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Applications of Benefit Cost Analysis 1.Tuolumne River preservation 2.Lead in drinking water.

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Presentation on theme: "Applications of Benefit Cost Analysis 1.Tuolumne River preservation 2.Lead in drinking water."— Presentation transcript:

1 Applications of Benefit Cost Analysis 1.Tuolumne River preservation 2.Lead in drinking water

2 “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.

3 Tuolumne: background Originates in Yosemite Nat’l Park Flows west 158 miles, 30 miles free-flow Many RTE species rely on river Historic significance World-class rafting: 15,000 trips in 1982 Recreation: 35,000 user-days annually

4 Hydroelectric power generation River’s steep canyon walls ideal for power generation “Tuolumne River Preservation Trust” lobbied for protection under Wild & Scenic 1983: existing hydro captured 90% water Municipal, agricultural, hydroelectric Rapid growth of region would require more water & more power

5 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).

6 Clavey-Wards Ferry project 2 new dams & reservoirs, 5 mile diversion tunnel Jawbone Dam 175’ high Wards Ferry Dam 450’ high Generate 980 gigawatt-hours annually Annual water supply of 12,000 AF Increased recreational opportunities Cost: $860 million (1995 dollars)

7 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

8 Economic evaluation EDF economists to evaluate costs and benefits, including environmental costs Traditionally, 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”.

9 Differences in the CBA’s Stavins’ CBA: Used data from original project proposal Included 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%

10 The costs and benefits Benefits: $188 million annually Electricity benefits: $184 million Water yield: $1.6 million Internal costs: $134 million annually External costs: $80 million annually Total costs: $214 million annually C > B

11 Tuolumne River: prologue Clavey-Wards Ferry project dams were not built Intense 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.’”

12 “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.

13 Background Lead in drinking water is byproduct of corrosion in public water systems Water leaves treatment plant lead-free, lead leaches into water from pipes. Factors associated with risk: Corrosivity of pipe material Length of time water sits in pipe Lead in plumbing Water temperature (hotter -> more lead)

14 Primary issues Evidence of lead-related health effects even from low exposure Tendency of lead to contaminate water in the house Decreasing corrosivity of water, also reap extra economic benefits by reducing damage to plumbing.

15 Scientific & analytical problems No baseline data on lead levels in tap w. High variability in lead levels in tap w. Corrosion control is system specific Uncertainty over reliability of corrosion control treatment Corrosion control treatment may change water quality and require further treatment.

16 Approach Stakeholders: 44% of U.S. population. 2 regulatory approaches: Define a single water quality standard at the tap or at the distribution center, OR Establish corrosion treatment requirements. Compare costs and benefits for each regulator approach

17 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.

18 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%.

19 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.

20 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.

21 Key uncertainties & Sensitivity Current lead level in drinking water Efficacy of corrosion treatment Likelihood of decreased lead in blood Precise link between lead exposure and cognitive damage. Sensitivity Analysis: Costs  50%, Benefits +100%, -30%

22 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


24 Reflections on analysis CBA played prominent role in regulation Very stringent rule was adopted by EPA Widespread EPA/public support Quantitative analysis more likely to have impact if: Credibly done and Done early in process

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