Guide to COST-BENEFIT ANALYSIS of investment projects - Ramiri

due to air pollution or water contamination by chemical products for example, is well known. The technique takesnatural science information on the physical effects of pollution and uses this in an economic model of evaluation.The economic evaluation will be performed by estimation, through a production or a utility function of the profitvariations of firms or the revenue gains or losses of individuals.The two steps of the method are:- the calculation of the pollutant dose and receptor function, and;- the economic evaluation by the choice of an economic model.To assess the monetary gain or loss of benefits due to the variation in environmental quality requires the analysis ofbiological and physical processes, their interactions with economic agents’ decisions (consumer or producer) and thefinal effect on welfare.The major fields of application of the methodology are the evaluation of losses (in crops, for example) due topollution, the pollution effects on ecosystems, vegetation and soil erosion, and the impacts of urban air pollution onhealth, materials and buildings. The approach cannot estimate the non-use value.Benefit TransferRecent developments in policy behaviour have stressed the relevance of the so-called Benefit-Transfer Approach inthe appraisal of non-market goods, specifically environmental goods and services (Pearce, Atkinson and Mourato,2006). This method consists of taking a unit value for a non-market good estimated in an original study and usingthis estimate, after some adjustments, to value benefits (or costs) that arise when a policy or project is implementedelsewhere.The Benefit Transfer method can be defined as the use of a good estimate in one site, the ‘study site’ as a proxy forvalues of the same good in another site, the ‘policy site’ (Desvousges, Johnson and Banzhaf, 1998). For example, theprovision of a non-market good at a policy site could refer to a lake at a particular geographical location. If sufficientdata are not available for that country, analysts can use values for similar conditions in data-rich countries.The interest shown in this approach is due to the opportunity to reduce the need for costly and time–consumingoriginal studies of non-market goods values. Moreover Benefit Transfer could be used to assess whether or not amore in-depth analysis is worthwhile.Clearly, the main obstacle in using this approach is that Benefit Transfer can give rise to seriously biased estimates.Obviously judgement and insight are required for all the basic steps entailed in undertaking a BT exercise. Forexample, information needs to be obtained on baseline environmental quality, changes and relevant socio-economicdata.Benefit transfer is usually performed in three steps:- the compilation of the existing literature on the subject under investigation (recreational activity, human health,air and water pollution…);- the assessment of the selected studies for their comparability (similarity of the environmental services valued,difference in revenue, education, age and other socio-economic characteristics which can affect the evaluation);- the calculation of values and their transfer in the new context of evaluation.The most crucial stage is where existing estimates or models are selected and estimated effects are obtained for thepolicy site. In addition, the population at the relevant policy site has to be determined.Adjustments are usually advisable in order to reflect differences at the original study sites and the new policy sites.The analyst may choose from three main types of adjustment of increasing sophistication:- unadjusted Willingness-to-pay Transfer => this procedure implies a simple ‘borrowing’ of the estimates made inthe study site and the use of those estimates in the policy site, with an obvious advantage in terms of simplicity;- willingness-to-pay Transfer with Adjustment (value transfer) => it could be useful to modify the values from thestudy site data to reflect the difference in a particular variable that characterizes the sites. For example, the valuescan be adjusted through multiplication using the ratio between the income level of the study case and the incomelevel of the policy case.- willingness-to-pay Function Transfer => a more sophisticated approach is to transfer the benefit or valuefunction from the study site to the policy site. Thus, if it is known that Willingness-to-pay for a good at the studysite is a function of, first, a range of physical features on the site, second, of its use, and third, of a set of socioeconomiccharacteristics of the population at the site, then this information itself can be used as part of thetransfer process.226