Valuation method & cost benefit assessment


(ThaoPham) #1

In a controlled scenario, government implement a measure, let’s say in year 2020 with a specific installation cost of some technologies. Every year, there is an add-on operation cost. These technologies have life time of 30 years. So, by the year 2035, all investment cost = installation cost + (2035-2020) * annual operation cost.
I estimated health benefit (i.e., mortality) of PM10 emissions reduction in year 2035 (between BAU and strengthen control measure). From my understanding, this is number of avoided mortality/specific year 2035.
I then also adopted VSL year 2015 (Thailand) from VSL (US EPA) and projected to year 2035.
Valuation now is a function of avoided mortality of specific year 2035 and VSL year 2035.

My question: In order to estimate cost-benefit of this measure, should I just compare health benefit in specific year 2035 to all investment cost up to year 2035? …considering that air benefit and heath benefit occurred every year since 2020 with implementation of new measure.

Thank you for your kind consideration and feedback in advance.

Best,

Thao


(Neal) #2

Hello Thao,

Thanks for your question.

Let me first make sure I understand your question… It sounds like:
–you are estimating the benefits and costs of a policy that will require a facility to install pollution control equipment in the year 2020 and that this equipment has a useful life of 30 years.
–you estimated benefits for the year 2035 (using a VSL transferred to Thailand).

And you want to know:
–how should you compare your benefits quantified in a single year (2035) to the costs incurring over a multi-decade period?

Does that sound about right? If so, I think you have two options:

  1. Compare the benefits occurring in the year 2035 to the annualized costs for the year 2035.
  2. Calculate the present value of benefits and the present value of costs over the life of the project. Calculate a net present value.

I think that the second option is preferable as it reflects the costs and benefits over the life of the project. However, you will also need to calculate benefits for each year of the project.

I hope this helps. Please feel free to write back with further questions.

Best wishes,
Neal Fann


(ThaoPham) #3

Hello Neal:

Thank you for your reply.
Yes, you understood right my hypothesis and question.
For 2 options, I would like to have more clarification:

  1. Option 1: Annualized cost = installation/lifetime of product + annual operation cost. Am I understanding right?
  2. Option 2: I estimated only emission reduction and air benefit and avoided mortality for a single year 2035. To calculate benefit for each year (let say during 2020-2035), should I repeat all steps for each year (including emissions reduction/air benefit/health benefit).
  3. In both 2 cases above, should I also apply a so called “mortality lag adjustment” in this case to for distribute health benefit over years? For example, with option 1, if avoided mortality in year 2035 equal 100 mortality, so it will be 30 mortality in year 2036 (30% during first year), 50 mortality in year 2037-2040 (50% during next 2-5 years), and 20 mortality in year 2041 - 2056 (20% during following 6-20 years).

I am searching some literature about valuation & mortality lag adjustment from US EPA. I would be very appreciated for your suggestion (if any)

Overall, I am excited with learning more and apply BenMAP to support policy maker in Thailand. Thanks for BenMAP team!

Best wishes,

Thao


(Neal) #4

Hi Thao,

Regarding your questions:

  1. Let me confirm with one of my colleagues who is an economist. I believe that you need to annualize the installation cost over the life of the project.
  2. That’s correct. However, you could simplify this process by assuming that the benefits are constant across the 10-year period if you do not have the air quality and population data for each year.
  3. I would not recommend applying the lag adjustment. This will simplify your analysis.

Best wishes,
Neal Fann


(ThaoPham) #5

Hi Neal, Just would like to say thanks for your answer. I found it useful !
Best wishes,

Thao