A gut reaction to a benefit-cost analysis

Let me preface: I'm not an economist. In fact, the only college-level economics course I ever took was Macroeconomics in a pre-college summer program. I took it because I wanted to get out of my high-school requirement for an economics program, because I wanted to take European History instead. So as you might imagine, that was a long time ago. (/preface)

Lately, the issue of benefit-cost analyes have been popping up on the blogosphere. On Environmental Economics today, there's a post about whether or not it makes economic sense for the economically-depressed town of Taylor, Florida to give the go-ahead to a coal-fired power plant. Economist John Whitehead does a back-of-the-envelope calculation to determine whether or not the plant is beneficial by balancing the revenue of the plant and the generation of new jobs against environmental costs such as sulfur dioxide, acid rain, carbon monoxide, etc. Each of these toxins are assigned a monetary value, and Whitehead comes up with the following: "Subtracting costs from benefits the annual net benefits to the town of Taylor are $3.75 - $1.33 = $2.42 million."

While I appreciate this post from an academic and intellectual standpoint, the whole thing makes me physically recoil. The idea that everything in the universe has a monetary value--including the cost of cancer, of polluting groundwater, of causing global warming by releasing CO2 into the atmosphere, of killing fish in lakes that are affected by acid rain--is truly chilling. What's the point of putting monetary value on the life of someone who gets cancer from the new coal plant? Maybe he'll even be cured and the insurance company will have paid for everything, but in the meantime, a large chunk of his life has been ruined.

Yet, I won't leave you with only a depressing scenario raised by a benefit-cost analysis. Recently I was discussing with some friends whether it makes more sense from an energy-conservation perspective to eat locally, or to eat organic. Which uses more energy: food grown locally with petroleum based fertilizers, or organically produced food trucked 1500 miles? I found links at the BBC and Treehugger and decided to look at little further.

A 2005 study in the journal Food Policy (J.N. Pretty, A.S. Ball, T. Lang and J.I.L. Morison, 2005. Farm costs and food miles: An assessment of the full cost of the UK weekly food basket. Food Policy, 30:1, 1-19) shows that if the entire United Kingdom moved from conventional to organic farming, agriculture costs would go from £1514.4M to £384.9M a year. This calculation includes some of those seemingly intangible-type elements I mentioned regarding the Florida power plant, such as nethane, nitrous oxide, ammonia emissions to atmosphere, losses of biodiversity and landscape values, adverse effects to human health from pesticides, adverse effects to human health from micro-organisms and BSE, etc.

Sounds great, right? Well, then they go on to look at the social, environmental, and health costs (again, those seeming intangibles) of vehicle transport. These costs include congestion, harm to health (noise, asthma), climate change (from greenhouse gases) and infrastructure damage. The transportation costs that they looked at included not only the cost of international transport of the food from the source to the grocery store, but also the transport of food to home and then to landfill.

The verdict? If all farms in the UK went organic but everything else stayed the same (i.e. there would still be importation), the country would save £1129M. If the way food is grown in the UK stays the same but food were transported no more than 20km from farm to grocery store, the UK would save £2119M. Excellent, but perhaps not practical. Still, if the food were grown within the country and then shipped only by rail, the country would save £1506M.

Finally, in the conclusion, the authors say:
We have calculated the environmental costs of the UK food basket, and found that farm externalities, domestic road transport to retail outlets, domestic shopping transport and subsidies are the main contributors to the estimated hidden costs of £2.91 per person per week (11.8% more than the price paid). It is clear that actions to reduce farm and food mile externalities, and shift consumers' decisions on specific shopping preferences and transport choices would have a substantial impact on environmental outcomes. The potential for food and transport businesses and governments to reduce these externalities would appear to be considerable. The key policy questions now centre on how best to do this using a variety of taxation, incentive, and regulatory mechanisms. It will be important to ensure that agriculture and food policy reforms continue to result in the production of safe and nutritious food whilst also maximising the production of positive externalities.

The most likely scenario for the immediate future is 'business as usual' with some incremental change. It could be, however, that external shocks institute more radical change. Such potential shocks range from another energy or oil crisis to the realisation of the seriousness of climate change or of the immense costs of current systems such as we outline here.

At least this article left me a little warmer and fuzzier than the analysis on Environmental Economics, but what makes me sad is that it's much more likely that the coal-fired power plant will be established than that the UK government will even pay attention to this sustainability study.

(If anyone is interested in this article but doesn't have access to an academic library, please let me know and I can get you a copy.)

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Thanks for the post, Ianqui. From the costs statement:

In a study of the external health costs of coal-fired electricity generation, Bill Desvousges, Reed Johnson and Spencer Banzhaf (Amazon.com link) estimate that the costs per ton of coal-fired power plant pollution in a rural area are ($2005):

$902/ton for fine particulates
$59/ton for nitrogen oxide
$28/ton for sulfur dioxide
$0.39/ton for carbon monoxide

Next, I multiply the costs per ton by the number of tons generated annually. The total cost is about $1.33 million annually.

No cost is assessed for carbon dioxide (CO2) emissions from the plant. This is especially ironic since the plant will be located in Florida, one of the most vulnerable areas in the US to future sea level rise. As far as I'm concerned, that closes the book on the environmental economist.

This is a common criticism of CBA. More specifically, many argue that it is relatively easy to monetize costs (i.e., construction, O&M, etc.), but it is often very difficult to monetize benefits (e.g., happy, healthy people enjoying a clean environment that they can pass on to their kids).

In my opinion, CBA has its place, but it should almost never be used exclusively, or given undue weight. It is a powerful tool that can be very persuasive in some contexts, but it can also be easily abused for environmentally destructive projects (see the Army Corps of Engineers).

The basic issue is that in making decisions about which technologies to use, which resources to consume, how to pay for them, which safeguards to enact, etc., there are tradeoffs. And the only way to make those decisions is to find a way to compare costs and benefits. If you don't compare them in dollars then you have to compare them in some other units.

Yes, putting a dollar value on things like cancer cases or environmental damage is extremely distasteful. (I lost both of my parents to cancer, and I have two other relatives undergoing treatment for it currently, so I find such things particularly painful to talk about.) But what other choice is there? Unless we want to shun every technology and practice that has ANY negative human or environmental impact, we have to find a way to say, "Yes, this benefit to society is worth the cost, but no, that one isn't."

Put another way, conjure up your own scenarios about a magic new energy source that carries an unavoidable cancer risk. I'm sure anyone reading this would agree that there are extremes in terms of the ratio of the amount of otherwise safe, reliable energy we would get for the number of new cancer cases that would be "no brainer" decisions, either because the ratio was so high it's "clearly" worth it, or because it's so low that it's "out of the question." The nastiness is in between those extremes, where reasonable people with different world views will reach different conclusions about the desirability of the tradeoff.

Anyone can avoid making a deal with the devil; the trick is in figuring out who the devil is.

Lou, I recommend reading William McDonough's Cradle to Cradle. He advocates changing our design paradigms so that there are zero known carcinogens in the ingredients for a product (also no toxins, mutagens, endocrine disruptors or bio-accumulative substances). McDonough also visualizes (and has implemented) products where, at the end of their lifecycle, their components are either biodegraded or fully re-utilized (at the same level, eg high carbon steel isn't downcycled into mild steel). This, coupled with his maxim "live off current solar income" has great repercussions for the Peak Oilers/Malthusians - a sustainable future is possible without oil/CO2/nuclear.


Lou says: "Unless we want to shun every technology and practice that has ANY negative human or environmental impact... "

First, I am sorry to hear about the cancers in your family. I agree with your statement but I would also argue that coal-fired power plants are "the devil", as you put it. These plants are often built within a least cost bidding process (for example, a plant XCEL energy wants to build in Pueblo, Colorado -- I live in Colorado). But, it is more expensive to build such plants with the latest technology for reducing all harmful emissions. So, the cheaper, higher pollution plants get built instead. This Canadian government site says fine particulates "are responsible for tens of thousands of deaths in that country [the US] each year". Here's another site, Healthlink, that discusses these particulates as they relate to power plants.

I think Lou has it about right. The key point is that if you want to be able mitigate harm, or choose the least harmful option, you need to be able to measure the harm. It may seem that by not measuring, you are not "putting a price on human life". In reality, you are still making the trade offs, you just have less information about them.

What’s that expression? Recognizing the cost of every thing but the value of none? I agree with what Lou says about the practice. I am a Systems Engineer and so was trained at assigning utilities (often expressed in monetary terms) to every factor possible (usually a small subset of what should be considered to keep the complexity manageable) in order to conduct analysis of alternatives; I can and do use this in my profession, and it is useful for managing and organizing complex decisions and tradeoffs but it certainly has its shortcomings. Often used in assessing safety factors to apply, I think lawyers may be the reason such analysis are done sometimes. If something goes bad (as it almost always does eventually), you can point to the analysis. Maybe that's being too synical.

But certainly when you get into the interaction of decisions with and effects on human and social systems the factors are nebulous and intractable, yet extremely critical. For example, what is the value to a culture of having such things as buildings and art that were created by previous generations? Kunstler says that it instills in us that “we have come from someplace memorable and are bound for someplace hopeful”. But, assign a value to it? Like that commercial, I would say ‘priceless’.

No reaction from you guys on thousands of deaths annually from "fine particulates" pollution due to coal-fired power plants?


Coal doesn't seem to get anyone excited around here. I noted on an earlier post that coal is the 800 pound gorilla in climate change, and in the future could well dwarf oil's impact.

However, I think the primary cause of human exposure to particulates is vehicles. The Canadian article you site refers to thousands of deaths in the US, but not to a cause. It does say "Diesel and gasoline vehicles are thought to be the major sources of PM2.5."

I did a lot of work on air pollution in Asia, where in some countries there was very good documentation on deaths, sickness and lost workdays caused by particulates - as well as sources. Coal fired power plants added to the overall particulate levels, but the primary determinant of exposure and health impacts appeared to be proximity to traffic.

Please, more mention of "externalities" here as a concept (although this thread is all around the topic). If we include these in calculations then the CBA changes in favor of public health, environment, etc. According to a book by Herman E. Daly "For the Common Good", traditional economics ignores externalities, assuming economic entities enjoy an infinite earth (resources) and can dump wastes harmlessly "away". I am not an economist, but if I were one, I would either force externalities into my work or be ashamed and find some other occupation. Another group interested in externalities is the organization Redefining Progress at http://www.rprogress.org .