffs during the Second World War.
In order to take account of these concerns several methods of assessing costs and benefits have been developed where not all factors are quantified in monetary terms. Perhaps the most well known of these is multi-criteria analysis (MCA) Public Factors are not assigned a monetary value, however, the overall evaluation of costs and benefits will always include consideration of monetary costs.
Three techniques have been most commonly applied in cost benefit analyses for the monetary valuation of public (external) factors: contingent valuation (CV), hedonic pricing (HP), and the use of production functions (PF).
The economic value of items can be measured in several ways including:
· The consumers willingness to pay (WTP) for a specific product or service; and
· Their willingness to accept (WTA) compensation for the loss of a product or service.
CV works by directly soliciting from a sample of consumers their WTP and/or WTA for a change in the environment. This is administered by a survey where the consumers are presented with a defined hypothetical scenario and are asked to assign monetary values to both WTP and WTA. Its strength is that it can be applied to extremely subjective factors, for example it considers not only those in direct proximity to a clean river but also those who derive value by knowing that such a river merely exists.
There is a considerable debate over the validity of CV in assessing environmental impacts and benefits. For example CV may confuse beliefs and desires with preferences. An individual may often answer for what he believes is right for the community rather than what he wants or desires as an individual.
HP seeks to find a relationship between the levels of environmental services (for example noise levels) and the price of marketed goods (such as houses). It cannot be used to estimate the more subjective factors that might be carried out through CV since it relates only to those factors that directly affect marketed goods. The advantage of the HP method is that it measures actual behaviour rather than relying on hypothetical situations as with CV.
An application of HP in evaluating remediation of contaminated land may
be to establish the variation of final land investment value with factors such
as the level of residual contamination. The data for HP studies can be
collected by contacting relevant information sources. For example, the relationship between land
value and the level of residual contamination may be established by collecting
data on property transactions of this type within the
· the omission of key variables from the examined relationship;
· the correlation of two “independent” variables which can significantly reduce the level of confidence attached to any model predictions;
· assuming a uniform market when it is not in reality. For example, the land development market is highly segmented and sensitive to regional factors and planning zones which need to be accounted for in the HP study to avoid bias;
· not only do current factors affect market prices (such as land values) but also expected changes in quality may also be important. For example, anticipation that future Governments may revise soil protection guidelines either upwards or downwards will lead to differences in current land values; and
· perhaps most importantly, HP relies on several restrictive assumptions, for example, that purchasers are fully aware of soil quality data and that the land development market is at or near to equilibrium.
These methods link environmental quality to changes in the production of goods and services. They are similar to HP techniques since they do not measure environmental benefits directly but link them to marketable items. Examples where this method might be applicable to land remediation include:
· the evaluation of environmental quality through quantification of averting expenditure (i.e. how much are people willing to pay to avoid or protect them from a decrease in environmental quality?).
· quantifying the relationship between environmental quality and the output level of a marketable commodity (for example, a reduction in “brownfield” sites for urban redevelopment resulting from contamination).
In the avoided cost approach (AC) the value of an environmental change is indirectly measured by the reduction in expenditure which would otherwise be required to mitigate such changes. For example, the off-site transportation of contaminated materials may cause increased noise and traffic pollution to a local community. Consumers living in this area may choose to install double-glazing or travel a longer route to work in order to avoid congestion, thereby incurring extra expenditure. The benefit of using an on-site technique could therefore in part be quantified by determining the level of this extra cost to the community.
A common problem with AC is that it can over-estimate the level of expenditure related to the specific environmental change of interest. For instance in the above example the installation of double-glazing may be attributed to other factors such as savings in heating bills or improvements to the value of the property.
In the dose-response (DR) method, the physical effects of contamination on the environment are evaluated and used within an economic model. The method can be divided into two phases:
· the derivation of the contaminant response dose and receptor response; and
· the choice and application of an economic model.
The DR technique is commonly applied to assessing benefits of improved environmental quality in relation to agricultural production. Its application to remediation of contaminated land may include determination of the value of improved soil fertility whether related to commercial or leisure activity. For example, ex situ biological treatments such as composting may improve soil fertility compared with other ex situ methods such as soil washing or solvent extraction. A key difficulty with using DR is the selection of the economic assessment model. Some economists consider that DR has lead to a wide range of reported costs for environmental damage.
Grimski, D. (2000) The
Land Value Balancing System – A Tool for Greenspace
Protection, Presentation at Brownfields2000
Environment Agency (1999) Cost Benefit Analysis for Remediation of Land
Contamination. R&D Technical Report P316. Prepared by
Risk Policy Analysts Ltd. and WS Atkins. Available from: Environment
Agency R&D Dissemination Centre, c/o WRC,
Environment Agency (2000) Costs and Benefits Associated with Remediation
of Contaminated Groundwater: Framework for Assessment. R&D Technical Report
P279. Prepared by Komex Clarke Bond & EFTEC Ltd., Available from: Environment Agency R&D
Dissemination Centre, c/o WRC,
NOBIS - Netherland Onderzoeksprogramma Biotechnologische In situ Sanering
(1995). “Risk Reduction, Environmental Merit and Costs.”
Phase 1. Document 95-1-03, CUR/NOBIS,
Weth 2000, IN
This overview is extracted from lecture material from the MSc/MRes in Contaminated Land Management at the