frst 318-march 5, 2013 cost benefit analysis. winning bid!

F R S T 3 1 8 - M A RC H 5 , 2 0 1 3

COST BENEFIT ANALYSIS

WINNING BID!

WHAT IS COST-BENEFIT ANALYSIS?

• Cost-Benefit analysis is used to evaluate public actions and decisions

• Goal is to provide information on what action provides society with the most economically beneficial use of its resources (Loomis 1993 in Ward 2006)

• Converts costs and benefits into a common denominator (most often money)

APPLICATION

• Can evaluate introduction of regulation; or consideration of alternative instruments (tax, regulation); • programs-for example

green transformation (what Mark mentioned); • projects

• The analogy to the private sector-instead if revenues to a private firm, CBA substitutes benefits to society; and instead of private costs for the firm; CBA substitutes opportunity cost; and the equivalent of profit is benefit minus cost

DECISION RULE

• A simple decision rule-benefits must exceed costs• Comparing different actions with same goal, the

one that provides the highest net benefit is the preferred action and should be adopted if economic efficiency is the goal• Other criteria• equity• administrative ease• Transparency• Predictability of implementation

ESTABLISHING ASSUMPTIONS AND SCOPE

• Analysis should consider all those people and values affected• Goal is to capture all benefits and costs

regardless of to whom they accrue• International not typically included unless these are

meant to be specifically evaluated

• Unless specifically restricted should span sectors and contingent costs• Benefits and costs should be measured with the

program versus without it

ALTERNATIVES

• Cost Effectiveness analysis• Where benefits difficult to

measure or quantify or undesirable to do so (i.e. lives saved, endangered species)

• Multi-criteria Analysis• Set of criteria against which

policy options are evaluated

• Environmental Impacts Assessment• Provides raw information,

with no common value-some prefer because it does not assign values

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OWLS VERSUS DOLLARS

The Policy Question

• Should we reduce old growth logging to protect more spotted owl habitat?

• Note that we could frame and answer this question in several ways, especially in regards to the prospects of seeing a species become extirpated

CONSTRUCTING THE CBA FRAMEWORK

SELECTED VALUES

• Timber• Carbon• Recreation• Non-timber forest products

METHODOLOGY

• Three scenarios are established• Values are measured over a 100 year period and

summed up• Sensitivity Analysis is used for the three most

important variables• Timber prices, carbon prices, and discount rate

• Timber harvest simulation model is used to calculate changes in forest growth, forest volume, and total timber stock

SCENARIOS

• Maintaining Current Approach (SOMPcurr)• Specific area preserved can change so long as 67% of

productive forest within long term activity centres is 100 years old

• Preserving 100% of existing suitable stands are preserved (SUIT100)• Habitat is expanded (TERR100)• Packed territories are defined where contiguous areas of

suitable habitat are not harvested

MEASURING TIMBER VALUES

• Measure producer surplus• Rely on market values for log prices and

harvesting costs• The difference is producer surplus

LOG PRICE ASSUMPTIONS

RECREATION VALUES

4.2.1 Consumer Surplus from Outdoor Recreation We measure the benefits to recreationists from the forests of the Fraser

TSA as their consumer surplus (see Chapter 3). For recreation, consumer surplus is the difference between how much consumers value outdoor recreation and how much they spend on outdoor recreation. There are many different methods for estimating consumer surplus, the most common of which is the contingent valuation method. Consumers are asked how much they would be willing to pay in a hypothetical market for outdoor goods, such as wildlife habitat and provincial parks, over and above their expenditure on equipment, travel, and fees or licenses. There have not been any contingent valuation studies done for BC provincial forests in the last decade, so we use estimates from the Outdoor Recreation Survey 1989/90 to form an estimate of current willingness to pay. This survey covered recreation activities on provincial forests, which coincides with the area being analyzed in this report, the Fraser TSA.

MEASURED VALUES

• Consumer surplus from outdoor recreation• Adjusting these

values for forest harvesting

• Hunting ($0.82 per ha)• Water-based and

human-powered recreation activities ($59.70 per ha)

Angling camping, hiking, backpacking paddling, skiing and

snowshoeing hot springs motorized activities hunting

MEASURING NTFP’S

• Commercial Mushroom harvesting (producer surplus) ($1.27 per ha)• Recreational mushroom picking (consumer

surplus from hiking plus market value) ($0.45 per ha)• Floral greenery and other NTFP’s (no value

assigned)

MEASURING CARBON VALUES

• Two main carbon flows• Carbon sequestration and storage through net

timber growth• Also carbon emissions from timber harvesting• Here only looked at decay of timber products• Did not look at changes in carbon content in the soil and

understory biomass, carbon emissions during harvesting

VALUING CARBON

• Pick three values to test sensitivity of results• $20, $75, and $150• Assume different decay rates for timber products• 38% becomes construction lumber (5% loss 1st year, then

approximately 1% thereafter)• 16.3% other type of lumber (40% 1st year, then approx. 1%)• 45.7% becomes chips (50% 1st year, then 9% for next 5

years)

• So net value of Carbon for each scenario equals that sequestered over the period minus the losses

RESULTS FOR ONE SET OF ASSUMPTIONS

BREAKING DOWN THE COMPARISON

1%, rising log prices

Timber SOMPcurr SUIT100 Terr100

Amount by which SOMPcurr is bigger (smaller)(for Terr100)

Revenues 7747.8 5220.5 5039.8  

Costs 7020.5 4883.2 4732.4  Producer surplus 727.7 337.3 307.4 420.3

Hunting 15.11 14.81 14.55 0.56

Other recreation 3404.5 3515.2 3544.9 -140.4

NTFP's 28.04 25.81 28.16 -0.12

Carbon ($20) -3.8 111 131.8 -135.6

total 4171.55 4004.12 4026.81  

Amount by which SOMPcurr is bigger (smaller) 167.43 144.74 144.74

In this scenario it does not make sense to reduce harvests; note that Baseline scenario has highest value

ANSWER

• Yes, that we should reduce old growth logging

• They find that the economic benefit of preserving more old growth (which leads to lower harvest levels) yields greater economic benefits

• They do not attach any value to the spotted owl

SENSITIVITY ANALYSIS

SENSITIVITY ANALYSIS

ALLOWABLE CUT EFFECT (ACE)

• The Allowable Cut Effect exists where there are regulations or policies that constrain harvest levels• Examples in BC are

the metering out of old growth timber (key for it to work)

• Improvements in growth and yield are spread out over the entire rotation• Conversely losses in

timber are also spread out (regardless of whether or not timber was close to harvesting age)

USING ACE AS AN INCENTIVE

EFFECT OF ACE

Standard CBA

• Cost of improving the stand -$1000 per hectare

• Result-doubling of growth (an additional 995 cubic metres)

• Standard cost-benefit:• Discounted Benefit:

$13,187/1.0558=$778• Cost: $1000• So NPV =-$222

Effect of ACE

• If you can take additional volume over the 58 years… ($13,187/58)• Then it looks quite different

• Using a formula-the present value of a finite annuity

• Result with ACE• Discounted benefit =

($13,187/58)*((1.05)58-1)/.05*(1.05)58 = $4,546

• Same cost but NPV=$3,546

EXPERIENCE WITH ACE