Topics Today 103008

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Topics Today (10/30/08)

• CBA case study on U.S. Acid Rain Program.
• Exam 2 is Thursday, November 6 please bring a
  calculator.
• Practice exam is on website.
• Study guide is on website.
• Office hours between now and exam
• Today 400-500pm
• F 800-900am
• M 200-430pm
• T 400-500pm
• No office hours on Wednesday (11/5).

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Cost-Benefit Analysis

• Cost-Benefit Analysis a comparison of total
  benefits and total costs associated with
  alternative policies.
• Net Benefits Total Benefits Total Costs.
• CBA involves computing net benefits for each
  policy alternative.

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CBA in Practice

• EPA Administrator statement in 2006 "This is an
  apples-to-apples comparison that shows Clear
  Skies legislation is the clear choice for cleaner
  air and healthier lives.
• Clear Skies Bill 2.8 billion in costs, 78
  billion in benefits.
• b/c 27.9 net benefits 75.2 billion.
• Carper Bill 10.5 billion in costs, 128
  billion in benefits.
• b/c 12.2 net benefits 117.5 billion.
• Jeffords Bill 41.1 billion in costs, 162
  billion in benefits.
• b/c 3.9 net benefits 120.9 billion.

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U.S. Acid Rain Program

• Title IV of the 1990 Clean Air Act Amendments
  (CAAA) aka the Acid Rain Program.
• Reductions in U.S. electric power industry
  emissions.
• Sulfur dioxide (SO2) and Nitrogen oxides (NOx)
  are the focus.
• First large-scale cap-and-trade program.
• Cap on SO2 8.95 million tons by 2010 (one-half
  the 1980 pollution level).

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CBA Case Study on Acid Rain Program

• Objective a cost-benefit analysis of the U.S.
  Acid Rain Program
• This case study illustrates
• The role of the counter-factual baseline (i.e.
  what wouldve happened without the policy).
• The role of multiple non-market valuation
  estimates.
• A large-scale CBA.
• Its not always necessary to estimate all costs
  and benefits.

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CBA Case Study on Acid Rain Program

• Emissions reductions from the program.
• Q What would emissions have been in the absence
  of the program? (the counter-factual).
• A key uncertainty in estimating Title IV
  benefits is projecting what levels of emissions
  would have been in the absence of Title IV.
  Benefits derive not just from reductions but also
  from prevention of increases. (p. 253).
  Uncertainties
• Remaining life for existing facilities.
• Rates of adoption of clean power technologies.
• Expected growth in demand for electricity.

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CBA Case Study on Acid Rain Program

• Emissions reductions from the program.
• The counter-factual is estimated with an
  Integrated Planning Model (IPM).
• The IPM provides forecasts of least-cost
  capacity expansion, electricity dispatch, and
  emission control strategies for meeting energy
  demand and environmental, transmission, dispatch,
  and reliability constraints. (p. 253).

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CBA Case Study on Acid Rain Program
Note Mercury reductions were not an original
goal, but are a by-product of general pollution
control strategies (e.g. switch to low-sulfur
coal).
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CBA Case Study on Acid Rain Program
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CBA Case Study on Acid Rain Program

• Cost estimates
• Estimated by EPA with the IPM.
• 2 billion for SO2.
• 1 billion for NOx.
• Average annual cost per ton of SO2 250.

MAC
P
Total Costs
?Pollution Abatement
Q
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CBA Case Study on Acid Rain Program

• Cost estimates
• Cost estimates lower than expected because
  technical improvements were made that were not
  anticipated. (p.255).
• Reasons
• Low transport costs for low-sulfur coal.
• Productivity increases in coal production
  lower prices for low-sulfur coal.
• Cheaper installation for smokestack scrubbers.

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CBA Case Study on Acid Rain Program

• Benefits of Acid Rain Program
• Human health
• Mortality
• Morbidity
• Visibility
• Natural resources
• Freshwater lakes and streams
• Coastal estuaries
• Forests

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CBA Case Study on Acid Rain Program

• Benefits of Acid Rain Program
• Physical impacts on human health
• Particulate aerosols (PM10 PM2.5) have multiple
  effects.
• Lung function.
• Inflammation and infection.
• Morphological changes.
• Immune systems.
• Effects arise in terms of mortality and
  morbidity.
• Chronic bronchitis.
• Respiratory hospital admissions.
• ER visits for asthma.
• Respiratory symptoms.

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CBA Case Study on Acid Rain Program

• Linking SO2 / NOx reductions to changes in
  particulate aerosols Regulatory Modeling
  System for Aerosols and Deposition (REMSAD).

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CBA Case Study on Acid Rain Program

• Population impacted by change in particulate
  aerosols / ozone.

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CBA Case Study on Acid Rain Program

• Benefits of Acid Rain Program
• Economic benefits of improved human health
• Value of statistical life used for mortality
  effects.
• WTP estimates are used here for monetary
  valuation of mortality and morbidity benefits
  when these estimates are available from the
  literature. (p.258)
• Hedonic wage method used for some.
• Stated preference studies for mortality risk
  reduction via automobile safety, preventative
  health care, and other means (p. 258).
• Central estimate 60 per 1 in 100,000 VSL of
  6 million.

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CBA Case Study on Acid Rain Program

• Benefits of Acid Rain Program
• Economic benefits of improved human health
• Value of statistical life used for mortality
  effects.
• Wide range of estimates for VSL.
• After reviewing the labor market studies, they
  (Mrozek and Taylor 2002) concluded that many of
  the studies did not adequately control for
  inter-industry wage differentials and therefore
  overstated the value of mortality risk
  reduction. (p. 259) Q what is this argument
  over?
• Using a much lower estimate of VSL does not
  change net benefit conclusions of this study? Q
  what is this an example of?

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CBA Case Study on Acid Rain Program
Note reduced mortality benefits comprise the
majority of the total benefits.
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CBA Case Study on Acid Rain Program

• Benefits of Acid Rain Program
• Physical impacts on human health
• Reductions in ozone
• NOx emissions are a precursor to ambient ozone.
• Ozone linked with mortality / morbidity effects,
  especially respiratory health problems.

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CBA Case Study on Acid Rain Program

• Ozone reductions projected from the program

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CBA Case Study on Acid Rain Program

• Benefits of Acid Rain Program
• Economic benefits of improved human health (ozone
  reduction)
• Value of statistical life used for mortality
  effects from ozone (e.g. hedonic wage, CVM).
• CVM used for morbidity.

Note 90 of benefits due to reduced mortality.
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CBA Case Study on Acid Rain Program

• Benefits of Acid Rain Program
• Physical impacts on human health
• Reductions in mercury
• Mercury can accumulate in the food chain.
• Human exposure to mercury often linked to
  consumption of fish.
• Children of women with high mercury levels show
  developmental delays, lower neurological test
  scores, and deficits in learning ability.
• Appears that benefits from mercury reduction were
  not included in this study.

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CBA Case Study on Acid Rain Program

• Benefits of Acid Rain Program
• Physical impacts on visibility.
• Sulfate aerosols scatter light and create a hazy
  look to the sky, reducing visual range.
• Mean annual reduction in average deciviews (a
  measure of visibility) is 1.4 east of
  Mississippi, 0.9 in central states, and 0.1 in
  the West.
• Economic benefits of improved visibility.
• CVM estimates of WTP for improved visibility in
  national parks 3 billion annual.
• Including improvements in other locations 5
  billion.

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CBA Case Study on Acid Rain Program

• Benefits of Acid Rain Program (natural
  resources)
• Physical impacts on freshwater lakes / streams.
• Reduced pollution lowers the acidity in lakes /
  streams.
• Effects on aquatic species increased catch
  rates for recreational angling.
• Adirondack region of New York is the most
  affected.

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CBA Case Study on Acid Rain Program

• Benefits of Acid Rain Program (natural
  resources)
• Economic benefits of reducing acidification in
  lakes and streams.
• Travel cost change in consumer surplus estimated
  for change in catch rates and in the number of
  sites where fish stocks are available. (p.263)
• Estimates for New York 65 million.
• Use value estimates only.
• However, New York residents hold substantial
  value for ecosystem improvement regardless of
  whether they participate in recreational fishing
  (Banzhaf et al. 2004) (p. 263). this refers
  to a CVM study.

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CBA Case Study on Acid Rain Program

• Benefits of Acid Rain Program (natural
  resources)
• Physical impacts on coastal estuaries.
• Nitrogen deposition contributes to eutrophication
  of coastal estuaries.
• Eutrophic conditions algal blooms, low levels of
  dissolved oxygen that kill fish / shellfish.
• The magnitude of the contribution is highly
  uncertain (p. 264).
• Economic benefits of reducing eutrophication in
  estuaries not quantified.

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CBA Case Study on Acid Rain Program

• Benefits of Acid Rain Program (natural
  resources)
• Physical impacts on forests.
• Acid deposition / ozone can harm trees and other
  vegetation.
• Slow growth, increased mortality, increased
  susceptibility to disease, insects, and drought.
• Economic benefits of reducing acid deposition /
  ozone on forests.
• 800 million for U.S. commercial timber sector.
• 700 million for U.S. grain crop producers.
• Use market prices to estimate producer surplus.

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CBA Case Study on Acid Rain Program
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CBA Case Study on Acid Rain Program

• This case study illustrates
• The role of the counter-factual baseline.
• Benefits of program are relative to what was
  expected if the program had not occurred.
• Since the counter-factual is never observed,
  this is quantitatively estimated.
• The role of non-market valuation.
• Many benefits are non-market.
• All major techniques (CVM, hedonic, travel cost)
  were used.
• A large-scale CBA.
• Not always necessary to estimate all costs and
  benefits.

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CBA in Practice

• How is CBA used in U.S. environmental policy
  making?
• Some legislation precludes CBA clean water act,
  designating species under the ESA.
• CBA is used extensively in policy decisions EPA
  regulation, NMFS regulation, designating critical
  habitat under the ESA, etc.
• CBA is not used as the ultimate decision tool,
  rather it is a piece of information in the
  decision making process.

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CBA in Practice

• Guidelines for using CBA
• Decision-makers should not be precluded from
  considering economics.
• CBA should be used in major regulatory decisions.
• Agencies should not be bound by CBA findings.

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CBA in Practice

• Guidelines for using CBA (cont)
• Costs/Benefits should be explicitly quantified if
  possible, but with all the caveats that come with
  their estimation.
• CBAs should be subject to external review.
• A core set of economic assumptions should be
  consistent across agencies (i.e. discount rate,
  value of statistical life, etc.)
• CBA should present information on distributional
  impacts to analyze fairness.