David Pannell Centre for Environmental Economics and Policy
Value for Money in Environmental Policy and Environmental
Economics
Slide 2
Slide 3
Problems with the salinity policy Selection of projects
Delivery mechanisms Design of projects Objectives Internal logic
Focus on outcomes
Slide 4
Observations The problems of the salinity program occur in many
other programs and agencies Cause enormous loss of environmental
benefits Readily avoidable (some trivially easy) Low awareness
Slide 5
Why value for money is important Limited resources for
environmental actions Salinity program: $1.4 billion Full
mitigation cost:$65 billion Achieving significant outcomes can be
expensive Gippsland Lakes, Australia Target 40% reduction in
nutrients over 25 years Budget: PV $30m Min cost: PV $1000m
Slide 6
Why value for money is important Heterogeneity among potential
investments Values at stake Threats Feasibility Time lags Adoption/
compliance Project risks Costs
Slide 7
Huge range of benefits and costs Best 5% = BCR 330 times better
than median Source: Fuller et al. (2010). Nature
Slide 8
Questions 1.What is required for public environmental programs
to deliver value for money? 2.What can economists do to increase
the chance that investment in environmental economics analysis
provides value for money?
Slide 9
Value for money from investment in environmental programs
Slide 10
1. Be selective Target resources to the best investments Which
environmental issues? In which places? Which people to involve?
Best = expected to provide most valuable environmental
benefits
Slide 11
2. Focus on outcomes Decisions about project priorities,
project design, program design, should explicitly consider the
environmental outcomes likely to be achieved Very commonly,
programs dont do so beyond a superficial level e.g. most
agri-environmental programs
Slide 12
e.g. Environmental Stewardship program Entry-level scheme has
200 priority options e.g. permanent grassland with very low inputs
legume- and herb-rich swards uncropped cultivated areas for
ground-nesting birds
Slide 13
Outcomes? Program indicates type of environmental benefits e.g.
dragonflies, newts, toads, bats, dormice, soil erosion Ideally,
allocate funds to actions/places most valuable environmental
outcomes Would need to account for How many extra bats? How much
improved water quality? How much does the community care? Its hard,
but more effort needed
Slide 14
Implication for programs Focus on actions rather than outcomes
means that most funded projects are not great
Slide 15
Implication for programs A suggested strategy: start with
outcomes you want and work backwards Outcome: Reduce frequency of
algal blooms in Gippsland Lakes from 1 year in 3 to 1 in 10 by 2025
Working backwards: What on-ground actions would be required to
achieve that target? Where? How much? What policy actions would be
required to bring about those on- ground actions? Cost? Value for
money?
Slide 16
3. Consider all relevant info Bio-physical factors Condition
without (current condition, future threats) Effectiveness of
management Time lags (in threats, in response to actions) Project
risks (technical) Socio-economic factors Importance of the
environmental values Adoption/compliance level Time lag (adoption)
Discount rate Project risks (social, political, financial)
Slide 17
Implications for programs If you leave some out, project
prioritisation can be greatly weakened Most programs that do
prioritise miss several out values effect of on-ground actions
adoption/compliance maintenance costs time lags
Slide 18
4. Use a sound metric The most common metric used to rank
projects is weighted additive Score = w 1.x 1 + w 2.x 2 + w 3.x 3 +
w 4.x 4 + Where x 1 = environmental threats x 2 = project risk x 3
= adoption x 4 = project cost etc.
Slide 19
Implications for programs Very poor rankings Implies you can
compensate for having no adoption by having low technical risk, but
you cant Where benefits are proportional to a variable, it should
be multiplied, not added To max benefits, must divide by cost, not
subtract it Logic leads to a very different metric Can make huge
difference to environmental benefits ultimately achieved
Slide 20
Comparing project rankings R 2 = 0.7% Cost divided Favours
cheap projects Of best 16 only 1 is actually best Loss 50% (5%
budget) Easy to fix
Slide 21
5. Comparing scale/intensity Typically only one scale/intensity
is considered for a project But value for money can be highly
sensitive to scale/intensity
Slide 22
Diminishing marginal benefits Width of riparian buffer strips
in Germany (Sieber et al. 2010, Land Use Policy) 3m wide: 61%
reduction in pesticides in river 30m wide: 94% reduction 50m wide:
96% reduction Technical vs psychological
Slide 23
Increasing marginal costs BCR:0.040.31.13.2
Slide 24
6. Select good policy mechanism Salinity policy: spent most of
its money on extension Promoted practices that were not adoptable
on the required scale Needed a simple tool to help people think
through the choice of mechanism Public: Private Benefits
Framework
Slide 25
Definitions Private benefits & costs relate to the
landholder making the decisions (internal) Public benefits &
costs: all others (external) neighbours, downstream water users,
city dwellers interested in biodiversity
Slide 26
Possible projects Each dot is a set of land-use changes on
specific pieces of land = a project. Perennials Farm A Perennials
Farm B Forestry in water catchment Current practice Which tool?
Incentives Extension Regulation New technology No action
Slide 27
Simple rules for allocating mechanisms to projects 1. No
positive incentives for land- use change unless public net benefits
of change are positive. 2. No positive incentives if landholders
would adopt land-use changes without those incentives. 3. No
positive incentives if overall costs outweigh overall
benefits.
Slide 28
Simple public-private benefits framework Pannell (2008) Land
Economics Win/Win Win/Small loss Win/ Large loss Large loss/ Win
Small loss/ Win Loss/Loss
Slide 29
7. Other Review proposed projects for accuracy, logic
Monitoring, learning, adaptation (uncertainty) Training and support
for decision makers Incentives for environmental managers to pursue
outcomes Remove incentives that conflict with that
Slide 30
What vs How? Both 1.Be selective (what) 2.Outcomes (what and
how) 3.All info (what) 4.Metric (what) 5.Scale (how) 6.Mechanism
(how) 7.Logic (how)
Slide 31
Value for money from investment in environmental economics
Slide 32
Observations Huge potential Largely unrealised We could do
better Apply economic principles to thinking about which economics
research to do Getting it across better
Slide 33
1. Optimising portfolio of EE Many information products to
choose from: non-market values market values human behaviour (e.g.
adoption of new practices) risk, uncertainty environmental
production functions discount rates time lags costs curves
transaction costs policy mechanism choice mechanism design metric
design
Slide 34
Policy agencies as consumers
Slide 35
Do we comply with that? Some info products relatively
well-supplied non-market values discount rates Others much less so
costs vs scale transaction costs environmental production functions
(effectiveness of management) human behavioural responses to policy
metric design
Slide 36
2. Optimise depth/sophistication Fertilizer: maximum profit
maximum yield Information: max net benefit maximum detail or
sophistication (diminishing marginal benefits)
Slide 37
Approximate information might be optimal for decision making
(depending on context) Also more timely, less challenging
Slide 38
3. Recognise users limitations Most are not economists Easily
psyched out by economics Another reason for simple information Need
help to see how to use economics information in their decisions its
not obvious Training and support Cultural change
Slide 39
INFFER Investment Framework for Environmental Resources
Slide 40
INFFER Addresses the identified common weaknesses
Outcome-oriented (works backwards) Includes all key bio-physical
and socio-economic variables Theoretically sound metric to rank
projects Includes Public: Private Benefits Framework Asks
consistency check questions to get the logic right Can cope with
expert judgement or high-quality scientific information
Simplifications usable by non-economists Structured, documented,
supported, training
Slide 41
River reach Intact native veg Cultural heritage Woodland birds
Wetland Listed on register Last of its type Fauna species Flagship
Critically endangered Native vegetation Concentration of threatened
species Near pristine condition Important location Asset types
Slide 42
Slide 43
Slide 44
Before INFFERAfter INFFER
Slide 45
Regional application
Slide 46
International application
Slide 47
Final comments Its possible to embed economics thinking in
environmental organisations/agencies Many challenges Culture,
timeliness, transaction costs, communications, aversion to the
results, attitudes to economics Enormous opportunities to deliver
greater environmental outcomes worth the effort Keen to support a
UK pilot of INFFER