of Restoration - Benefits
of Restoration - Overview of Benefit-Cost Analysis
Overview of Benefit-Cost Analysis
Traditional BCA | Alternative
Benefit-Cost Analysis (BCA) is a tool for organizing information
on the relative value of alternative public investments like environmental
restoration projects. When the value of all significant benefits
and costs can be expressed in monetary terms, the net value (benefits
minus costs) of the alternatives under consideration can be computed
and used to identify the alternative that yields the greatest increase
in public welfare. However, since environmental goods and services
are not commonly bought or sold in the marketplace, it can
be difficult to express the outputs of an environmental restoration
project in monetary terms.
A couple of things can be done to overcome this. Either specialized
measurement techniques must be used to estimate the value of goods
and services produced by the projecttechniques that can be
expensive and whose results can reflect a much higher degree of
uncertaintyor alternative analytical methods must be used
to allow the "apples and oranges" comparisons of monetary
costs and non-monetized outputs.
The tools associated with BCA and value estimation have been developed
to evaluate the overall economic efficiency of proposed actions,
but the efficient use of resources is only one of many important
social goals. Equity and justice are two others. For this reason,
traditional BCA or alternative tools for assessing efficiency should
not be used without also considering such factors as distributional
effects (who pays vs. who benefits) and environmental justice (disproportionate
share of negative impacts born by low-income and minority populations).
BCA analysis is commonly used to evaluate the economic feasibility
of traditional public expenditures. Harbor deepening projects, for
example, are usually evaluated using BCA since most of the costs
and benefits of the deepening alternatives can be easily expressed
in monetary terms. The costs are the monetary costs of mobilizing
and operating a dredge for the initial deepening and for future
maintenance dredging. The benefits are the transportation cost savings
that result from being able to use larger, more efficient ships
or from more fully loading the large ships that are already in use.
However, there are many complicating factors in this apparently
First, a lot of money must be spent up front to deepen a harbor,
but the benefits are realized little by little over time. That time
span must be accounted for because a dollar spent today is worth
more than a dollar received next year, even when you ignore the
effects of inflation. This principle is what economists call the
"time value of money." It reflects the fact that a dollar
received today can be invested or saved in an interest bearing account
and next year will be worth anywhere from $1.04 to $1.15 or more.
In investment decisions, the time value of money is accounted for
by using a discount
rate to put the entire stream of benefits and costs on equal
temporal footingexpressing all benefits and costs in terms
of their worth at a single point in time. Most economists agree
that the discount rate used to evaluate public investments should
be equal to the average rate of return of funds in the private sector.
In its 1999 publication, "Discounting And The Treatment Of
Uncertainty In Natural Resource Damage Assessment," NOAA's
Damage Assessment and Restoration Program explains it like this:
"Each dollar spent on assessment, emergency restoration, or
restoration represents a dollar that is not allocated to another
use. These costs are discounted at a rate that represents the productivity
of alternative uses of these funds in the economy." However,
economists do not agree on the magnitude of the "opportunity"
cost of capital--sometimes called the""social discount
rate"--or even on how it should be measured. In the interim,
most government agencies use the cost of government borrowing as
a surrogate for the social discount rate.
Second, not all the costs of harbor deepening can easily be monetized.
There are very real costs, for example, associated with the resuspension
of contaminated sediments, the use of upland sites or ocean bottom
for the disposal of materials, and the loss of marine life, such
as loggerhead turtles, during the dredging process. But even when
the expected environmental impacts of proposed alternatives are
explicitly evaluated and quantified, the costs are usually not monetized.
When they are treated separately in an environmental assessment,
their full impact may not be appropriately reflected in the final
ranking of alternatives.
Third, deep-draft navigation projects are funded in part by the
federal government and in part by a non-federal sponsorusually
a state port authority. The resulting transportation cost savings
are shared by a number of partiesport authorities; shipping
companies; U.S. producers and foreign consumers of exported goods;
and foreign producers and U.S. consumers of imported goods all share
in the cost savings. Any consideration of the goodness of the fit
between who is paying for the project and who is benefiting from
it must happen outside the framework of BCA. The distributional
effects of publicly funded projects must be considered from the
standpoints of equity and justice.
Fourth, harbor deepening can result in significant externalitiesbenefits
or costs that are not directly generated by the investment under
consideration, but that are the indirect result of that investment.
When there are significant externalities, a plan may seem cost-effective
only because project costs are passed on to someone else. Thus,
calculated benefits, costs, and benefit-cost ratios can differ significantly
from the project's true value to society.
For example, the improved
efficiency of a deeper navigation channel often induces the flow
of additional traffic as U.S. goods become more competitive in
foreign markets and foreign goods become more competitive in U.S.
markets. This induced traffic can result in externalities in the
form of uncompensated social costs associated with the added noise,
light, traffic, and pollution. These costs are as real as dredging
costs, whether they show up in declining property values or quality
of life. Either the social and environmental costs of these negative
impacts or the cost of their avoidance should be included in benefit-cost
analyses. However, they usually are not because they are hard
to predict, hard to measure, and sometimes hard to express in monetary
Finally, it is possible that many of the supposed benefits would
have occurred without public expenditures for harbor deepening.
Perhaps one of the most important and difficult components of BCA
is the definition of the most likely future without-project condition,
which forms the baseline against which all the with-project alternatives
Alternative Analytical Methods
If a correct application of BCA to a traditional civil works project
like harbor deepening is problematic, its application to environmental
restoration projects is even more so. Many outputs
of environmental restoration projectscleaner water, greater
species diversity, improved ecosystem healtharen't
commonly bought and sold in the marketplace. That doesn't
make them less valuable, but it does greatly increase the difficulty
of measuring their value and expressing it in monetary terms.
According to Orth et al. (1998), "[d]ecisions regarding potential
investments in watershed resources can leave decision makers comparing
'apples to oranges' when the costs of watershed improvements
are measurable in dollars but the benefits are not." There
are two ways to address this problem: (1) estimate the monetary
value of environmental benefits or (2) develop tools to help decision
makers compare apples with oranges. Some tools for comparing apples
and oranges will be described in the next three paragraphs.
When it's not possible or desirable to monetize the benefits
of the project alternatives that are being evaluated, as would be
needed for BCA, there are other economic tools that can help resource
managers incorporate cost considerations into decision-making. Two
of the most commonly used tools are closely related to BCACost-Effectiveness
Analysis and Incremental Analysis.
Cost-Effectiveness Analysis (CEA) is used when there are two or
more ways to achieve the same goal or to produce the same type and
level of outputs. Given some environmental goal, such as enabling
specified numbers and types of anadromous fish to pass a low dam,
CEA helps users to identify the least-costly means of achieving
that goal. When correctly applied, CEA takes into account the full
stream of project costs, including construction, maintenance, and
monitoring costs, as well as the time-value of money. Unlike BCA,
CEA cannot be used to identify optimal plans when outcomes are dissimilar
either in type or magnitude, but it does support the incorporation
of cost considerations into decision-making.
Incremental Analysis (IA) is used primarily to evaluate alternatives
that produce varying quantities of similar outputs. If, for example,
the salinity of a wetland has been altered by a series of culverts
and channel modifications, IA can be used to rank each increment
of restoration (e.g., replacing culverts and restoring altered stream
morphology) in terms of their cost-effectiveness. Like BCA and CEA,
IA takes into account the full stream of project costs and the time
value of money, and, like CEA, it does not require that the value
of outputs be monetized. Unlike CEA, it does require that the outputs
be quantified. In the example above, analysts would need an estimate
of the salinity change associated with each increment of improvement.
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Orth, K., R. Robinson, and W. Hansen. 1998. Making more informed
decisions in your watershed when dollars aren't enough. IWR
Report 98-R-1. U.S. Army Corps of Engineers, Alexandria, Virginia.
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