Memorandum by CSERGE, (the Centre for
Social and Economic Research on the Global Environment), University
of East Anglia, Norwich.
Q. When are damages likely to occur and how
satisfactory is the economic approach to dealing with costs and
benefits that are distant in time?
Cost-Benefit Analysis provides a framework to
help maximise the net benefits and efficiency of a scheme to determine
whether a policy, project or action is economically efficient.
As a rule, a project is efficient if total benefits exceed total
costs. Recent government guidance has placed greater emphasis
on the valuation of the benefits, especially long-term and non-market
benefits; within the appraisal process rather than focusing on
just the costs (HM Treasury, 2003). CBA can provide a very useful,
transparent and reliable input into the decision-making system,
making explicit the costs and benefits of a decision, provided
that it is carried out fully and impartially.
As benefits and costs are incurred across the
life time of a project and to enable valid comparisons a `discount
rate' is applied. Debate exists over the choice of discount rate,
with higher discount rates placing very little weight on the impacts
occurring in later years during the decision making process, while
low discount rates will encourage investments in all projects,
not just non-environmentally beneficial projects; resulting in
a rapid depletion of resources. Current government guidance recommends
the use of a declining discount rate in appraisals where different
discount rates are applied to different time periods over an indefinite
time period (HM Treasury, 2003). The use of a declining discount
rate is supported by empirical observations of how people actually
discount the future, the uncertainty in the future state of the
economy in terms of future consumption levels in addition to reducing
the unfair burden of social cost placed on future generations
through the use of a constant discount rate (OXERA, 2002)
Any adaptations to climate change will incur
costs in the present while the benefits are most likely to occur
in the future. A good example of the use of the cost-benefit analysis
approach to inform decision/policy makers adapting to climate
change is determining the future flood and coastal defences of
the Humber catchment. Faced with rising sea-levels and increasing
storminess resulting from climate change, the favoured policy
option is to realign the existing defences landward, creating
intertidal habitat which acts as a natural form of sea defence,
absorbing the energy of the waves and water. Thus, managed realignment
schemes generally aim to realign defences in a manner that will
not only reduce the length of defence required, but will also
increase the overall area of intertidal habitat. Furthermore,
in addition to contributing to acting as a natural sea defence,
amenity benefit is derived from these intertidal habitats; and
impacts on local and regional water quality through trapping sediment,
nutrients, carbon, and other contaminants.
In undertaking a cost-benefit analysis of the
flood defences in the Humber Estuary, all the costs and benefits
involved were assessed, however only the benefits from amenity
(taken as a composite value for a range of environmental services)
and carbon storage were valued. This conservative valuation approach
was undertaken to avoid possible double counting as the nutrient
retention function is integral to the maintenance of water quality
and biodiversity in the intertidal habitat and therefore to overall
amenity, and to combine these values would overestimate the feasible
benefits to be derived from the ecosystem. Therefore this assessment
probably represents an underestimate of the total economic value
of the managed realignment schemes. The cost-benefit equation
used in appraising managed realignment of flood defences in the
Humber is detailed below.
As with many adaptation strategies, the initial
capital costs involved in these realignment projects are considerable,
while the maintenance costs and amenity benefits occur over the
life time of the project. Following the government guidance for
flood and coastal defences (DEFRA, 2003), the appraisal period
is taken to be 100 years, reflecting the physical life of the
defences, with the use of a declining discount rate.
When compared to the present value of the costs
of an equivalent `hold-the-line' traditional defence system (CSERGE,
2005), the results showed that even with the partial valuation
of only the amenity and carbon storage benefits, managed realignment
schemes were more economically efficient than the policy of holding
the line. Furthermore, the benefits of managed realignment increased
as the appraisal time horizon was increased (25, 50 and 100 year
project time-span) and if the managed realignment approach was
extended to encompass more related stretches of coast or estuaries.
REFERENCES
CSERGE (2005) Managed Realignment: An economic
appraisal in the Humber Catchment. University of East Anglia,
Norwich. Forthcoming.
Department for Environment, Food and Rural Affairs
(DEFRA), (2003). Flood and Coastal Defence Project Appraisal
Guidance: Economic Appraisal: Supplementary Note to Operating
Authorities. REVISIONS TO ECONOMIC APPRAISAL PROCEDURES ARISING
FROM THE NEW HM TREASURY "GREEN BOOK". http://www.defra.gov.uk/environ/fcd/pubs/pagn/FCDPAG3supplementv3.pdf
HM Treasury (2003) "The Green Book"
Appraisal and Evaluation in Central Government. London: The
Stationery Office. http://www.hm-treasury.gov.uk/media/785/27/Green—Book—03.pdf
http://www.hm-treasury.gov.uk/media/54C/E8/Green—Book2—03.pdf
OXERA (2002) A Social Time Preference Rate
for Use in Long-Term Discounting. A report for ODPM, DFT and
DEFRA.
1 March 2005
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