Applications of Benefit Cost Analysis

1.Tuolumne River preservation2.Lead in drinking water

“Saving the Tuolumne”

Dam proposed for hydroelectric power generation.Benefits: hydroelectric power, some recreation.Costs: environmental, rafting, fishing, hiking, other recreation.Question: Should the dam be built?

Influential analysis by economist, Stavins.

Tuolumne: background

Originates in Yosemite Nat’l ParkFlows west 158 miles, 30 miles free-flowMany RTE species rely on riverHistoric significanceWorld-class rafting: 15,000 trips in 1982Recreation: 35,000 user-days annually

Hydroelectric power generation

River’s steep canyon walls ideal for power generation“Tuolumne River Preservation Trust” lobbied for protection under Wild & Scenic1983: existing hydro captured 90% water

Municipal, agricultural, hydroelectric

Rapid growth of region would require more water & more power

New hydroelectric projects

2 proposed hydro projects:Clavey River, Wards Ferry

3 year study on Wild & Scenic stalled FERC (Fed. Energy Reg. Comm.) from assessing feasibility of hydro projects.April 1983, FERC granted permit to study feasibility of Clavey-Wards Ferry Project (CWF).

Clavey-Wards Ferry project

2 new dams & reservoirs, 5 mile diversion tunnel

Jawbone Dam 175’ highWards Ferry Dam 450’ high

Generate 980 gigawatt-hours annuallyAnnual water supply of 12,000 AFIncreased recreational opportunitiesCost: $860 million (1995 dollars)

The opposition

Historical context: John Muir & Sierra Club lost Hetch Hetchy Valley fight.Dams would damage

Fishing, rafting, wildlife populations, wild character.Recreational opps created are minimal

Cheaper alternative sources of energy

Economic evaluation

EDF economists to evaluate costs and benefits, including environmental costsTraditionally, environmental losses only measured qualitatively. Difficult to compare with quantified $ Benefits.Stavins: “Rather than looking at it from a narrow financial perspective, we believed we could look at it from a broader social perspective by trying to internalize some of the environmental externalities”.

Differences in the CBA’s

Stavins’ CBA:Used data from original project proposalIncluded environmental externalities (mostly in lost rafting and fishing opps.)Took dynamic approach – evaluated costs and benefits over entire life of project (50 year “planning horizon”), r=10.72%

The costs and benefits

Benefits: $188 million annuallyElectricity benefits: $184 millionWater yield: $1.6 million

Internal costs: $134 million annuallyExternal costs: $80 million annuallyTotal costs: $214 million annuallyC > B

Tuolumne River: prologueClavey-Wards Ferry project dams were not builtIntense lobbying forced the political decision to forbid project.Pete Wilson was senator.Stavins said: “[Wilson] couldn’t say ‘I did it because I love wild rivers and I don’t like electricity’, but he could do it by holding up the study and saying, ‘look, I changed my vote for solid economic reasons.’”

“Lead in drinking water”

Should the EPA control lead contamination of drinking water?Should water utilities be responsible for the quality of water at the tap?An economic analysis at EPA showed benefits outweighed costs by 10:1. Analysis formed basis for adoption of this rule.

Background

Lead in drinking water is byproduct of corrosion in public water systemsWater leaves treatment plant lead-free, lead leaches into water from pipes.Factors associated with risk:

Corrosivity of pipe materialLength of time water sits in pipeLead in plumbingWater temperature (hotter -> more lead)

Primary issues

Evidence of lead-related health effects even from low exposureTendency of lead to contaminate water in the houseDecreasing corrosivity of water, also reap extra economic benefits by reducing damage to plumbing.

Scientific & analytical problems

No baseline data on lead levels in tap w.High variability in lead levels in tap w.Corrosion control is system specificUncertainty over reliability of corrosion control treatmentCorrosion control treatment may change water quality and require further treatment.

Approach

Stakeholders: 44% of U.S. population.2 regulatory approaches:

Define a single water quality standard at the tap or at the distribution center, OREstablish corrosion treatment requirements.

Compare costs and benefits for each regulator approach

Estimating costs [1 of 2]1. Source water treatment: for systems with

high lead in water entering dist’n system. 880 water systems, $90 million/yr.

2. Corrosion control treatment: either (1) adjust pH, (2) water stabilization, or (3) chemical corrosion inhibitors [engineering judgement] $220 million/yr.

3. Lead pipe replacement: 26% of public water systems have lead pipes; usually best to increase corrosion treatment, $80-370 million/yr.

Estimating costs [2 of 2]

4. Public education: inform consumers about risks $30 million/yr.

5. State implementation: $40 million/yr.

6. Monitoring: (1) source water, (2) corrosion, (3) lead pipe replacement, $40 million/yr.Total costs: $500-$800 million/yr.Annulization over 20 yrs @ r = 3%.

Benefits: children’s health

Avoided medical costs from lead-related blood disorders: $70,000/yr. Avoided costs to compensate for lead-induced congnitive damage ($4,600 per lost IQ point) $900 million/yr.Offset compensatory education $2 million/yr.Total: $900 million/yr.

Benefits: adult health

Avoided hypertension, $399 million/yr.Avoided heart attacks, $818 million/yr.Avoided strokes, $609 million/yr.Avoided deaths, $1.6 billion/yr.Total: $3.4 billion/yr.

Total (all health): $4.3 billion/yr.

Key uncertainties & Sensitivity

Current lead level in drinking waterEfficacy of corrosion treatmentLikelihood of decreased lead in bloodPrecise link between lead exposure and cognitive damage.Sensitivity Analysis:

Costs 50%, Benefits +100%, -30%

Summary of costs & benefits

Costs: $500-$800 million/yr.NPV = $4 - $7 billion

Benefits:$4.3 billion/yr.NPV = $30 - $70 billion

Benefits outweigh costs by ~ 10:1

Reflections on analysis

CBA played prominent role in regulationVery stringent rule was adopted by EPAWidespread EPA/public supportQuantitative analysis more likely to have impact if:

Credibly done andDone early in process