University of California at Santa Barbara

Bren School of Environmental Science & Management

ESM 245: Cost-Benefit Analysis

Fall 2010

Units / 4
Class / Mo/We 15:45 – 17:00
Lecture room / Bren 1414
Instructor / Rolf Groeneveld
Office / Bren 3430
Office hours / Friday 11:00 – 12:00

Introduction

Cost-benefit analysis (CBA)is a tool to evaluate environmental policy. By doing a cost-benefit analysis, one systematically identifies, organizes, and compares the negative and positive effects of a policy or a project, in order to support decisions on its endorsement, or to compare it to one or more alternatives.

This course covers the theory and practice of performing a cost-benefit analysis. We will discuss the theory of social decision-making, which underlies CBA. We will also look atnumerous applications in the context of environmental and natural resource management. An important part of CBA involves putting a price tag on environmental effects through methods of nonmarket valuation. Hence we will also discuss the theory of nonmarket valuation,as well as itspractical methods. Other issues discussed in the course are the question of discounting (how important are future effects – and future generations?), income distribution, risk and uncertainty, and the role of CBA in the overall policy process.

Learning Outcomes

After completion of this course, students are expected to

  • Understand the underlying theory of cost-benefit analysis, its strengths and its limitations
  • Understand the theory of economic value of the environment
  • Understand the theory and practice of the most common methods of nonmarket valuation
  • Be able to conduct original cost-benefit analyses
  • Be able toevaluate cost-benefit analyses conducted by others
  • Be able to reflect on the role of cost-benefit analysis in environmental policy

Teaching methods and course material

The course includes lectures on the theory of CBA, as well as discuss of examples of cost-benefit analyses and valuation studies. Students are expected to study all reading material before the lecture as the lectures will complement rather than reiterate the reading material.

Background material mainly includes selected chapters from Pearce et al. (2006), Cost-Benefit Analysis and the Environment: Recent Developments.OECD. These chapters will be made available online. Students are also advised to consultBoardman et al: Cost-Benefit Analysis, 2nd Ed (Prentice-Hall, 2001), which has been used in ESM 204, and is available in the Periodicals Room.

Discussion of CBA examples will involve a joint presentation by about 3-5students and general discussion by all. We will form presentation groups and distribute the examples overgroups in the first lecture.

The purposeof the presentation and discussion of CBA examples is to consider how the topic of the class (mostly a valuation method) is applied in real CBAs, and what may be its advantages and disadvantages. When you present an example, keep the following in mind:

  • Focus your discussion of the example on the topic of the class;
  • Leave sufficient time for discussion, so limit your presentation to 5-10 minutes;
  • Include questions or issues that you think warrant discussion.

Term paper

Students will also write a term paper as part of the activities. The objective of the term paper is to show that you know how to apply the course material, and its grade counts for 40% of the final grade. Write the paper as if you are writing it for a client, such as a local government, the EPA, or an NGO. This means that it should contain the information necessary to interpret and evaluate the results and conclusions, such as the data sources used, the method, assumptions made, etcetera. The term paper can involve any of the following:

  • An original cost-benefit analysis on a topic of your choosing
  • A detailed proposal for an original cost-benefit analysis on a topic of your choosing
  • A detailed critique of an existing cost-benefit analysis of your choosing

The maximum length of the paper is 10 pages. Deadline for handing in the paper is Friday December 3, 2010. You can hand it in by e-mail or in print, but e-mail (Microsoft Word document) is preferred.

Examination

Course grades will be based on participation (10%), the final exam (50%), and the term paper (40%).

Course Schedule

Week / Monday / Wednesday
1 / Introduction: Conducting a CBA
Background literature:
  • Pearce Ch 1, 3, 4
/ Welfare economic foundation of CBA
Background literature:
  • Pearce Ch 11

2 / Contingent Valuation (1)
Background literature:
  • Pearce Ch 8
/ Contingent Valuation (2)
Example 1:
  • Bulte, E., Gerking, S., List, J.A., and de Zeeuw, A. 2005. The effect of varying the causes of environmental problems on stated WTP values: Evidence from a field study. Journal of Environmental Economics and Management 49:330-342.

3 / Choice Experiments (1)
Background literature:
  • Pearce Ch 9
/ Choice Experiments (2)
Example 2:
  • Ku, S.J., Yoo, S.H., and Kwak, S.J. 2009. Willingness to Pay for Improving the Residential Waste Disposal System in Korea: A Choice Experiment Study. Environmental Management 44:278-287.

4 / Hedonic Pricing Method
Background literature:
  • Pearce Ch 7.2
Example 3:
  • Baranzini, A., Schaere, C., Thalmann, P. 2010. Using measured instead of perceived noise in hedonic models. Transportation Research Part D 15:473-482.
/ Travel Cost Method
Background literature:
  • Pearce Ch 7.3
Example 4:
  • Ahmed, M., Umali, G.M., Chong, C.K., Rull, M.F., and Garcia, M.C. 2007. Valuing recreational and conservation benefits of coral reefs: The case of Bolinao, Philippines. Ocean & Coastal Management 50:103-118.

5 / Averting Expenditure Method
Background literature:
  • Pearce Ch 7.4
Example 5:
  • Lavee, D. 2010. Averting expenditures and valuation of damages: two methodsfor assessing the benefits of water filtration in Israel. Water Policy 12:290-303.
/ Valuing Ecosystem Goods and Services
Discussion literature:
  • Costanza, R. et al 1997. The value of the world’s ecosystem services and natural capital. Nature 387:253-260.
  • Smith, V.K. 1998. Mispriced planet. Regulation Summer.
  • For other reactions to Costanza et al. see Ecological Economics 25(1).

6 / Benefits Transfer
Background literature:
  • Pearce Ch 17
/ Benefits Transfer
Example 6:
  • Brander, L.M., Florax, R.J.G.M., and Vermaat, J.E., 2006. The Empirics of Wetland Valuation:A Comprehensive Summary and aMeta-Analysis of the Literature. Environmental & Resource Economics 33:223-250.

7 / Market failures, shadow prices, and employment
Background literature:
  • Pearce Ch 5
/ Market failures, shadow prices, and employment
Example 7:
  • Niskainen, A. 1998. Financial and economic profitability of reforestation in Thailand. Forest Ecology and management 104:57-68.

8 / Discounting and sustainability
Background literature:
  • Pearce Ch 13
  • Economist 2009. A special report on climate change and the carbon economy: Is it worth it? December 3, 2009.
/ Risk, uncertainty, and irreversibility
Background literature:
  • Pearce Ch 10

9 / Distribution of costs and benefits (1)
Background literature:
  • Pearce Ch 15
/ Distribution of costs and benefits (2)
Example 8:
  • Gunawardena, U.A.D.P. 2010. Inequalities and externalities of power sector: A case of Broadlands hydropower project in Sri Lanka. Energy Policy 38:726-734.

10 / The role of CBA in policy-making
Discussion text:
  • Pearce Ch 1.4, 19
/ Wrap-up lecture: questions, discussion, any other business