Cost estimation procedures and benefit estimation Senior Researcher Brian H. Jacobsen Institute of Food and Resource Economics University of Copenhagen CIS Workshop on Exemptions 10-11th April Content 1. Cost definitions and estimations 2. Marginal costs and marginal benefits 3. Likely exemption in case area (Roskilde) 4. Danish National estimates 5. Benefit transfer 6. Recommendations Background The choice regarding exemptions is a political decision at the national and EU level The cost estimation comes from the CEA analysis Some considerations regarding the cost and benefit estimation procedure are required in order to compare across MS Cost estimation Environmental protection costs The actual costs and expenditures of measures, which aim to protect the environment Environmental costs (lost benefits) The costs of damage that water impose on the environment Resource costs (lost benefits) The costs of economically inefficient allocation of water use ECO2-report Cost estimation The costs of moving from the present activity to a new activity: -Loss of present income -Reduction in costs -New income from new activities -New costs related to new activities How to calculate costs ? WATECOUKDK Direct costs (operating cost and investment) Yes Subsidies and taxes excluded PerhapsYes Conversion to consumer price No Yes Non-water costs and benefits YesNo Tax distortion effect No Wider economic effects PartlyProbably notNo Administrative costs Perhaps Does it matter to the total cost ? Index Direct costs (running and investment costs) 100 Subsidies and taxes10 Conversion to consumer price20 Non-water costs and benefits10-30 Tax distortion effect20 Adm. Costs5-20 Wider economic effects0-20 Total index Uncertainty with respect to CEA and costs -The assumptions regarding baseline -Effectiveness of measures -Cost of measures -Likely potential of cheap measures -Variation between MS on estimation procedure can be used to increase costs. No single approach to CEA should be desired or expected (CEA drafting group, 2006) Case : A lake in DK Required reduction of 700 kg P to reach target 3 measures: -P-wetlands (river bank) (cheap) -Grass on areas to reduce erosion -Digging up the lake bed to remove P (costly) Total cost is 1,3 mio. and benefits are 1,1 mio. . Conclusion: Target has to be met, but is it optimal ? Marginal costs (/ kg P) P-wetlands Grass Digging Total costs () Marginal costs and benefits (/ kg P) Total benefits and costs (/ kg P) Marginal costs and benefits (/ kg P) Cost and Benefit estimation The optimal pollution level might be lower than the target for a given lake. Is it easier to get exception if this is shown to be the case ? Procedure for cost calculations in DK Step 1: CEA analysis regarding streams, lakes and coastal waters based on selected cost effective measures to meet N and P targets. Step 2: This analysis will probably show that the objective in some cases can not be reached by the selected measures and the realistic potential for those measures. The cost effective curve is used to find possible candidates for time derogation. Step 1 and 2 will be carried out in July-August 2008 for all 23 catchment areas in DK including more than 120 sub catchments. Possible exemptions in DK Streams: Abstraction of groundwater affect the flow of water in streams and moving the sites to other places is not enough. (Zealand) Lakes: The P-target will probably be very difficult to reach for some lakes. The environmental improvement is slow (10-15 years). Requires action now. Coastal waters: Large N-reductions implies long implementation period (10 years). Spreads the costs. Benefit transfer issues in DK - 1 (Susanne Thomsen) Non-use values of water quality is important when estimating benefits. No access lowers the benefits. The lack of (DK) primary valuation studies makes benefit estimation more difficult. Same benefit for lake no. 1 as lake no. 100 in a region ? Which area is the basis for calculating benefits ? The use of distance decay functions is important. Benefit transfer issues in DK - 2 (Susanne Thomsen) The non-water related impacts of measures/programmes are important. Reduced ammonia and CO2 could be decisive for results. A forestation project in urban areas could be the sole argument as the benefits are high. How to single out costs and benefits specifically related to the achievement of good status in a particular water body (up/down stream effect). Conclusions and recommendations Cost estimation: The difference between the definition of costs could in itself mean a difference in costs of 100% between MS. On top comes uncertainty related to effect and cost of measures. Consideration: To set up a clear minimum standard for the cost estimation used along side the national approach. This would allow for more comparable decisions on exemptions. Conclusions and recommendations - 2 Marginal cost : Although a time derogation or less stringent objective is allowed, it might be found that the optimal pollution level, based on marginal costs and benefit, is lower than what is required. Consideration: Time derogation or less stringent objectives might be allowed if the optimal pollution level is significantly lower than the original target. Conclusions and recommendations - 3 Other issues : -What level is the exemption at ? Large variation in size of water bodies across MS -Up/down stream effects and costs also in relation to optimal location of measures. -Does the pricing of water (cost recovery) go before measures to improve water quality? -Cost and benefit estimation over time (will cost be reduced/benefit increased?). Discounting future benefits. -Benefit studies will often not give clear answers but help the decision process. -Guidelines have to give practical help to MS when analysing likely exemption. Thank you for your attention