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ESP168a.f10.lecture7.10.12.10

ESP168a.f10.lecture7.10.12.10 - ESP168a EnvironmentalPolicy...

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ESP 168a Environmental Policy  Analysis Lecture 7:  Benefit-Cost Analysis Joan Ogden October 12, 2010 [email protected]
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Cost Benefit Analysis Widely used method to evaluate alternative projects or actions Systematic enumeration of all costs and benefits as a result of an action To all members of society Easily Quantifiable or not.
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Cost Benefit Analysis Allow decision-maker to evaluate actions before they are taken Put resources to their most beneficial use In many cases, $ will be the measure, but even if results can’t be exactly quantified, it is useful to describe costs and benefits. Typically applied to well-defined projects (options for a new power plant; a dam; new hospital etc.)
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Cost Benefit Analysis: Potential Drawbacks and Limitations False sense of precision (output of cost- benefit analysis is only as precise as inputs) Vulnerable to misapplication through carelessness, naivete or deception
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Steps in a Cost-Benefit Analysis Identify projects to be analyzed All impacts favorable and unfavorable are determined (use models for this) Values (often in $) are assigned to these impacts Positive impacts are benefits Negative impacts are costs Net benefit = Benefits – Costs is calculated Choice is made
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Making a choice In any choice situation select the choice with the greatest net benefit. Sometimes making the best net benefit choice involves adding a policy to assure equity.
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A Simple Example Changes in Net Benefits Present Fire Station Locate New Station in N. Part of Town Locate New Station in S. Part of Town Bob 0 -$120 +$330 John 0 +$250 -$140 TOTAL 0 +$130 +$190 What is the best choice? Is it fair?
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Types of Cost-Benefit Analysis Accept or reject a single project Choose among a number of options Accept or reject a number of projects subject to a constraint (on $ for example) Accept of reject a number of projects, and choosing well the level of operation of each.
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Accept or reject a single project We have to decide whether or not to put scrubbers on a coal power plant. We know that it will cost $10 million to build and last 20 years. It will cost $1 million to operate each year It will reduce emissions over 20 years by 200 tonnes of particulates and 2000 tonnes of NOx The health benefits of cleaner air are estimated to be $40/kg of NOx avoided, and $200/kg of particulates (PM) avoided.
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Accept or reject a single project Compare costs and benefits: Costs = $10 million + $1 million/yr x 20 years = $30 million over 20 years Benefits = (2,000,000 kg NOx x $40/kg + 200,000 x $200/kg ) = $80 million + $40 million = $120 million Net benefits = $120-30 million = $90 million In this case, scrubber pays for itself in reduced health impacts Best option is to build scrubber
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