[Environmentl Helth nd Preventive Medicine 6, 63 73, July 2001] Review Article Cost-Benefit Anlysis Methods For Assessing Air Pollution Control Progrms in Urbn Environments A Review A. Scott VOORHEES 1, Ryoji SAKAI 1, Shunichi ARAKI 1,2, Hjime SATO 1, nd Akiko OTSU 1 1 Deprtment of Public Helth nd Occuptionl Medicine, Grdute School of Medicine, The University of Tokyo, Tokyo Abstrct The most common method of evluting beneficil impcts of environmentl policies is cost-benefit nlysis (CBA). In the present review, CBA methods for ir pollution impcts re reviewed. Three types of ir pollution effects re identified, including helth, productivity, nd menity. Mrket vlution, stted preference methods, nd reveled preference methods re identified for vluing benefits. Three types of costs re described, including privte sector costs, societl costs, nd governmentl regultory costs. A benefits vlution pproch bsed on Freemn s principls is described. A costs vlution pproch bsed on U.S. Environmentl Protection Agency nd Dixon et l. principls is described. Limittions ssocited with estimtes of benefits nd costs re summrized. Input ssumptions nd results re compred for severl existing ir pollution nlyses. The importnce of CBA in environmentl policy studies is discussed. Our conceptul pproches should be useful in nlyses of urbn ir pollution impcts nd ir pollution prevention policies. Key words: cost-benefit nlysis, urbn ir pollution, environmentl policy, benefit vlution, cost estimtion Introduction Modern cost-benefit nlysis (CBA) hs been used for the lst qurter century to estimte socil costs nd benefits, either possible or rel, of certin societl choices. It is often pplied s decision mking tool for development projects nd is lso useful in evluting policies 1). However, the use of CBA s tool for estimting environmentl costs nd benefits is reltively new nd still evolving 2 4). Present interest in this field cn be ttributed to the 1987 report Our Common Future 5) tht outlined the concept of Sustinble Development, nd reorgniztion t the World Bnk in the erly 1990 s tht estblished the Globl Environment Fcility. In the United Sttes, Presidentil Executive Orders now require ll mjor federl regultions to pss cost-benefit test before they cn be implemented. Section 812 of the U.S. Clen Air Act Amendments of 1990 stipultes tht the U.S. Environmentl Protection Agency (U.S. EPA) should consider the costs, benefits nd other effects ssocited with complince with ech stndrd issued for [ech section of the Act] 6). Severl studies hve been done to ssess costs or benefits of federl pollution policies nd progrms 7 10). Received Aug. 3 2000/ccepted Feb. 20 2001 Reprint requests: A. Scott VOORHEES Visiting Fellow, The University of Tokyo, 5109 Lnsdowne Drive, Durhm, NC 27712 U.S.A. TEL: +1(919)541-5348 (work), +1(919)382-8477 (home), FAX: +1(919) 541-5509 E-mil: voorhees.scott@ep.gov 2 Present ddress: Ntionl Institute of Industril Helth, Kwski Reserch into economic vlution techniques for use in environmentl policy decision-mking is occurring in North Americ nd in Europe. Africn, Ltin Americn nd Southest Asin countries re lso interested in this field due to the desires of development bnks nd ntionl governments to incorporte environmentl concerns into policy nd project pprisls 11). When governments require pollution, mssive expenditures by the public nd privte sectors my result. Estimtes of the economic vlue of environmentl clen up cn help nswer the question of whether diverting resources from the production of other goods nd services mkes society better off 4). The most common method of evluting environmentl impcts where benefits cn be vlued is CBA 2). The use of CBA provides n ccount of the rel costs nd benefits of environmentl policies by quntifying their environmentl effects 1). There hve been historicl developments nd disputes over the quntifiction of benefits nd costs, nmely, wht items to include nd how to clculte their importnce in the overll vlution. Though CBA bsed results re not regrded s rbitrry, decisions mde by nlysts regrding input prmeters nd ssumptions cn hve significnt bering on results. In the present review, we (1) reviewed the history of CBA for ir pollution progrms, (2) identified benefits vlution techniques, (3) ctegorized costs of ir pollution, (4) described conceptul pproches for estimting benefits nd costs, (5) compred CBA ssumptions nd results for severl existing nlyses of ir pollution in urbn res, nd (6) summrized the importnce of CBA in environmentl policy studies. 63
History The methodologicl properties of costs nd benefits nlyses include time (i.e., prospective or retrospective), pollutnt (i.e., single or multiple), type of pollution s (i.e., single or multiple), nd scle (i.e., urbn, regionl, or ntionl). A chronology of urbn- nd regionl-scle ir pollution benefits nd costs nlyses is presented in Tble 1. Such nlyses include Loehmn et l. s CBA for electric power plnts s in Tmp, Florid 12), Chestnut et l. s ir pollution benefits nlysis for led, prticulte mtter, nitrogen dioxide (NO 2 ), sulfur dioxide (SO 2 ), ozone nd crbon monoxide in Snt Clr, Cliforni 13), Chestnut nd Rowe s prticulte mtter nd ozone benefits nlysis for Denver, Colordo 14), nd Krupnick nd Portney s prospective CBA for ozone pollution s in Los Angeles, Cliforni 15). Additionl studies include Ostro s estimtes of helth impcts due to led, prticulte mtter, NO 2, SO 2, nd ozone in Jkrt, Indonesi 16), Dixon et l. s follow up nlysis of helth impcts nd medicl expenses from prticulte mtter exposure in Jkrt 3), the U.S. EPA s nlyses of the prospective costs of lterntive pollution strtegies for prticulte mtter in Phildelphi, Pennsylvni nd El Pso, Texs 17,18), Shin et l. s estimtes of the productivity impct of prticulte mtter, crbon monoxide nd led pollution levels in Bngkok, Thilnd nd other Asin cities 19), Austin et l. s nd Krupnick et l. s prospective nlyses of nitrogen oxides (NO X ) costs in the Chespeke By irshed 20,21) nd our retrospective CBA of NO 2 in Tokyo 22). A chronology of ntionl-scle ir pollution nlyses is presented in Tble 2. Ntionl nlyses include Freemn s CBA of U.S. ir nd wter pollution policies for the yer 1978 8), Hzill nd Kopp s comprison of their estimtes of socil costs from ir nd wter pollution policies to U.S. EPA s estimtes bsed on engineering dt for the yers 1975 nd 1981 1990 7), nd Portney s summry of U.S. ir pollution policy benefits nd costs for the yer 1981 compiled from other reserchers 9). Additionl studies include the Europen Commission s clcultions of helth effect externlities ssocited with ir pollution from energy production in western Europe during the erly 1990 s 23), U.S. EPA s retrospective CBA of ir pollution policies instituted under the U.S. Clen Air Act for the period 1970 1990 10), Burtrw et l. s study of the impcts of pollution s on cid rin sources in the U.S. for the time period 1995 2030 24), nd the Committee on Jpn s Experience in the Bttle ginst Air Pollution s nlysis of the costs of ling ir pollution in Jpn for the time period 1966 1995 25). These studies hve been mde either in response to existing environmentl crises in nticiption of the need for pollution policies, or to evlute pst mjor environmentl policies in these res. Benefits vlution techniques for ir pollution effects Three principl environmentl benefits vlution techniques identified in the literture re summrized in Tble 3: (1) Mrket Vlution of Physicl Effects, lso known s Techniques in Which Mrket Prices re Used to Vlue Impcts, (2) Stted Preference Methods, lso known s Contingent Vlution Methods, nd (3) Reveled Preference Methods, lso known s Techniques in Which Surrogte Mrket Prices re Used. Objective benefits vlution techniques, which use mrket prices to vlue environmentl effects, re bsed on physicl reltionships tht formlly describe cuse nd effect reltionships nd provide objective mesures of dmge resulting from environmentl chnge. Objective pproches ssume tht rtionl individuls were willing to py n mount less thn or equl to the costs Tble 1 Chronology of urbn- nd regionl-scle ir pollution nlyses Principl Investigtor Yer(s) of Anlysis Study Are(s) Pollutnt(s) Type of Anlysis Loehmn et l. (1979) lte 1970 s Tmp SO 2, PM prospective costs nd benefits of ir pollution s on electric utilities Chestnut et l. (1987) uncertin Snt Clr led, PM, NO 2, SO 2, O 3, CO prospective benefits of ir pollution Chestnut nd Rowe (1987) uncertin Denver PM, O 3 prospective benefits of ir pollution Krupnick nd Portney (1991) 1990 s Los Angeles O 3 prospective costs nd benefits of ir pollution Ostro (1994) 1990 s Jkrt led, PM, NO 2, SO 2, O 3 prospective helth impcts of ir pollution Dixon et l. (1994) 1990 s Jkrt PM prospective benefits of ir pollution U.S. EPA (1995) 2007 Phildelphi PM prospective costs of ir pollution U.S. EPA (1995) 2007 El Pso PM prospective costs of ir pollution Shin et l. (1997) 1985 Bngkok, Beijing, Bomby, Delhi, Hong Kong, Jkrt, PM, CO, led productivity impct of existing ir pollution levels Kul Lumpur, Shnghi, Tokyo Austin et l. (1997) lte 1990 s Chespeke By irshed NO X prospective costs of ir pollution Krupnick et l. (1998) 2005 Chespeke By irshed NO X prospective costs nd benefits of ir pollution Voorhees et l. (2000) 1994 Tokyo NO 2 retrospective costs nd benefits of ir pollution SO 2 =sulfur dioxide, NO X =nitrogen oxides, PM=prticulte mtter, NO 2 =nitrogen dioxide, O 3 =ozone, CO=crbon monoxide. 64
Tble 2 Chronology of ntionl-scle ir pollution nlyses Principl Investigtor Yer(s) of Anlysis Study Are Pollutnts Type of Anlysis Freemn (1982) 1978 United Sttes SO X, NO X, PM, led, O 3, CO retrospective costs nd benefits of ir pollution policies Hzill nd Kopp (1990) 1975, 1981 1990 United Sttes SO X, NO X, PM, led, O 3, CO retrospective costs of ir pollution policies compred with engineering costs Portney (1990) 1981 United Sttes SO X, NO X, PM, led, O 3, CO retrospective benefits estimtes nd costs estimtes compiled from other reserchers for ir pollution policies Europen Commission (1996) erly 1990 s Western Europe SO 2, NO X, PM helth effect externlities from existing levels of ir pollution due to electricity genertion from fossil fuel combustion, nucler fission nd renewble energy sources U.S. EPA (1997) 1970 1990 United Sttes SO 2, NO 2, PM, led, O 3, CO retrospective costs nd benefits of ir pollution Burtrw et l. (1997) 1995 2030 United Sttes SO 2, NO X prospective costs nd benefits of ir pollution s on electric utilities Jpnese Committee (1997) 1966 1995 Jpn SO X retrospective costs of pollution ; impct of pollution timing on economic efficiency SO X =sulfur oxides, NO X =nitrogen oxides, PM=prticulte mtter, O 3 =ozone, CO=crbon monoxide, SO 2 =sulfur dioxide, NO 2 =nitrogen dioxide. Tble 3 Summry of benefit vlution techniques for vluing environmentl effects Environmentl Vlution Techniques Principl Technique Methods Used in Ech Technique Ctegory Description of Method Mrket Vlution of Physicl Effects Stted Preference Methods Reveled Preference Methods uses mrket prices to ssign vlue to the physicl effects of environmentl chnge surveys people nd directly sks them their preferences observes people s ctul economic mrket choices nd indirectly drws inferences bout their preferences dose-response function dmge function production function humn cpitl/cost of illness replcement cost contingent vlution method trvel cost method vertive behvior/defensive expenditure hedonic pricing method Tble bsed on descriptions in Orgnistion for Economic Co-opertion nd Development 1) nd Dixon et l. 3). mesures physicl impcts of on environment (e.g., ir pollution on mterils dmge, crop dmge or humn helth) used to vlue productivity, helth uses dose-reponse dt to estimte economic cost of environmentl (vlues physicl effects using mrket prices of the units of output) used to vlue productivity, helth environmentl input (e.g., ir qulity) is relted to output (e.g., frm crop yields increse or decrese) used to vlue productivity estimtes cost of ill helth on worker output due to environmentl chnge (humn cpitl) estimtes medicl cost of bd helth due to environmentl chnge (cost of illness) used to vlue productivity, helth estimtes cost of dmge using costs which injured prties incur in lleviting hrm used to vlue productivity, helth sks people directly how much vlue they ssign to chnge in environmentl qulity (willingness to py for improvement or to prevent deteriortion; willingness to ccept compenstion) used to vlue helth, menity, existence vlues exmines time nd cost incurred in visiting nd enjoying nturl site s surrogte for its vlue used to vlue menity uses dt on wht people spend to protect themselves ginst ctul or potentil environmentl decline used to vlue productivity, helth ssumes the price of lnd (i.e., rel estte) reflects the qulity of the environment in which it is locted used to vlue menity incurred s result of the effect. Subjective benefit vlution methods, which use surrogte mrket prices, re bsed on ssessments of possible dmge expressed or reveled in rel or hypotheticl mrket behvior 3). Using mrket prices s mens of vluing environmentl effects ssumes tht mrket prices ccurtely reflect the vlue tht individuls in society plce on those effects, nd tht ll individuls behve uniformly in their consumption decisions. If the government provides finncil ssistnce to regulted industries, it would be inccurte to rely on mrket prices chrged by compnies for their products when clculting costs, becuse those mrket prices my not reflect the true cost of producing those products. Where the government provides subsidies or tx exemptions, or if there re price nd quntity s, the mrket price understtes the true cost by n mount clled the shdow price 11). Using surrogte mrket prices s vlution tool ssumes tht mrket prices do not or could not ccurtely reflect the vlue tht individuls plce on environmentl effects, nd ssumes tht 65
ll individuls do not behve uniformly in their consumption decisions. Surrogte mrket prices re identified by ssessing stted or reveled mrket behvior. Stted mrket behvior relies on constructing hypotheticl mrkets for vrious options to reduce environmentl dmge, nd then uses surveys to sk people directly to express how much they would be willing to py for n improvement in environmentl qulity or wht they would be willing to ccept for loss of environmentl qulity. Reveled mrket behvior relies on observtion of people s ctul mrket behvior nd then mkes indirect inferences bout their preferences 1,3). Ctegorizing costs of ir pollution As outlined in Tble 4, costs ssocited with implementing environmentl policies re divided into three economic sectors, including privte sector costs, societl costs, nd governmentl regultory costs 3,26). The costs incurred by the privte sector include direct nd indirect costs. There re two types of direct costs, cpitl costs nd operting costs. Cpitl costs include expenditures for fcilities nd equipment, s well s chnges in production processes tht reduce or eliminte pollution genertion. Cpitl costs re mortized over time, becuse such costs re incurred in short period of time, but provide pollution benefits over longer time frme. Amortized cpitl costs represent the rel resource costs of tying-up funds in the purchse nd instlltion of cpitl equipment or other fixed ssets required by environmentl regultion. Operting costs consist of ll costs nd expenses for the opertion nd mintennce of pollution processes, including spending for mterils, equipment lesing, prts nd supplies, direct lbor, fuel nd power, services provided by privte contrctors, nd reserch nd development. In multi yer nlyses, nnul costs include the operting costs for the yer in question plus one yer s mortized cpitl costs 26). In ddition to direct costs, the privte sector incurs indirect costs (lso known s second order effects or opportunity costs ) from pollution requirements. Indirect costs exist for regulted industries nd lso for the privte sector s whole. In the cse of regulted industries, fctory my decrese its overll production if it diverts cpitl to purchse nd operte pollution equipment, it my chrge higher price for its outputs of goods nd services when it hs to py for pollution, or it my ly off employees when it uses some of its resources to py for pollution. For the privte sector s whole, environmentl regultions will result over time in mcroeconomic impcts due to shifts in economic ctivity between industries, including chnges in distributions of lbor, cpitl, nd other production fctors within the economy, nd chnges in the distribution of goods nd services 10). Society lso incurs opportunity costs, defined s the forgone income from other uses of resource which cnnot be relized becuse the resource ws used to comply with environmentl regultions 3). The costs for ntionl nd locl regultory gencies consist of the portion of governmentl gency budgets devoted to implementing nd overseeing environmentl progrms, including personnel, contrcts, nd finncil ssistnce to regulted businesses. Conceptul frmework of cost-benefit nlysis in urbn ir Estimting benefits nd costs of ir pollution for urbn res cn be divided into three components. First, the impcts of ir pollution re estimted, then the benefits re estimted, nd the costs re clculted. There re two types of nlyses used to evlute the temporl reltionship between pollution nd its impcts, prospective ( ex nte ) nd retrospective ( ex post ). There re two scenrios used in ex nte nlyses, no- nd. In no- ex nte nlyses, the impcts of ir pollution re bsed on rel ir pollution levels, the benefits consist of the expenditures for pollution equipment tht industry is not pying, nd the costs consist of the vlue of ctul medicl expenses tht society is pying while exposed to pollution. On the other hnd, in ex nte nlyses, the impcts of ir pollution re bsed on hypotheticl future clen ir, the benefits consist of the vlue of potentil medicl expenses tht society would not py in the future if it were not exposed to pollution, nd the costs consist of the potentil expenditures for pollution equipment tht industry would py in the future. In ex post nlyses, the impcts re bsed on hypotheticl ir pollution tht ws prevented by ir pollution policies in the pst, the benefits consist of Tble 4 Costs of ir pollution Economic Sector Type Ctegories of Costs Specific Cost Items Privte Industry Direct-Cpitl Expeditures for fcilities nd equipment Chnges in production processes Direct-Operting Opertion nd mintennce of equipment/processes Mterils Equipment lesing Prts nd supplies Direct lbor Fuel nd power Contrctor services Reserch nd development Indirect-Regulted Industries Decresed production Incresed product prices Employee lyoffs Indirect-Other Industries Chnges in distribution of lbor, cpitl, other production fctors Society Indirect Forgone income Government Direct Personnel Contrcts Finncil ssistnce Derived from U.S. EPA 10,26) nd Dixon et l. 3). 66
the vlue of those potentil medicl expenses tht society did not py becuse it ws not exposed to pollution, nd the costs consist of the ctul expenditures for pollution equipment tht industry pid. Both ex nte nd ex post nlyses cn be thought of s comprtive in nture. Prior to the implementtion of regultion, it my be informtive to policy mkers to compre the benefits of no- (i.e., voided equipment expenditures by industry), with the costs of no- (i.e., medicl cre expenditures by citizens). Both before nd fter the implementtion of regultion, it cn be illustrtive to clculte the benefits of (i.e., voided medicl cre expenditures by citizens) nd compre them with the costs of (i.e., equipment expenditures by industry). The distinction between ex nte nd ex post nlyses is temporl in nture. Depending on the timing of the nlysis, costs of no- cn be considered to be synonymous with benefits of, nd benefits of no- cn be considered to be synonymous with costs of. Ostro proposed four step process for estimting pollution impcts in n ex nte nlysis of Jkrt, Indonesi: (1) estimte the dose-response function, (2) multiply the slope of the doseresponse function by the exposed popultion, (3) estimte the chnge in ir qulity, nd (4) clculte the economic vlue of the predicted helth effects 16). Ostro s process ws chosen by Dixon et l. s cse study for how benefits nlysis should be conducted for ir pollution impcts, nd they crried the nlysis further by estimting the dollr vlue of reducing ir pollution 3). Winpenny included similr steps for clculting environmentl effects: (1) determine emissions, (2) estimte ir concentrtion, (3) estblish dose-response functions, (4) define the popultion t risk 2). The U.S. EPA pplied seven step pproch in its ex post CBA study of the Clen Air Act. Step 1 ws the estimtion of direct costs nd Step 2 ws the modeling of mcroeconomic impcts. Steps 3 through 6 were the benefits estimtion steps. Step 3 ws the modeling of ir pollutnt emissions. Step 4 ws the modeling of ir qulity, the identifiction of mbient monitoring dt, nd the estimtion of no- concentrtions of ir pollution. Step 5 ws the use of nd no- ir qulity dt in combintion with dose-response functions to estimte helth nd environmentl effects. Step 6 ws the estimtion of the economic vlue of chnge in the incidence of dverse effects. Step 7 ws the ggregtion of results nd uncertinty chrcteriztion 10). In either cse, the core components re the sme, which emphsizes the reltively stright forwrd nture of the CBA process. By ppliction of these steps, the following four sections describe procedures for identifying criticl benefit nd cost components nd outline some of their limittions. Frmework for benefits vlution According to Pul Portney of Resources for the Future, A. Myrick Freemn s 1979 text The Benefits of Environmentl Improvement: Theory nd Prctice ws considered the definitive reference on environmentl benefit estimtion for mny yers, nd becme the de fcto stndrd for use in pplied cost-benefit nlyses of environmentl regultory ctions 4). Freemn s model of environmentl nd resource vlution in his updted text The Mesurement of Environmentl nd Resource Vlues: Theory nd Methods serves s the bsis for conceptul benefits vlution pproch. His model is bsed on the premise tht the environment is resource which provides services tht cn be vlued. For exmple, ir provides oxygen so humns nd other nimls cn survive, crops cn grow, nd industry cn operte. It lso provides sink for by-products of the economy, including plce for industry to dischrge wste, plce for humns to exhle, nd vegettion to relese oxygen. Freemn described three functionl reltionships tht llow for thorough nlysis of benefits. He referred to these reltionships s some mesure of environmentl or resource qulity [relted] to the humn interventions tht ffect it, the humn uses of the environment or resource nd their dependence on [the qulity of the resource], nd the economic vlue of the uses of the environment 4). As pplied specificlly to ir pollution, these reltionships cn be expressed in the form of three questions: (1) How re levels of ir pollution ffected by humns? (2) Wht re the effects of ir pollution? (3) Wht is the economic vlue of the effects of ir pollution? 22). The first question reltes ir qulity to those humn ctions tht ffect it. When the government imposes environmentl restrictions on sources of pollution, industries respond by ltering their opertions to comply with the new requirements. The effect on ir qulity of chnge from not regulting ir pollution to regulting ir pollution depends on the privte sector response. Not ll regulted industries my ccept legl requirements eqully, but clerly, s the degree of complince with n environmentl policy rises, ir qulity improves. In other words, the qulity of ir is ffected by environmentl regultions, pollutnt emissions, nd of those emissions. The second question concerns the effects of ir pollution. Bsed on Freemn s clssifiction of environmentl effects, three seprte systems use ir: humn systems, ecosystems, nd nonliving systems 4). The level of ctivity involving ir is dependent on the qulity of tht ir fter the inputs of lbor (e.g., the efforts people mke to protect themselves from dirty ir), cpitl (e.g., money spent to clen up ir tht is not pure enough, money spent to relocte wy from polluted re) nd other resources, such s time (e.g., time spent trveling to loction to exercise or work where the ir is clener). The people, plnts, nimls or nonliving things tht re potentilly ffected re considered to be the susceptible popultions, or subjects t risk, nd the effects on those subjects cn be divided into three ctegories: helth, productivity nd menity 1). For exmple, in humn systems, the effect of ir pollution on citizen s helth is considered to be helth effect. The effect on worker s work output is considered to be productivity effect. The effect on noise or odor levels on person s mentl or physicl well-being is considered to be n menity effect. The third question concerns the economic vlue of the effects of pollution in society tht result from using the ir resource. Vlue is expressed in monetry terms bsed on wht the society considers those effects to be worth. Limittions of estimting benefits The effects of ir pollution tht re most menble to mrket vlution include humn helth effects nd productivity effects (e.g., work output, crop yield, fishing yield, dmge to industril equipment nd soiling). Amenity effects, including visibility, odor nd noise, re the most menble to surrogte mrket vlution using either contingent vlution or hedonic pricing. Ecosystem helth, however, typiclly does not hve mrket vlue, nor cn it be redily vlued with surrogte mrket prices since people s behvior is difficult to link to ny preference for helthy nturl 67
ecosystem over n unhelthy one. Mterils dmge cn be ssigned mrket-bsed vlue using combintion of dose-response function followed by dmge function, but often is unquntified due to the bsence of dose-response functions. Likewise, nturl ecologicl impcts which my occur cnnot be vlued without relevnt dose-response functions. Avertive behvior (e.g., reloction by sthmtics to void brething polluted ir) nd defensive expenditures (e.g., purchse of ir purifiction mchines for clen indoor ir) re lso difficult to isolte nd quntify given the dt tht re typiclly vilble for n urbn re. Both require surveys tht demnd the use of resources nd time beyond the scope of most nlyses. Economic externlities consist of those benefits of resource which re not sold s mrket products, but which hve inherent vlue 3). Benefits estimtes should ttempt to vlue the importnce of ir to nturl ecosystems nd its importnce to the productivity of industries, frms nd forests. However, it is often not possible to quntify those benefits due to lck of sufficient dtbse of ecosystem helth nd ecosystem/nonliving system productivity effects to develop dose-response functions. In our previous Tokyo study, we ssumed tht chnges in emissions of NO X resulted in the sme level of chnge in ir concentrtions of NO 2. This ssumption ws lso used by the U.S. Environmentl Protection Agency in its ntionl ex post nlysis. The U.S. gency noted tht chnges in ir qulity were treted s proportionl to estimted chnges in emissions becuse, for NO X, chnges in mbient concentrtions in prticulr re re strongly relted to chnges in emissions in tht re 10). Sensitivity nlysis performed in our previous study indicted tht the use of different ssumptions for NO X emissions would hve ffected our benefits clcultions nd our costs clcultions more thn ny other input vribles. Regrding benefits, if we hd pplied n lterntive ssumption of NO X emissions from motor vehicles, which would then impct our estimtes of NO 2 concentrtions, the benefits estimte would hve been reduced by 35%. Likewise, our cost estimtes could hve incresed drmticlly by 420% or decresed by 16% if the upper nd lower bounds of our rnges of emission volumes emitted by fctories nd other sttionry sources were ssumed respectively, rther thn the midpoint 22). Frmework for costs vlution The U.S. EPA s cost document Environmentl Investments: The Cost of A Clen Environment 26) ws the bsis for U.S. EPA s ex post CBA of ntionl ir pollution progrms for the United Sttes 10). Dixon et l. s costs procedures in Economic Anlysis of Environmentl Impcts re used by the Asin Development Bnk nd the World Bnk for nlysis of environmentl impcts 3). Bsed on the U.S. EPA nd Dixon et l. references, eleven dt items re identified s importnt to estimte costs. (1) Environmentl regultions defines the stringency of. (2) Extent of coverge by regultions defines the types nd percentges of pollution sources tht re ultimtely required by the regultions to dopt pollution s. (3) Degree of complince with regultions defines the number of sources tht re complying with the regultions. (4) Types nd numbers of sources/motor vehicles in the study re defines how mny sources nd motor vehicles there re in the study re. (5) Air pollution technologies defines the types of technologies used to ir pollution. (6) Percentges/numbers of sources/motor vehicles with s instlled identifies the type nd number of sources nd motor vehicles whose dedline for using methods hs lredy pssed. (7) Cpitl nd operting costs of pollution technologies defines the costs of purchsing, instlling, operting nd mintining ech type of equipment. (8) Direct pollution costs for sources/motor vehicles in the study re defines the direct costs for sources in the study re. (9) Indirect costs for sources/motor vehicles nd the mcroeconomy defines indirect costs for sources, motor vehicles nd the mcroeconomy. (10) Societl opportunity costs defines the ripple effects of regultions on society. (11) Ntionl nd locl government costs defines the costs incurred by governmentl regultory gencies. Limittions of estimting costs Relince on engineering costs hs been criticized becuse cpitl nd operting expenses lone do not ccount for dynmic nd generl equilibrium impcts of regultion. Rther, costs should be mesured by the mount of money required to compenste individuls for unfvorble effects ssocited with regultory policies nd which leve those individuls no worse off fter the policy thn they were before the policy ws implemented 7,9,15). Due to the bsence of dt, our previous study in Tokyo ws not successful in estimting the indirect costs incurred by regulted industries. The EPA noted tht indirect (i.e., second-order) benefits were excluded from its benefits clcultion, nd the resulting CBA included comprison of only direct costs nd direct benefits. This decision ws supported by EPA s externl review pnel of scientists nd economists 10). Our previous study ws lso unble to clculte the indirect mcroeconomic costs resulting from regultions. A computer simultion model would hve been needed to derive these impcts. In discussing mcroeconomic costs in its ntionl-scle CBA, the EPA hs noted tht mcroeconomic modeling provides informtion on mcroeconomic costs but not on mcroeconomic benefits, nd concluded tht estimted second-order mcroeconomic effects were smll reltive to the size of the U.S. economy 10). Comprison of CBA ssumptions nd results In clculting the benefits nd costs s described in the frmework bove, the choice of ssumptions nd inputs cn substntilly ffect the resulting benefits nd costs vlutions. Dt of importnce include helth effects nd durtion, medicl costs nd wges, nd in prticulr pollutnt emission volumes nd ir concentrtions. Sufficient ttention should be given to these ssumptions when reding, compring, or pplying CBA cross pollutnt, loction, nd time. Different pollutnts produce differing impcts with vrying degrees of severity depending on exposure concentrtion nd durtion. Benefits nd costs reflect locl (domestic) prices, nd ny cross-culturl comprison should ddress possible bises. Time discounting my be necessry, s in the cse of compring options for future policy chnges when the time horizons for both the imposition of the costs nd the enjoyment of the benefits re mesured in yers. The use of discounting techniques including net present vlue, internl rte of return, or benefit-cost rtio is criticl to the proper incorportion of the trde-off between present nd future consumption, known s time preference 3). Durtion of illness, medicl costs nd lost wge costs Herein, we compred the ssumptions nd results of vrious 68
ir pollution-relted CBA from the literture. As shown in Tble 5, Dixon et l. ssumed 2 weeks per episode, irrespective of pollutnt, for durtion of lower respirtory illness in children, bsed on cost of illness 3) nd we ssigned 2 to 3 dys durtion per incidence for phlegm in dults nd lower respirtory illness in children bsed on cost of illness 22). Dixon et l. ssumed $210 per cse for lower respirtory illness in children using cost of illness 3) nd we ssigned men vlue of $210 in medicl costs per incidence bsed on cost of illness 22). Medicl expenses in Tokyo would tend to be higher thn expenses in most other world megcities due to the reltively high cost of living. We ssumed $320 to $480 per incidence in lost wges in dults using humn cpitl vlution 22). Using humn cpitl vlution, Dixon et l. ssumed either $116 or $232 in lost wges by prents for lower respirtory illness in children bsed on the ssumption of two Restricted Activity Dys (RAD) per prent for cre per episode, vlued t $58 for ech RAD 3). We ssumed $200 to $310 in lost wges for prentl cre per episode of lower respirtory illness in children using humn cpitl vlution 22). Kenkel s vlues 27), which were bsed on pre-1994 cittions in the literture, were lower for disese durtion, medicl cost, nd lost wges. In our previous study, our durtion of illness nd medicl costs were bsed on men vlues from ctul outptient cses for tretment of pollution-relted helth impcts in Tokyo over one month period in 1995 (n=15,239) 28). Likewise, our wge rtes were specific to Tokyo. Using site-specific informtion on illness durtion, medicl expense, nd wges is preferble when vilble. Dixon et l. 3) indicted tht [e]conomic costs for chnges in morbidity re, of course, very country-specific. We recommend the use of region-specific dt where vilble; otherwise, generic vlues cn be used, such s those cited by Kenkel 27), cknowledging tht medicl costs nd wges hve risen in the intervening yers since Kenkel s work ws published. For durtion of illness, which cn vry widely depending on the severity of the helth effect being evluted, we suggest including scenrio in sensitivity nlysis which ssumes resonble durtion different from the defult vlue. Per-person work loss dys As shown in Tble 5, we estimted the hypotheticl number of work loss dys (WLDs) per person in 1994 for workers s 4.7 nd for working mothers s 0.61 22). Work Loss Dys re defined s the excess number of dys tht illness or injury prevent n individul from working. We were unble to identify ny other nlyses tht estimted WLDs for NO 2 exposure. However, Shin et l. estimted totl nnul WLDs in severl Asin cities due to existing prticulte levels nd we clculted their per-person equivlents to rnge from 1.1 WLDs in Kul Lumpur to 4.5 in Bngkok. Shin et l. lso estimted the number of Restricted Activity Dys (RADs) in one yer, which is defined s WLDs plus dys where ctivity ws restricted but the person works nywy 19). We derived per-person equivlents, including 8.7 dys (Bngkok), 7.3 dys (Beijing), nd 4.4 dys (Shnghi). Kenkel, Dixon et l., Ostro, nd Shin et l. ll cited U.S. cohorts for helth effects dt. As noted bove, in our previous study we relied on the verge durtion of illness vlue cited for cses of pollution-relted illness in Tokyo. We pplied ctul demogrphics dt on the number of workers nd dt from survey of working women in Tokyo to clculte work loss dys. Even though per-person work loss dys cn be compred cross nlyses to vlidte the resonbleness of given study s results, ech nlysis is obviously unique to some extent. Pollutnt type, concentrtion nd doseresponse functions, nd thus the clculted per-person work loss dys, will vry depending on the region being nlyzed. Nonetheless, given the similr results which we predicted compred to Tble 5 Comprison of cost-benefit nlysis of nitrogen dioxide nd ir pollution benefits in vrious cities Principl Investigtor (yer) Pollutnt Trget Illness Study City Avoided Incidence of Illness Illness Durtion of Per Cpit men (LL, UL) b Medicl Costs Lost Wges - Lost Wges - Work Loss Per Incidence Workers Per Mothers Per Dys Per men (LL, UL) b Incidence Incidence Cpit men (LL, UL) b men (LL, UL) b men (LL, UL) b Ostro et l. (1994) d NO 2 respirtory symptoms Jkrt 0.20 (0.12, 0.28) TSP respirtory Jkrt 5.2 (2.6, 7.9) symptoms TSP sthm Jkrt 0.078 (0.039, 0.66) Dixon et l. (1994) e TSP respirtory Jkrt 3.4 symptoms TSP sthm Jkrt 0.052 TSP LRI c Jkrt 0.012 2 weeks $210 $116 or $232 Kenkel (1994) f not specified ll respirtory diseses 4.1 dys $87 $56 Shin et l. (1997) g TSP Kul Lumpur 1.1 TSP Beijing 3.7 TSP Bngkok (0.81, 4.5) crbon monoxide ftigue & hedches Bngkok 0.40 (0.024, 0.060) Voorhees et l. ($320, $480) ($200, $310) 4.7 (4.4, 5.0) (2000) h 2 $240) LRI c 0.33 (0.30, 0.35) 0.61 (0.56, 0.66) NO 2 =nitrogen dioxide, TSP=totl suspended prticultes b LL=lower limit, UL=upper limit c LRI=lower respirtory illness d Ostro 16) e Dixon et l. 3) f Kenkel 27) g Shin et l. 19) h Voorhees et l. 22). 69
Shin et l., it would be resonble to ssume 2 or 3 dy loss of work per cse of illness due to unled ir pollution, if sitespecific dt on work loss dys re not vilble. Per-person illness incidence Our estimted numbers of voided helth cses in Tokyo were derived by multiplying the slope of the dose-response function times exposed popultion times exposure concentrtion. The resulting numbers of voided cses of phlegm in dults nd lower respirtory illness in children (30 million nd 3.8 million respectively), were then divided by the 1994 popultion of 11.6 million. As shown in Tble 5, our per person estimtes of voided phlegm in dults in 1994 ws 2.6 nd for lower respirtory illness in children ws 0.33 22). There is derth of reserch into the incidence of NO 2 -relted illness on urbn popultions. Ostro ws the only resercher we identified who hs estimted the number of cses of phlegm due to NO 2 exposure within specified urbn popultion. Applying the sme Schwrtz nd Zeger 29) doseresponse function for phlegm in dults s we did, he estimted the impct of reducing NO X levels in Jkrt from their estimted nnul verge vlues of 50 350 g/m 3 (0.025 0.175 ppm) bsed on dispersion modeling of emissions, to proposed Indonesin stndrd of 100 g/m 3 (0.05 ppm). His concentrtion isopleth mpping showed most of Jkrt with nnul verge concentrtions of 100 g/m 3 (0.05 ppm) or less nd two smll res with concentrtions between 300 nd 350 g/m 3 (0.15 0.175 ppm), nd his estimtes of voided incidence of phlegm in dults were 1.77 million 16). Assuming popultion of 9 million, we converted this to per-person incidence of 0.20. The principl reson why the results in our study were higher ws becuse of much broder re of hypotheticl high NO 2 concentrtions in Tokyo. Although our highest estimte of no NO 2 concentrtion (0.15 ppm) ws predicted t only one site, ll but three of our 87 wrd nd city monitoring sites throughout Tokyo were clculted to hve no-pollution- nnul verge concentrtions bove 0.05 ppm nd 31 of those sites were estimted to hve concentrtions t or bove 0.1 ppm. Our perperson incidence rtes were bsed on wrd nd city specific popultion nd concentrtion dt, unlike Jkrt s rtes which were bsed on city-wide dt nd thus diluted by popultion in low pollution prts of the city. If more geogrphiclly specific vlues were provided within vrious prts of Jkrt, we would hve estimted higher per-person incidence in the inner city high concentrtion zones. A second possible explntion for our higher incidence results ws our use of n verge NO 2 monitored concentrtion in Tokyo cities (n=29) for eight of the cities, out of 27 cities in totl, which hd no monitoring dt. Ostro estimted the impct of reducing TSP levels in Jkrt from their estimted nnul verge vlues of 50 350 g/m 3 bsed on dispersion modeling of emissions, to Cliforni stndrd of 55 g/m 3. His concentrtion isopleth mpping showed most of Jkrt with nnul verge concentrtions of 100 g/m 3 or less, with one re with concentrtions between 300 nd 350 g/m 3, nd three res with concentrtions between 200 nd 300 g/m 3. His estimtes of voided incidence of respirtory symptoms in dults were 47 million nd 705,000 cses of sthm ttcks 16). Assuming popultion of 9 million, we converted this to perperson incidence of 5.2 for respirtory symptoms in dults nd 0.078 for sthm ttcks. Using Dixon et l. s estimtes of voided illness due to exposure to prticultes in Jkrt bsed on doseresponse functions 3), we clculted per-person rtes of 3.4 fewer cses of respirtory symptoms, 0.052 fewer sthm ttcks, nd 0.012 fewer cses of lower respirtory illness. Using Shin et l. s estimtes of illness due to exposure to current levels of crbon monoxide in Bngkok bsed on dose-response functions 19), we clculted per-person rte of 0.40 cses of excess ftigue nd hedches. In our previous study we pplied ctul demogrphics dt on the number of dults nd children nd site-specific ir concentrtions dt. Even though per-person illness incidence cn be compred cross nlyses, ech nlysis is obviously unique to some extent. Pollutnt type, concentrtion nd dose-response functions, nd thus the per-person illness incidence, will vry depending on the region being nlyzed. Given the reltively high illness incidence which we clculted, cution should be exercised in the estimtion of unled pollution levels, which hs direct impct on the estimtion of dverse helth impcts. If unled pollution levels reflect current ctul conditions, clerly the potentil for over-estimtion is less thn if unled pollution must be estimted in loction where pollution hs lredy been reduced. Control cost-effectiveness of NO X As shown in Tble 6, the cost effectiveness of NO X in our Tokyo study, expressed s dollrs per ton of NO X emissions led ws pproximtely $1,400/ton for motor vehicles, $21,000/ton for ll NO X sources, nd $91,000/ton for sttionry sources 22). This compres to $5,600/ton from motor vehicles in Virgini 20), $26,000/ton from ll NO X sources in the Chespeke By Airshed 21) nd $4,500/ton from ll non-utility sttionry sources in the Chespeke By Airshed 21). The high vlue tht we clculted for sttionry sources might hve been lower if the NO X equipment lso led other pollutnts, thus llowing the costs to be pportioned mong the led pollutnts. However, the types of s used for NO X do not typiclly reduce other pollutnts, especilly for combustion processes 30). In our previous study, we pplied ctul site-specific NO X costs dt in Tokyo. Even though cost-effectiveness cn be compred cross nlyses, ech nlysis is unique to some extent. Cost of, fuel use nd size of fctories, nd thus cost-effectiveness, will vry depending on the region being nlyzed. However, our extensive use of site-specific cost dt nd the similrity with other reserchers in our cost-effectiveness vlues for motor vehicles nd ll NO X sources combined, suggests tht our cost vlues re not too dissimilr from other studies, nd my hve utility in future nlyses of other urbn loctions if site-specific dt re not vilble. Rtio of benefits to costs of NO X As shown in Tble 6, in our Tokyo study of NO 2 exposure, our best estimte of benefits exceeded the costs by rtio of pproximtely 6 to 1 22). In Krupnick et l. s study of NO X from ll NO X sources in the Chespeke By irshed to void ozone effects plus protection of the qutic ecosystem 21), the benefits-to-costs rtio rnged from 0.07:1 to 0.8:1. The helth effects which they vlued using willingness to py were due to ozone exposure. This is reflection of differing politicl decisions between of NO X to reduce ozone levels in the United Sttes nd the of NO X to reduce mbient NO 2 in Jpn. 70
Tble 6 Comprison of cost nd benefit-cost rtios for NO 2 in vrious urbn res Principl Investigtor (yer) Pollutnt Study Are Sources Controlled Cost Effectiveness of Pollution Control ($1,000/ton of NO X led) men (LL, UL) b Benefit-Cost Rtio men (LL, UL) b U.S. EPA (1995) NO X Phildelphi ll NO X sources 5.4 U.S. EPA (1995) NO X El Pso ll NO X sources 5.6 Austin et l. (1997) NO X Northern Virgini c motor vehicles 2.7 Virgini d motor vehicles 5.6 Krupnick et l. (1998) NO X West Virgini e ll NO X sources (0.24, 1.5) (0.07:1, 0.8:1) Chespeke By irshed f sttionry NO X sources (2.1, 4.5) Chespeke By irshed f ll NO X sources (17, 26) Voorhees et l. (2000) NO X Tokyo motor vehicles 1.4 (1.3, 1.5) 6:1 (0.3:1, 44:1) ll NO X sources 21 (19, 23) sttionry NO X sources 91 (84, 98) NO X =nitrogen oxides, SO 2 =sulfur dioxide. b LL=lower limit, UL=upper limit. c Includes the cities of Arlington, Alexndri, Reston, McLen nd others. d Includes the cities of Northern Virgini plus Richmond, Norfolk, Lynchburg, Chrlottesville, Ronoke nd others. e Includes the cities of Chrleston, Wheeling, Huntington, Prkersburg, nd others. f Includes the mjor cities of the United Sttes est cost, including Boston, New York City, Phildelphi, Wshington, D.C., Richmond nd Atlnt, plus midwestern cities such s Pittsburgh, Detroit, nd Clevelnd. Krupnick et l. did not vlue lost productivity s benefit, which my explin why their benefits/costs rtio ws n order of mgnitude below ours. In Burtrw et l. s study of NO X nd SO 2 from electric utilities to void premture mortlity, improve morbidity nd visibility, benefit-cost rtio of pproximtely 7:1 ws reported. They included dose-response functions for prticultes, SO 2, NO 2 nd nitrtes. They included eye irrittion nd phlegm for NO 2 24). They estimted premture mortlity due to prticulte exposure, impcts on visibility nd recretionl fishing, plus estimtes of morbidity from severl pollutnts, which would explin reltively high benefits estimte. However, it ppers tht lost productivity ws not vlued, nor did they vlue helth impcts in children, which would led to n underestimte of benefits. Finlly, their study ws focused on power plnts lone, rther thn the complete universe of NO X emission sources ssessed in our Tokyo study. This would either led to higher or lower rtio of benefits to costs thn complete NO X source inventory ssessment. Thus, this lrge disprity cross pst studies cn be ttributed, t lest prtly, to the ssumptions nd methodologies used by the respective reserchers. The choice of ssumptions used in CBA cn impct the outcome significntly. In our previous Tokyo study, for exmple, pplying n lternte ssumption of unled pollutnt emissions decresed our benefits estimte by 35%. Assuming shorter durtion of bsenteeism from work by employees decresed our benefits by 30%. Including different types of helth effects incresed our benefits by 200% 22). Applying site-specific input dt should be primry gol of CBA where fesible. This is importnt especilly for dt tht vry widely cross cultures, such s medicl costs nd wges. If such dt re lcking for the study re, stndrd of living djustment fctor should be pplied, or the potentil bis should be quntified in sensitivity nlysis. Dose-response functions re rrely vilble for non-united Sttes cohorts. The use of U.S. helth effects dt in developing country context my introduce significnt bis due to mjor differences in fctors such s bseline helth sttus, ccess to helth cre, nd occuptionl exposure 3). Given these cvets, CBA is nonetheless vluble tool to evlute environmentl policy options. In the next section we summrize some importnt fetures of this nlyticl procedure. Importnce of CBA in environmentl policy studies In conducting CBA studies, we need set of relible dt, s well s number of ssumptions which cn be scientificlly justifible. If relible dt nd justifible ssumptions re used, completing CBA cn perform severl vluble functions in evluting environmentl policies. A necessry first step is identifying the severity of existing helth impcts in polluted res. Such informtion cn be powerful mens of convincing policy mkers tht some effort should be tken to clen up the ir or wter. Ostro predicted significnt reductions in mortlity nd morbidity if Jkrt s prticulte mtter, led nd NO 2 concentrtions were lowered to World Helth Orgniztion stndrds 16). Shin et l. estimted hundreds of deths, millions of work loss dys nd restricted ctivities dys in Asin cities tht could be voided if existing levels of prticulte mtter were reduced to United Sttes ir qulity stndrds 19). In our previous study we reched the conclusion tht pst NO 2 ir pollution policies in Tokyo were economiclly very effective, with benefit-cost (B/C) rtio of 6 to 1. This is one importnt use of CBA, nmely to scertin if pst environmentl policies were economiclly worthwhile. Freemn reched the sme conclusion in his ntionwide nlysis, while t the sme time pointing out tht sttionry source pollution s showed higher B/C rtio thn s on mobile sources 8). A second importnt use of CBA is to evlute future s to provide informtion to policy mkers in order to inform their decisions. Krupnick nd Portney found tht the costs of future s to reduce ozone concentrtions would exceed the benefits 15). Burtrw et l. estimted tht the future benefits of reduced mortlity nd morbidity, nd improved visibility, would exceed the costs 24). More sophisticted pplictions of CBA llow for preferentil decisions regrding lloction nd identifiction of 71
externlities. Austin et l. completed cross-medi nlysis of ir nd wter pollution s nd mde recommendtions for cost-effective lloction of s long geogrphic lines or ccording to preferences for ir versus wter qulity improvement 20). Krupnick et l. reviewed existing s of NO X in the Chespeke By irshed nd reched the conclusion tht the costs of reducing emissions could be lowered by rellocting emission reductions bsed on type of source nd lso on geogrphic loction 21). Finlly, the Europen Commission ssessed the mrginl environmentl costs of energy production nd identified key externlity issues to be ddressed in future policy 23). Closing remrks Numerous urbn re nd ntionl scle studies hve nlyzed costs nd benefits of ir pollution nd pollution. Conducting thorough CBA requires n estimte of impcts on helth, productivity, nd menities. With this informtion, it is then possible to estimte the benefits nd costs of either polluted ir without pollution, or clen ir with pollution s. Most nlyses re prospective nd provide estimtes of wht the benefits nd costs would be if future regultory ctions were tken. Very few nlyses re retrospective nd provide estimtes of the benefits nd costs of regultory ctions in the pst. Herein, we described the historicl bckground of CBA, summrized existing benefits nd costs methodologies, nd proposed conceptul pproch for CBA in n urbn setting, bsed on our experience in CBA of the Tokyo metropolitn re. Much ttention should be pid in reding nd pplying CBA studies, since the choice of ssumptions nd inputs cn ffect the results, especilly for emissions volumes, ir concentrtions, helth effects nd durtion, medicl costs, nd wges. If ssumptions re fully described nd the bounds of vribles re quntified in sensitivity nlyses, CBA cn be powerful tool for ssessing both pst nd future policy choices nd preferentilly llocting pollution s or identifying externlities. Acknowledgments The uthors thnk Mr. Steve Hitte, Mr. Bob Kellm nd Mr. Tom Currn t the U.S. EPA. The uthors lso thnk Mr. Sng Hwoi Prk of the Deprtment of Public Helth nd Occuptionl Medicine t the University of Tokyo, Mr. Hismitsu Bb of the Bureu of Environmentl Protection in the Tokyo Metropolitn Government (TMG), Director Tsuneo Ngok, M.D., of TMG Helth Deprtment, Deputy Chirmn Tkeshi Hsegw, Ph.D., of Tokyo Metropolitn Reserch Institute for Environmentl Protection, Chief Noto Aoki, M.D., of Tokyo Metropolitn Reserch Lbortory of Public Helth, Mr. Kiwmu Ngoshi, Ms. Fusko Nishikw, Mr. Mnbu Kubot, Mr. Ktsunori Hirokne, nd Mr. Hirotk Tchikw of the Jpn Environment Agency, nd Seiichi Nkmur, M.D., of Tokyo Metropolitn Hiroo Hospitl for providing dt nd comments. References 1) Orgnistion for Economic Co-opertion nd Development. The Economic Apprisl of Environmentl Projects nd Policies: A Prcticl Guide. Pris: Orgnistion for Economic Co-opertion nd Development, 1995. 2) Winpenny JT. 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