Benefit-cost analysis as a decision-support tool for risk-informed land use planning

Benefit-cost analysis as adecision-support tool for

risk-informed land use planning

Valérie Meunier (ICSI)

Eric Marsden (FonCSI)

Nicolas Treich (INRA/Toulouse School of Economics)

ESReDA LUP-RIDM, October 2012

Context

Land use planning raises numerous complex questions:

. which criteria should society use for ALARP decisions?

. which balance between different methods of reducing risk from afacility should be implemented?

Benefit-cost analysis: a decision-support tool which can help discussionwith stakeholders concerning these questions:

. structured framework for presenting all of the components of adecision and their different weightings

. increasing the transparency of the decision-making process

. provides a historical record of the elements considered in adecision

• and the level of uncertainty existing at the time the decision was made

2 / 21 ESReDA Land-User Planning and Risk-informed decision-making conference, October 2012

Context

. BCA advises in favour of all decisions whose benefits, for the wholeof society, are greater than their costs

• Benefits: consequences of a reduction in the level of pollution or therisk of mortality from accidents

• Costs: spending on new safety measures and indirect costs such asimpacts on and competitiveness

. Comparing costs and benefits requires a common measure• BCA uses a monetary measure: conversion of costs and benefits into

euros


Benefit-cost analysis

. Benefits of prevention measures (reduced probability or lowerconsequences of industrial accidents) are more difficult to monetizethan costs of prevention

. BCA makes this conversion based on citizens’ preferences,attempting to estimate people’s willingness to pay for a change intheir environment

• construction of a railway line between two cities• improvement in air quality in their area• …

. Underlying philosophy is democratic, or populist, rather thantechnocratic or paternalist


Benefit-cost analysis

. Industrial safety: BCA monetizes individuals’ willingness to pay for amarginal reduction in their exposure to technological risk

. Extrapolate to large population: concept of value of a statistical life• the cost of a fatality which is avoided by the spending on safety

• if VSL = 5M€, an average individual would pay 5€ to reduce hismortality risk by 1 in a million

• a population of 1 million people would be willing to pay 5M€ toprevent a statistical fatality

. VSL 6= what society would pay to save an identified life• it is not a measure of the intrinsic “value” of a human life

• this notion is implicit in any public spending on safety limited by anannual budget


Estimating willingness to pay

. Estimating WTP for changes in exposure to risk:• direct methods: ask people how much they would be prepared to pay

to benefit from a specific risk-reduction method

• revealed-preference methods: observe their preferences on similarmarkets, such as purchasing ABS, or wage differentials

. WTP for environmental “goods” such as a national park:• ask people whether they would prefer creation of a national park or

building of a municipal swimming pool

• number of kilometers that people are willing to travel to benefit fromthe amenity

• opportunity cost of time spent in the park


Regulatory applications of benefit-cost analysis

. Used since the 1970s in the USA for regulatory impactassessments of environmental legislation

. UK Seveso context: recommended measure for justifying theALARP nature of a safety investment

. Little used for risk issues in France• exception: public spending on managing flood risk


Case study

. Study undertaken by ICSI and the Toulouse School of Economics, onbehalf of industrial operator

. Compared three scenarios for a maritime LPG importation andrefilling site:

1 safety barriers proposed by plant operator (removal of one LPG sphere,removal of railway wagons on site, reduction of quantity of gas storedon site)

2 mounding LPG spheres to protect from impinging flame (measureimposed by competent authorities)

3 closure of the facility, with current clients being supplied by truck fromanother facility

. Relatively dense urbanization around the site:• > 7000 people within a 900 m radius

• potential domino effects towards neighboring facilities8 / 21 ESReDA Land-User Planning and Risk-informed decision-making conference, October 2012

Steps comprising a BCA

1 Specify the perimeter of the analysis• list of economic agents for whom we will estimate the consequences of

the scenarios

2 List the consequences of the scenarios and choose ways ofmeasuring them

3 Provide a quantitative prediction of the consequences for eachscenario, over the project lifetime

4 Monetize the consequences• convert them into a monetary unit to allow comparison

5 Discount future benefits and costs, in order to obtain the netpresent value of each scenario

6 Analyze the robustness of the results obtained by undertaking anuncertainty analysis for the main uncertain input parameters

7 Recommend a decision


Consequenceestimation

. 420 people (in addition to 22 workers on site) workingor living within a radius of 360m

. 6 700 people living between 360 and 900m

. 24 500 people living between 900 and 1 600m10 / 21 ESReDA Land-User Planning and Risk-informed decision-making conference, October 2012

Hazards considered

. unconfined vapour cloud explosion (UVCE), due to a leak offlammable gas to the atmosphere which explodes some time after thetime of release

. jet fire, a large flame due to a leak of gas to the atmosphere whichignites close to release point

. BLEVE

Accidental scenarios considered:

. BLEVE of LPG transport trucks, railway wagons, or large LPGstorage spheres (envelope scenario)

. pipe ruptures, for pipes of small and large diameter

. the rupture of loading mechanisms for railway wagons or trucks

Probabilities and consequences taken from the safety case.


Consequences excluded from study perimeter

. Impact on firm’s image in case of an accident• very difficult to estimate

• would depend strongly on how the accident was reported in the media

. Strategic value for France of an LPG importation location notmonetized

. Impact on productivity in each scenario is assumed to be negligible


Study assumptions: benefits

. Averted fatalities and injuries:• 2.5M€ per statistical fatality (upper value recommended by EU)

• 300 k€ for severe industrial injury (UK HSE)

• 225 k€ for severe road accident, 33 k€ minor road accident (Frenchministry)

. Avoided material damages:• value of industrial facility is estimated at 25M€

• nearby industrial installations: 67.5M€

• LPG tankers and cargo boats potentially at port: 60M€

• lost production of firms in nearby industrial zone: 5M€

• house in potentially affected area average 150 k€, apartments 120 k€

• replacing window frames and windows: 5.5 k€

• average household has 1.5 vehicles, each worth 15 k€


Study assumptions (scenario 3)

. Site closure → estimated increase in 475 000 km/year in road traffic• 400 000 km of trucks with small LPG bottles• 75 000 km for LPG tankers

. Annual consequences of extra traffic [accident statistics concerninghazardous materials transport]:

• 366 · 10-5 statistical deaths• 2 928 · 10-5 severe injuries• 5 124 · 10-5 light injuries

. Environmental impact (external cost of CO2 emissions) ≈ 0.6€/km

. Dismantling the facility is assumed to have a zero net cost• sale of scrap metal from the installations would compensate for labour

costs


Study assumptions: costs

. Investment for scenario 1: 1.5M€

. Investment for scenario 2: 10M€

. Extra operating costs for scenario 3: 1.1M€ per year• higher LPG purchasing costs at other importation sites on the French

west coast• additional road transport

. Investment horizon: 15 years

. Social discount rate of 4%

. Cost of lost employment on the site (both direct and indirect) over 4years: 1.2M€


Summary of benefits and costs

Scenario 1 Scenario 2 Scenario 3BenefitsAverted fatalities 6 275 6 400 -1 169Averted injuries 2 745 2 817 -5 060Material damage avoided

On site 950 675 4 000Off site 1 045 1 016 1 087

Sum of benefits 11 015 10 908 -1 142

Direct costsInvestment 129 723 864 818 0Distribution overheads 0 0 1 100 000Other direct costs 0 0 43 241

Indirect costsEnvironmental costs 0 0 2 850Lost indirect employment 0 0 103 778

Sum of costs 129 723 864 818 1 249 869

Net annual benefit -118 708 -853 910 -1 251 011


Robustness of the conclusions


Interpretation

. Closure of site would lead to an increase in the level of risk to whichinhabitants of the region are exposed

. Scenarios 1 and 2 would result in levels of technological risk whichare within the same confidence interval

• cost of the second scenario is 7 times greater than the first

. Alternative presentation: net cost to society of each statistical deathaverted by implementing the safety measure is 50 M€ for scenario 1and 332M€ for scenario 2

• 1.5M€ for public investment in road safety projects in France• 2.5M€ for regulatory impact assessment of EU legislation on air quality

. Suggests that scenarios 1 and 2 are inefficient : larger number offatalities could be avoided if spending were allocated to other classesof risks


Reception of the method

. Results presented to the competent authorities by the site operator

. Authorities required implementation of scenario 2• risk-informed and cost-informed argument was rejected

. Argument not judged sufficiently convincing to override a BestAvailable Technology approach

• national doctrine requiring flame-proof mounds

. Argument based on concepts such as statistical value of life wasjudged difficult to defend politically

. National doctrine concerning the management of technological riskis based on uniform thresholds defining acceptable exposure to risk

• little latitude for the integration of cost considerations• low impact of local preferences


Conclusions

. BCA invented in France by Jules Dupuit in the mid 1800s, to assistdecision-making concerning maintenance of public transportationinfrastructures

• but decision-evaluation techniques see little use in France …

. BCA could provide decision-makers and stakeholders with a clearerview of the benefits and drawbacks of the various alternativesavailable in land-use planning decisions

. Help to establish compromises which are in the public interest

. Document the different issues which impact the decision andhighlight the different weights accorded to different criteria

• decision process becomes more transparent and more open to publicdebate and critique

• land-use planning decisions should be better accepted by stakeholders


Thanks for your attention!

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Engineering

Benefit-cost analysis as a decision-support tool for risk-informed land use planning