2017 Conference - Session 2

Session 2 - Thursday, March 16, 10:45 - 12:15am

A.2: Assessing Approaches to Updating the Social Cost of Carbon (Roundtable)

Chairs: Casey Wichman and Richard Newell, Resources for the Future

The social cost of carbon dioxide (SC-CO2)—the present discounted value of the net damages caused by a 1-metric ton increase in carbon dioxide (CO2) emissions in a given year—has been estimated and used by the federal government in several dozen regulatory impact analyses since 2008. Estimating the SC-CO2 involves four steps: (1) projecting a future path of GDP, population and global greenhouse emissions; (2) translating this emissions path along with an alternative that adds 1 ton of CO2 into temperature, sea level rise and other climate variables; (3) estimating physical impacts of these climate variables on humans and ecosystems and monetizing these impacts; and (4) discounting future monetized damages back to the present. The SCC is the difference in damage valuations with and without the additional ton of CO2.

A recent NAS report evaluates approaches to updating the SC-CO2. The report recommends that the SC-CO2 be computed using an integrated, modular framework. The committee provides criteria for conducting each of the four steps of the analysis and suggests approaches that could be used in constructing each module in the near term. The report also makes suggestions for improvements in the longer term and associated research recommendations.

This panel brings together several of the members of the NAS committee, who will discuss the main results of the report and provide an opportunity for broader discussion of future estimation of the SC-CO2.

Panelists:

Max Auffhammer, University of California, Berkeley
Maureen Cropper, University of Maryland
Richard Newell, Resources for the Future
William Pizer, Duke University
Richard Schmalensee, Massachusetts Institute of Technology

B.2: Evidence-based Policy (Roundtable)

Chair: Craig Thornton

On March 30, President Obama signed the Evidence-Based Policymaking Commission Act of 2016, a bill law creating the bipartisan Commission on Evidence-Based Policymaking. The 15-member Commission is charged with examining all aspects of how to increase the availability and use of government data to build evidence and inform program design, while protecting privacy and confidentiality of those data. Panelists, who include experts on the Commission, from academia, non-profit organizations, and charitable foundations focused on evidence-based policy will discuss the work of the Commission and key concepts involved in “evidence-based policy.”

Panelists:

Tony Cox, Cox Associates
Sandy Davis, Bipartisan Policy Center
Nicholas Hart, Commission on Evidence-Based Policymaking
Sofie Miller, The George Washington University
Kathy Stack, Laura and John Arnold Foundation

C.2: Issues in BCA Applications in Energy and the Environment

Chair: Timothy Brennan, Resources for the Future

Discussant: Charles Griffiths, U.S. Environmental Protection Agency

Presentations:

1. Climate Change Adaptation: Benefit-Cost Analysis of Coastal Flooding Hazard Mitigation; Federico Garcia* and David Ryder*, ICF International

The damages caused by hurricanes are a reminder of the sheer power of nature. In the aftermath of these storms, crippled infrastructure hampers restoration. Airports are a critical link in the supply chain for relief supplies and regional commerce, and are a priority for repair after storms. Some airports, however, suffer severe flooding and operations are severely limited for months. Given the critical nature of airports for relief efforts and economic activity, adaptation strategies are fundamental to maintaining airport operations following a hurricane.

In this study, we develop an economic model to assess the costs and benefits of protecting an airport with a flood mitigation system that includes a series of flood walls and pumps to mitigate the effect of coastal flooding caused by a hurricane. Where possible, we use the Federal Emergency Management Agency Benefit-Cost Analysis toolkit to develop estimates of avoided damages and loss of function based on flood depth. We account for the lifecycle costs of the project, including costs for upfront construction of the flood mitigation system, ongoing maintenance, administration, and contingency costs. Benefits of the project include avoided damages to the terminal building, hangars, and aircraft; avoided fuel spills; and avoided loss of function of the airport and the fire station. To account for the effects of climate change, and to verify that the project effectiveness over the long term, we factor in the effects of sea level rise and account for higher flood depths over the 50-year useful life of the project.

According to our findings, present value benefits of the project exceed present value costs, suggesting that the project would be cost-beneficial. We found that conservative estimates valued the net benefits of the project between $3 and $190 million, depending on discounting and benefits included, with benefit-cost ratios ranging from 1.05 to 8.01.

2. Triple-Bottom-Line Benefits for Urban Resiliency Projects; James Cottone* and Aaron Henderson, Arcadis

Our presentation will provide an overview of traditional hazard mitigation BCA, and describe the new approaches using a triple bottom line approach that have been successful, including case study projects.

The framework for federal assistance following natural disasters was laid out by the Robert T. Stafford Act in 1974 and its amendment in 1988. A key concept of the Stafford Act is the idea that recovery from disasters is an opportunity to mitigate against natural hazards in the future. The Act stipulates that such mitigation projects must be cost effective. Over decades, this requirement has led to the creation of software and accepted methods by FEMA to be used for hazard mitigation benefit-cost analysis, or BCA. In the fields of emergency management and mitigation, benefits have traditionally been based solely on the reduction of loss of life, property damage, and loss of critical public services. Since Hurricane Sandy in 2012, mitigation against coastal storms and the long-term effects of climate change have become areas of significant federal interest. The Rebuild-By Design competition, and subsequently the National Disaster-Resiliency Competition, sponsored by HUD, required design proposals to include BCA in their proposals. This has catalyzed a sea-change in hazard mitigation BCA, bringing in a new emphasis on what we might call triple-bottom-line analysis. With renewed interest in the social and environmental effects of large scale mitigation projects, the BCA is slowly transforming from a strict focus on the reduction of loss into one that integrates a number of different benefits focusing on environmental and social sustainability.

Thinking outside of the old box and evaluating a project across multiple levels can not only lend itself to projects that resolve a number of different issues but can provide a project that communities can get excited about.

3. Benefits and Costs of Authorizing the Use of Substances of Very High Concern under REACH; Matti Vainio*, European Chemicals Agency

In June 2017, the European Union’s REACH (Registration, Evaluation, Authorization and Restriction of Chemicals) regulation will have been in force for ten years. One unique feature of REACH is that it allows firms to continue the use of substances of very high concern (SVHC), if they can demonstrate that no suitable alternative exists and the benefits of continued use outweigh the associated risks to human health and the environment. To be authorized firms have to submit an application to the European Chemicals Agency (ECHA), whose scientific committees will examine the application documents and forward a corresponding opinion to the European Commission, which will then, together with EU Member States, decide whether to grant the authorization of a particular use. Shifting the burden of proof to industry is a novel feature in chemicals regulation, making the REACH authorization process a ‘living lab’ of applied benefit-cost analysis. Since August 2013, ECHA has processed 112 applications for authorization and as of October 2016 its scientific committees have provided opinions on 84 different SVHC uses. In this study, we analyze what the impacts of authorization have been so far and provide a nuanced picture of the benefits and costs (in terms of health and environmental impacts) that applicants have associated with their continued use of SVHC. Evidently, information asymmetry pertains—as applicants seek to continue the use of SVHC, they have a clear incentive to overstate the benefits of doing so and to downplay risks to human health and the environment. We therefore also assess to what extent ECHA’s scientific committees have concurred with the applicants’ analysis of the welfare impacts of their authorization. Our results suggest that, overall, authorization of SVHC results in benefits that are substantially greater than the monetized risks.  

D.2: Role of CBA in Decision Making in OECD Countries

Chair: Fran Sussman, Independent Consultant

Discussant: Chris Dockins, U.S. Environmental Protection Agency, and Emile Quinet, Ecole des Ponts-ParisTech

Presentations:

1. A General Survey of CBA in Decision Making in OECD Countries; Nils Axel Braathen*, OECD

This presentation will show results of a recent OECD survey of practices in the use of CBA in relation to public investments in the transport and energy sectors, as well as in relation to ex ante and ex post assessments of public policies or programs. The presentation will focus in particular on how environmental impacts, such as changes in CO2 emissions and emissions of local air pollutants, are being addressed in these CBAs. The presentation will also highlight administrative aspects of the CBAs, for example whether or not they are made publicly available, whether the public is invited to make comments on them and on their impacts on final decisions.

2. Looking Back at Social Discount Rates: The Influence of Papers, Presentations, Political Preconditions and Personalities on Policy; Ben Groom*, London School of Economics

In the past 20 years, discounting policy has evolved alongside the theoretical and empirical contributions of academics to this topic. But how influential were the academic advances in changing discounting policy? Did academics drive the process along, or were there political preconditions in policy that pushed the academic endeavor? This paper couches the process of policy evolution in terms of a policy demand side and an academic supply side. We highlight the importance in this process of policy brokers who bring these two sides together, and of personalities who influence change when institutional procedures fail to keep policy up to date with the academic frontier. The examples of discounting policy changes in the UK, US, Netherlands and Norway are discussed using qualitative evidence from interviews with key individuals in government, academia and consultancy. This evidence is coupled with our own experiences of having informed discounting policy in each case. 

E.2: Applications of Benefit-Cost Analysis in Developing Countries

Chair: Michael Toman, World Bank

Discussant: Elisabeth Gilmore, Clark University

Presentations:

1. Economic Consequences of an Infectious Disease Event for a Small, Island Economy; Jamison Pike*, U.S. Centers for Disease Control and Prevention

The Federated States of Micronesia (FSM) experienced a measles outbreak from February–August 2014. A total of 393 cases were detected in three of four states. During any infectious disease outbreak, the resources needed to respond to the outbreak can strain local public health resources. In the case of FSM, this strain was exacerbated by the unique logistic, economic, and geographic challenges in responding to the outbreak. Further, because FSM is a narrowly-based economy with large distances to major markets, an outbreak can result in economic volatility. FSM is linked to the United States through a Compact of Free Association and receives immunization funding and technical support from the United States. The compact allows residents of FSM to travel freely between FSM and the United States. Fifty-nine measles cases were imported into the United States as a consequence of the 2014 outbreak. The response, containment, and local direct medical costs of the outbreak (not including medical costs incurred in the United States) are estimated to have totaled over $3 million. FSM's share of the costs ($848,000) was equivalent to 0.23% of their gross national income while the US costs were 0.00001% ($2,637,000) of their gross national income. These estimates do not include the costs incurred to the United States from imported cases. Further research will be presented on simulated interventions that could have prevented and controlled the outbreak to assess costs and benefits. We pose the questions, (1) what were the specific consequences of this adverse health event for a small, island economy? and (2) what consequences could have been avoided through different degrees of intervention and at what cost? Utilizing a dynamic transmission model, we evaluate the cost-effectiveness and cost-benefit of preventing versus controlling such an event, including the rippling effects of an infectious disease outbreak on economic activity.

2. Performance Based Financing and Improving Girls' Education: Lessons Learned in Zimbabwe; Jordan Nanowski*, Limestone Analytics; and Bahman Kashi, Queen's University

This study explores the theoretical and practical aspects of evaluating an education intervention in which funding is tied to a measure of impact. A number of challenges are identified and discussed, including the usage of alternative measures of impact for contractual purposes, dealing with perverse incentives, and managing the ability to control for external events that can affect the outcome. Furthermore, challenges and opportunities in disaggregation of impact by gender and attribution of impact when faced with multi-component programs are discussed. The results of an empirical analysis of an ongoing education intervention in rural Zimbabwe are then presented. Findings highlight the role of impact investing in promoting the use of rigorous benefit-cost analysis in decision making, the importance of aligning a project’s objectives with the measures of results reflected in financing contracts, and the potential for adverse results if incentives aren’t properly aligned.

3. On-Grid Solar PV versus Diesel Electricity Generation in Sub-Saharan Africa: Economics and GHG Emissions; Glenn Jenkins*, Queen’s University and Eastern Mediterranean University and Saule Baurzhan, Eastern Mediterranean University

Many power utilities in sub-Saharan Africa (SSA) have inadequate generation capacity, unreliable services and high costs. They also face capital constraints that restrict them from making necessary investments needed for capacity expansion. Capacity shortages have compelled power utilities to use leased emergency power generating units, mainly oil-fired diesel generators, as a short-term solution. An economic analysis is carried that compares the economic net present value (ENPV) of fuel savings as well as greenhouse gas (GHG) savings, from investing capital in solar PV power generation plants as compared to investing the same amount of funds into diesel power plants. The results show that economic net present value is negative for solar PV plant, whereas it is a large positive value for the diesel plant. In addition, the diesel plant would be almost three times as effective in reducing GHG as the same value of investment in solar PV plant. Even with solar investment costs falling, it will take 12 to 24 years of continuous decline before solar PV will become cost-effective for SSA. The capital cost of solar PV would need to drop to US$ 1058.4 per KW to yield the same level of ENPV as the diesel plant.

F.2: Risk, Competition, and Procurement Design

Chair: Aylin Sertkaya, Eastern Research Group, Inc.

CBA focuses on selecting those investments that would improve social welfare most. Having a view what the benefits and cost of particular project will be, though, does not guarantee that the Value for Money will be maximized or even attained. Sub­optimal procurement design can substantially undermine the net welfare we can expect from the “best” projects, selected through diligent CBA. Theoretically, different options available for particular projects could potentially affect the conclusions of the CBA. An established and robust process comparable to the CBA, which would systematically inform procurement design based on theoretical and empirical findings is to date not available. In this context there is a limited understanding of how a key element in procurement design – risk, its allocation, the extent of transfer, and the availability of information about risk -- affect the cost and the benefits of project delivery. Little is also understood about how other choices, such as the size of the project, the “freedom” of the contractor to inform/change design, and decision to bundle project phases, affect competition, and through that the outcomes of project delivery. This session will showcase three presentations demonstrating how important procurement design choices are and how far we have gotten in the process towards a robust system for procurement design to complement the efforts of CBA.

Presentations:

1. The Inefficiency of Risk Pricing in PPPs; Dejan Makovsek*, International Transport Forum; Marian Moszoro, George Mason University

The transfer of risk to a contractor is an essential component for providing efficiency incentives in procurement. How risk transfer affects project outcomes and informs procurement design, however is surprisingly under investigated area, especially in terms of empirical evidence. Despite this there is a drive around the World towards delivering and operating public infrastructure through public-private partnership (PPP) rather than traditional public procurement, where a PPP is in essence a high-powered contractual scheme with very strong incentives but also high cost. The assessment of the value for money achieved by the two alternative approaches rests in the cost of financing and their efficiency in delivery and operation. If capital markets were efficient and complete, the cost of public (government) and private financing should be the same, with the relative delivery and operational efficiency remaining as the primary determinant of value for money. Evidence suggests, however, that the risk transfer to a public-private partnership entails an inefficient risk pricing premium. We argue that a high price for public-private partnerships results from large risk transfers, risk treatment within the private sector, and uncertainty around the past and future performance of PPP consortia. Hence, risk transfer not only increases the incentives for efficiency but also has an offsetting effect on the competition. More importantly, if information about risk is insufficient, high-powered contracts may increase contingencies well beyond what the effective risk exposure might require. On PPPs specifically, the corollary is that the efficiency gains from a PPP must be much higher than commonly expected to deliver a greater value for the money than under a traditional approach. In a larger context, this contribution unwinds some of the complexities of risk transfer and its impact on procurement outcomes in high powered contracts in general not only PPPs and can be used to inform procurement design. Lastly, the work represents an input to the Working Group on Private Investment at the OECD/ITF, which seeks how to address the issue of lack of information about risk in long-term contracts in the context of infrastructure investment.

2. A Decision-Making Model for Procurement Design; Adrian Bridge*, Queensland University of Technology

Evidence is presented of the short-term nature of procurement decision-making associated with current procurement theory and practice, which lacks rigor and transparency. Developed as part of an Australian Research Council grant a new procurement decision-making model is presented (that is cited/endorsed by Australia’s Productivity Commission and in CIB TG72’s PPP research road map, and published at the International Journal of Project Management). The new model comprises a series of analytical procedures that begin by breaking-down the project into production activities (design, construction, operations and maintenance). These activities are then assessed in terms of the make-or-buy procedure (using an integration of a range of theories from the New Institutional Economics and the capabilities perspective). Externalized activities (that represent the part of the project to be procured by government) are subject to filtering procedures in which activities likely to lead to market failure (either ex ante market failure associated with thin markets or ex post market failure related to the appropriation of quasi-rent, or hold-up) are excluded from the subsequent bundling procedure (in which the potential for net gains arising from positive externalities are assessed). As such, the model unlocks the full potential of bundling (e.g. Oliver Hart) to speak to individual projects, instead of– hitherto–mere sectors. In doing so, the model delivers a comprehensive procurement strategy for the entire project including identifying whether the project–either whole or part/s–is a suitable Public-Private Partnership or if another form of procurement is more suitable. A successful empirical test of the model is also presented (using case study and survey data of major road and health projects) including developing competition (i.e. expressions of interest) as a proxy of both ex ante and ex post market failure, and thus Value-for-Money. Finally, we provide an update and next steps for the new model including its upcoming live trial and transition to reforming procurement public policy.

3. How does PPP Contract Design Respond to Introduction of Uncertainty; Philippe Gagnepain*, on behalf of David Martimort, Paris School of Economics

For several decades, economists have shed light on how the optimal design of concession contracts and organizational forms in a principal–agent context allows a public authority to provide the contracted firm with perfect incentives to reduce infrastructure and operating costs. As real world regulatory relationships are ongoing processes in changing environments, parties lay down arrangements for trading goods and services covering several periods. Thus, economic theory has also devoted considerable attention to understanding dynamic contractual relationships and especially how contracts are renegotiated over time. It claims in particular that renegotiation prevents attainment of the efficient solution that could be obtained under full commitment. More recently, researchers have also shown a growing interest in the impact of uncertainty in the design of concession contracts. In a context of dynamic moral hazard, the possibility of future and uncertain productivity shocks on the returns on the firm's effort may create an option value of delaying efforts, which leads to an increase of operating costs. This presentation aims at proposing an overview of the tools proposed by contract theory to control this cost of delegated flexibility. In particular, it will be reminded that the possibility to unbundle different stages of the construction project through short-term contracts becomes particularly appealing in this context.