IALUC Berlin 2008

David Pannell

Centre for Environmental Economics and Policy

Value for Money in Environmental Policy and Environmental Economics

Problems with the salinity policySelection of projectsDelivery mechanismsDesign of projectsObjectivesInternal logicFocus on outcomes

ObservationsThe problems of the salinity program occur in many other programs and agenciesCause enormous loss of environmental benefitsReadily avoidable (some trivially easy)Low awarenessWhy value for money is importantLimited resources for environmental actionsSalinity program: $1.4 billion Full mitigation cost:$65 billionAchieving significant outcomes can be expensiveGippsland Lakes, AustraliaTarget 40% reduction in nutrients over 25 yearsBudget: PV $30mMin cost: PV $1000m

Why value for money is importantHeterogeneity among potential investmentsValues at stakeThreatsFeasibilityTime lagsAdoption/complianceProject risksCosts

Huge range of benefits and costsBest 5% = BCR 330 times better than medianSource: Fuller et al. (2010). NatureQuestionsWhat is required for public environmental programs to deliver value for money?What can economists do to increase the chance that investment in environmental economics analysis provides value for money? Value for money from investment in environmental programs

1. Be selectiveTarget resources to the best investmentsWhich environmental issues?In which places?Which people to involve?Best = expected to provide most valuable environmental benefits2. Focus on outcomesDecisions about project priorities, project design, program design, should explicitly consider the environmental outcomes likely to be achievedVery commonly, programs dont do so beyond a superficial levele.g. most agri-environmental programse.g. Environmental Stewardship programEntry-level scheme has 200 priority optionse.g. permanent grassland with very low inputslegume- and herb-rich swardsuncropped cultivated areas for ground-nesting birds

Outcomes?Program indicates type of environmental benefitse.g. dragonflies, newts, toads, bats, dormice, soil erosionIdeally, allocate funds to actions/places most valuable environmental outcomesWould need to account forHow many extra bats? How much improved water quality?How much does the community care?Its hard, but more effort neededImplication for programsFocus on actions rather than outcomes means that most funded projects are not greatImplication for programsA suggested strategy: start with outcomes you want and work backwardsOutcome: Reduce frequency of algal blooms in Gippsland Lakes from 1 year in 3 to 1 in 10 by 2025Working 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?

3. Consider all relevant infoBio-physical factorsCondition without (current condition, future threats)Effectiveness of managementTime lags (in threats, in response to actions)Project risks (technical)Socio-economic factorsImportance of the environmental valuesAdoption/compliance levelTime lag (adoption)Discount rateProject risks (social, political, financial)

Implications for programsIf you leave some out, project prioritisation can be greatly weakenedMost programs that do prioritise miss several outvalues effect of on-ground actionsadoption/compliancemaintenance coststime lags

4. Use a sound metricThe most common metric used to rank projects is weighted additiveScore = w1.x1 + w2.x2 + w3.x3 + w4.x4 + Wherex1 = environmental threatsx2 = project riskx3 = adoptionx4 = project costetc.

Implications for programsVery poor rankingsImplies you can compensate for having no adoption by having low technical risk, but you cantWhere benefits are proportional to a variable, it should be multiplied, not addedTo max benefits, must divide by cost, not subtract itLogic leads to a very different metricCan make huge difference to environmental benefits ultimately achievedComparing project rankingsR2 = 0.7%Cost dividedFavours cheap projectsOf best 16 only 1 is actually bestLoss 50% (5% budget)Easy to fix5. Comparing scale/intensityTypically only one scale/intensity is considered for a projectBut value for money can be highly sensitive to scale/intensity

Diminishing marginal benefitsWidth of riparian buffer strips in Germany (Sieber et al. 2010, Land Use Policy)3m wide: 61% reduction in pesticides in river30m wide: 94% reduction50m wide: 96% reductionTechnical vs psychological

Increasing marginal costs

BCR:0.040.31.13.223236. Select good policy mechanismSalinity policy: spent most of its money on extensionPromoted practices that were not adoptable on the required scaleNeeded a simple tool to help people think through the choice of mechanism Public: Private Benefits FrameworkDefinitionsPrivate 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

Possible projectsEach dot is a set of land-use changes on specific pieces of land = a project.PerennialsFarm APerennialsFarm BForestry in water catchmentCurrent practiceWhich tool? Incentives Extension Regulation New technology No action26Simple rulesfor allocating mechanisms to projects1. 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.

27Simple public-private benefits frameworkPannell (2008) Land EconomicsWin/WinWin/Small lossWin/Large lossLarge loss/WinSmall loss/WinLoss/Loss287. OtherReview proposed projects for accuracy, logicMonitoring, learning, adaptation (uncertainty)Training and support for decision makersIncentives for environmental managers to pursue outcomesRemove incentives that conflict with thatWhat vs How? BothBe selective (what)Outcomes (what and how)All info (what)Metric (what)Scale (how)Mechanism (how)Logic (how)

Value for money from investment in environmental economics

ObservationsHuge potentialLargely unrealisedWe could do betterApply economic principles to thinking about which economics research to doGetting it across better1. Optimising portfolio of EEMany information products to choose from:non-market valuesmarket valueshuman behaviour (e.g. adoption of new practices)risk, uncertaintyenvironmental production functionsdiscount ratestime lagscosts curvestransaction costspolicy mechanism choicemechanism designmetric design

Policy agencies as consumersDo we comply with that?Some info products relatively well-suppliednon-market valuesdiscount ratesOthers much less so costs vs scaletransaction costsenvironmental production functions (effectiveness of management)human behavioural responses to policymetric design2. Optimise depth/sophisticationFertilizer: maximum profit maximum yield

Information: max net benefit maximum detail or sophistication (diminishing marginal benefits)Approximate information might be optimal for decision making (depending on context)Also more timely, less challenging3. Recognise users limitationsMost are not economistsEasily psyched out by economicsAnother reason for simple informationNeed help to see how to use economics information in their decisions its not obviousTraining and supportCultural change

INFFERInvestment Framework for Environmental Resources

INFFERAddresses the identified common weaknessesOutcome-oriented (works backwards)Includes all key bio-physical and socio-economic variablesTheoretically sound metric to rank projectsIncludes Public: Private Benefits FrameworkAsks consistency check questions to get the logic rightCan cope with expert judgement or high-quality scientific informationSimplifications usable by non-economistsStructured, documented, supported, training

River reachIntact native vegCultural heritage Woodland birdsWetlandListed on registerLast of its typeFauna speciesFlagshipCritically endangeredNative vegetationConcentration of threatened speciesNear pristine conditionImportant location Asset types

Before INFFER

After INFFER

4444Regional application

International applicationFinal commentsIts possible to embed economics thinking in environmental organisations/agenciesMany challengesCulture, timeliness, transaction costs, communications, aversion to the results, attitudes to economicsEnormous opportunities to deliver greater environmental outcomes worth the effortKeen to support a UK pilot of INFFER inffer.org pannelldiscussions.net

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