Swedish University of Agricultural SciencesDepartment of Forest Economics
Cost-Benefit Analysis-An Economic tool to measure costs and benefits of an environmental policy
Cecilia Håkansson
Department of Forest Economics
SLU, Sweden
Trade-offs between hydropower and wild salmon in the Ume/Vindel River, northern Sweden
Swedish University of Agricultural SciencesDepartment of Forest Economics
Introduction/Method/Empirical Exmple/Conclusions (2/21)
Article 5Characteristics of the river basin district, review of the environmental impact of human activity and economic analysis of water use
1. Each Member State shall ensure that for each river basin district or for the portion of an international river basin district falling within its territory:
-an analysis of its characteristics,
-a review of the impact of human activity on the status of surface waters and on groundwater, and
-an economic analysis of water use
is undertaken according to the technical specifications set out in Annexes II and III and that it is completed at the latest four years after the date of entry into force of this Directive.
2. The analyses and reviews mentioned under paragraph 1 shall be reviewed, and if necessary updated at the latest 13 years after the date of entry into force of this Directive and every six years thereafter.
Swedish University of Agricultural SciencesDepartment of Forest Economics
Why should an economic analysis be carried out?
EfficiencyThe economic requirement is intendent to enable there to be a rational discussion on the cost-effectiveness of the various measures.
EquityDecisions on the most appropriate measures to achieve the objectives in the river basin management plan will involve balancing the interest in various groups.
The economic requirement is intendent to provide a rational basis for this discussion.
TransparencyThe greater transparency in the establishment of objectives, the greater the care Member States will take to implement the legislation in good faith.
Introduction/Method/Empirical Exmple/Conclusions (3/21)
Swedish University of Agricultural SciencesDepartment of Forest Economics
Cost-Benefit Analysis-
What is it and what kind of information can/should it provide? (1/3)
Welfare improvement A Cost-Benefit Analysis (CBA) examines the consequences (costs and benefits) of an environmental policy in order to assess the relative merits of possible options.
Cost-efficiency The option with the highest net benefit (benefits minus costs) is the most efficient.
Environmental goods Evidently, a CBA should entail marketrelated as well as non-marketrelated costs and benefits.
Introduction/Method/Empirical Exmple/Conclusions (4/21)
Swedish University of Agricultural SciencesDepartment of Forest Economics
Equity It is not obvious how to deal with distributional issues when applying CBA.
Transparency and Equity However, by shedding light on how environmental policy maps into consequences for different groups in the society we obtain a richer basis for making decisions.
Cost-Benefit Analysis-
What is it and what kind of information can/should it provide? (2/3)
Introduction/Method/Empirical Exmple/Conclusions (5/21)
Swedish University of Agricultural SciencesDepartment of Forest Economics
Cost-Benefit Analysis-
What is it and what kind of information will/should it provide? (3/3)
Transparency and UncertaintyA CBA should present the degree of uncertainty in the analysis that is due to that our understanding of the economic and ecological systems per se is limited.
Perhaps more importantly, our understanding of the complex interplay between the economy and the environment is even more limited.
In SummaryA CBA provides decision-support information, rather than definite answers.
Introduction/Method/Empirical Exmple/Conclusions (6/21)
Swedish University of Agricultural SciencesDepartment of Forest Economics
Trade-offs between Hydropower and Wild Salmon inthe Ume/Vindel River
Introduction/Method/Empirical Example/Conclusions (7/21)
Swedish University of Agricultural SciencesDepartment of Forest Economics
Ume/Vindel River
Introduction/Method/Empirical Example/Conclusions (8/21)
Swedish University of Agricultural SciencesDepartment of Forest Economics
The lifecycle of Atlantic Salmon
Introduction/Method/Empirical Example/Conclusions (9/21)
Swedish University of Agricultural SciencesDepartment of Forest Economics
80 %
These wild salmon have their most important spawning sites
c. 230 km upstream (data from Laxracet)
Major Upstream problem: Stornorrfors
Power station
Swedish University of Agricultural SciencesDepartment of Forest Economics
The Study area in the Ume River
Bypass channel(Old river bed)
Fish-ladder
Rapids (Laxhoppet)
”Laxhoppet”
Minimum flow:Weekdays 20 m3/sWeekends 50 m3/s
Swedish University of Agricultural SciencesDepartment of Forest Economics
Cost-Benefit Analysis
• Project: Guarantee that a certain amount of salmon reach their spawning
places each year.
• Benefits: Increase of the wild salmon stockNon-market goodNon-market valuation
• Costs: Loss of electricity productionMarket good
Introduction/Method/Empirical Example/Conclusions (12/21)
Swedish University of Agricultural SciencesDepartment of Forest Economics
Non-market valuation
Introduction/Method/Empirical Example/Conclusions (13/21)
Swedish University of Agricultural SciencesDepartment of Forest Economics
Introduction/Method/Empirical Example/Conclusions (14/21)
Swedish University of Agricultural SciencesDepartment of Forest Economics
Ecological Models (1/2)How much extra water needs to be allocated to the wild salmon?
• Model: Predicted upstream migration success of salmon in the bypass channel at added bypass flows
• River specific data: Turbine flow, flow in the bypass chanell, water temperature, sex of salmon, length of salmon and the salmon’s moving patterns in the river.
Swedish University of Agricultural SciencesDepartment of Forest Economics
Ecological Models (2/2)
• Model: Predicted number of salmon passing the fish ladder after improved upstream migration.
• River specific data: The model is based on results from
1995-2005 of tracking radio-tagged upstream migration salmon in the Ume River, and 30 years of information from the fish ladder.
• Other data: Data from International Council for the exploration of the Sea (ICES) (2000)
For how many years do we need to allocate extra water to the wild salmon?
Years after improvement
Swedish University of Agricultural SciencesDepartment of Forest Economics
Results
Total benefits: 96 MSEK- 517 MSEK
Total costs: 114 MSEK- 2101 MSEK
Net-benefits: -2005 MSEK- 403 MSEKIntroduction/Method/Empirical Example/Conclusions (17/21)
Swedish University of Agricultural SciencesDepartment of Forest Economics
Benefit side• Valuation
uncertainty
Cost side• Electricity price• Biological models
Uncertainties
Total benefits/costs
0
500
1000
1500
2000
2500
1 2 3 4 5
MSE
K
Total Costs0.25 SEK/kWh
Total Benefits
Total Costs0.25 SEK/kWh
Total Costs1.50 SEK/kWh
Total Costs1.00 SEK/kWh
Total Costs0.50 SEK/kWh
Introduction/Method/Empirical Example/Conclusions (18/21)
Swedish University of Agricultural SciencesDepartment of Forest Economics
During the coming years we will investigate how costs and benefits are distributed between different groups.
Conclusions Among other things this cost-benefit analysis shed light on:
Efficiency
Transparency
Equity
the presence of big economic and ecological uncertainties
the importance of including environmental costs and benefits that are not priced on a market in the analysis
Introduction/Method/Empirical Example/Conclusions (19/21)
Swedish University of Agricultural SciencesDepartment of Forest Economics
According to the WFD’s requirements this issues have to be seriously evaluated…
and…
the programme of measures have to be developed accordingly to the outcomes of art.5 analysis.
Introduction/Method/Empirical Example/Conclusions (20/21)
Swedish University of Agricultural SciencesDepartment of Forest Economics
Introduction/Method/Empirical Example/Conclusions/End
All Swedes
Angling days/year Nr. of observations
Proportion of
responses
with WTP>0
Mean WTP
(SEK)
Proportion of
men
>=0 644 0.51 109 0.47 0 290 0.45 81 0.36 No use-values 251 0.38 66 0.37 >0 354 0.55 116 0.56 0-5 498 0.47 90 0.41 >5 146 0.63 120 0.69 0-20 590 0.48 99 0.44 >20 54 0.74 118 0.80
Table 1 Characteristics for Swedes depending on how often the respondents go anglinga. Characteristics for the sample Swedes, i.e. women and men
Women Men
Angling
days/year
Nr. of
observations
Proportion of
responses
with WTP>0
Mean WTP
(SEK)
Nr. of
observations
Proportion
of responses
with WTP>0
Mean
WTP
(SEK)
>=0 340 0.52 95 304 0.50 109
0 186 0.51 79 104 0.36 55
No use-values 157 0.42 69 94 0.32 56
>0 154 0.53 97 200 0.57 112
0-5 295 0.52 89 203 0.40 72
>5 45 0.49 102 101 0.69 103
0-20 329 0.52 95 261 0.44 88
>20 11 0.45* - 43 0.81 115
b. Characteristics for women respectively men in the sample Swedes* Only three observations.
