Impact pathway approach

The Impact Pathway and Cost-Benefit Modelling Review

Peter Bickel, Rainer Friedrich, IER, University of Stuttgart

In this review we present the Impact Pathway Approach (IPA), which has been developed to support policy decisions in the context of reducing environmental and health impacts from energy use. After sketching the need for quantifying health damage costs we explain the procedure of the IPA, we discuss the central requirements for a decision support methodology and finally draw conclusions.

Purpose of Quantifying Health Damage Costs

Human activities cause damages and impose risks on human beings, ecosystems and materials. For instance, a power plant when producing electricity may emit pollutants that are transported in the atmosphere and then when inhaled can create a health risk or after deposition can disturb ecosystems. In order to be able to assess and compare the damages (often referred to as “external effects”) with each other and with costs, it is advantageous to transform them into a common unit; the choice of a monetary unit here has advantages described later. Thus converting external effects into monetary units results in damage costs or external costs.

Why would we want to calculate external costs and for what purposes do we need or use them? There are a number of purposes, which are described in the following.

When investment decisions are made, e.g. about which power plant technology to use or where to site a power plant, it is evident that it would be of interest for society to take environmental and health impacts into account and include the external effects into the decision process. To support the decision process, the social costs of the investment alternatives, i.e. the sum of internal and external costs, can then be compared. If decisions are to be taken now, but the consequences of the decisions reach decades into the future, the possible future costs have to be estimated.

In a similar way external cost estimates are useful for carrying out technology assessments, and thus to find out the principal weaknesses and strengths of a technology and to be able to assess the overall performance and usefulness of a technology; this would for example help to answer questions about whether and where the technology would need further improvement, and whether subsidising it or supporting further research might be justified.

A third very important field of application is the performance of cost-benefit- analyses for policies and measures that reduce environmental and health impacts. Policies and measures for reducing environmental pollution generally imply additional costs for industry and consumers. Thus it is important for the acceptance of the measure to show that the benefits, for example reduced health risks, outweigh or justify the costs. The benefit can be expressed as avoided damage costs. To calculate these it is necessary to create two scenarios: a baseline scenario, which describes a development without the implementation of the measure or policy and a scenario including it. Then the impacts occurring for the two scenarios are calculated. The difference of the impacts is monetised; this gives the avoided damage costs or benefits (provided that the impacts of the scenario with the measure are lower than for the baseline scenario). These benefits can then be compared with the costs. If benefits are larger than costs, the policy or measure is beneficial for society’s welfare.

The fourth area of application is the assessment of health and environmental impacts occurring in a region due to activities of different economic branches, in short green accounting. For example one could monetise the health effects occurring due to emission of different pollutants, and can then rank different source categories, economic sectors or pollutants according to their health impacts, compare health effects in different countries or imposed from one country to another or to compare health effects of different years to find out whether the situation is improving.

The Impact Pathway Approach

The general idea of the Impact Pathway Approach is illustrated in Figure 1. A human activity (e.g. electricity production) causes changes in environmental pressures (e.g. air pollutant emissions), which are dispersed, leading to changes in environmental burdens and associated impacts on various receptors, such as human beings, crops, building materials or ecosystems (e.g. emissions of air pollutants leading to respiratory diseases). This change in impacts leads either directly or indirectly (e.g. through health effects caused by air pollutants) to a change in the utility of the affected persons. Welfare changes resulting from these impacts are transferred into monetary values. Based on the concepts of welfare economics, monetary valuation follows the approach of ‘willingness-to-pay’ for improved environmental quality. It is obvious that not all impacts can be modelled for all pollutants in detail. For this reason the most important pollutants and damage categories (so-called “priority impact pathways”) are selected for detailed analysis.

One of the strengths and main principles of the IPA is the valuation of damages (e.g. additional respiratory hospital admissions) and not pressures or effects (e.g. emissions of fine particles). The monetary valuation of concrete casualties (e.g. hospital admissions) is more reliable and transparent than deriving a general willingness-to-pay for reducing air pollution.

Many of the impact pathways include non-linearities, due to air chemistry for example, therefore impacts and costs from two scenarios are calculated: a reference scenario reflecting the base case concerning the amount of pollutants or noise emitted, and a modified scenario, which is based on the reference scenario, but with changes in emissions due to the activity considered. For the marginal analysis this may be an additional road vehicle, for the sectoral analysis this may be the emissions from the electricity production sector in one country. The difference in physical impacts and resulting damage costs of both scenarios represents the effect from the activity considered.

The principle of modelling the pressure (e.g. emissions), resulting burden (e.g. pollutant concentration increase), response of receptors (e.g. health damages) and monetary valuation can and should be applied for all impact categories. The main bottleneck of this procedure is the availability of the models required for the different stages.

The IPA was developed, made operational by providing the models required on each stage and updated for air pollution impacts in the ExternE project series (see e.g. Friedrich and Bickel, 2001; European Commission, 1999 and 2005). Besides the different phases of ExternE the methodology has been used and applied to support several policy decisions and legislative proposals, e. g. of DG Environment, such as to perform economic evaluations of the:

• Draft directive on non-hazardous waste incineration.
• Large combustion plant directive.
• EU strategy to combat acidification.
• Costs and benefits of the UN-ECE Multi-pollutant, Multi-effect protocol and of proposals under this protocol (e. g. NOx and VOC control).
• Costs and benefits for the emission ceilings directive.
• Air quality limits for PAHs.
• Diversion of PVC from incineration to landfill and recycling.
• Benefits of compliance with the EU environmental acquis: quantification of the benefits of air quality improvements.
• Costs and benefits of acidification and ground level ozone (as input to negotiation on the ozone directive 1998).
• Air quality guidelines on CO and benzene.
• Second NOx Protocol (for the UN-ECE Task Force on economic aspects of abatement strategies).
• Clean Air for Europe (CAFE) Programme

Discussion of Central Aspects Relevant for Decision Suppor t

The applications mentioned in the first section above all have something in common: having calculated different impacts (risks, damage) or indicators that indicate to what extent objectives are fulfilled, it is necessary to compare these impacts with each other and with costs. To compare technologies or assess policies, it has to be found out whether one set of impacts and costs is better or worse than another set. This is not straightforward, as the different impacts have different units, so they cannot be added directly. So, before being able to add them, it is necessary to transform them into a common unit. Central aspects relevant for providing decision support in the context of INTARESE are discussed in the following.

1. All the applications mentioned in the first section imply that there are different effects and impacts that somehow have to be weighted relative to others to get an overall assessment of whether one basket of impacts is better or worse than another. The first requirement to a decision support methodology is that this assessment or weighting of impacts is as far as possible carried out using quantitative figures and procedures. The reason is that only quantitative algorithms ensure the necessary transparency and reproducibility of results.

1. Secondly, the use of monetary values as common unit into which impacts are transformed has a number of advantages. First, units are conceivable. The importance of an impact in monetary units, say €10,000, can be directly and intuitively grasped, as one can compare it with the utility of the goods and services that one could buy with this amount. Whereas an amount of say 120 utility points does not say anything about the importance of the impact. Secondly, monetary values are transferable from one application to another. This is because monetary units are defined independently of the assessment process. So if a monetary valuation of the risk to get a certain disease, e.g. bronchitis, has been found, this value can – with some caution and adjustment – then be used in a further analysis, where this disease occurs, without having to carry out a new survey on its monetary value. Thirdly, the applications mentioned in the first section at some stage require the use of monetary units. So in order to compare costs with utility, it is necessary to convert utility into monetary units. It would of course also be possible to convert costs into some measure of utility like ecopoints, but this is obviously less useful due to the first reason mentioned.

1. How is it possible to get a measure for the relative importance of impacts and thus for the weighting factors or algorithms needed? As no natural law exists that somehow weighs impacts with different units, the logical possibility is to measure the preferences of the population. This can be done with a number of methods, e.g. by asking for or observing the willingness to pay to avoid a certain impact. The only alternative would be to measure the preferences of elected representatives of the population, with the argument that representatives are or can be better informed than the public. However, these representatives change, so that benefit transfer is difficult or not possible. Furthermore experience with multiattribute utility analysis shows that decision makers are often not willing to expose their preference structure, possibly because they fear that they lose influence on their decisions. Although it is also possible to use revealed preferences of decision makers for example, the preferred way is to directly measure preferences of the population. To get useful results, impacts should be described and explained as well as possible before measuring preferences. Given that it would be not feasible to ask the whole population, it seems sufficient to ask a representative sample of the population. Thus, the assessment of impacts is based on the (measured) preferences of the affected well-informed population.

1. To be able to get meaningful results, the interviewed persons have to understand the change of utility that occurs due to the impact to be assessed. This implies that it is important to value damages, not pressures or effects. For instance, it is not useful to ask for the willingness to pay to avoid an amount of emissions, say 5 tonnes of NOx, as no one – at least without further information or knowledge – can judge the severity of this or the damage or loss of utility caused by this emission. On the other hand, if somebody is asked for an assessment of a concrete health risk, e.g. a cough day, he can compare this impact with other impacts and changes of utility that he experiences.

1. An important aspect is that damage costs depend on the time and site of the emission. For instance, if air pollutants are released in a densely populated area, the health of more people is at risk than for a site where equal amounts of pollutants are emitted but in a less densely populated area. Noise in a city at night is more annoying than a similar noise level outside the city during the day. The decision support methodology should thus be capable of calculating site and time dependent damage costs. Only a detailed bottom-up calculation allows a close appreciation of such site, time and technology dependence.

1. Depending on the nature of the policy question, average or aggregated damage costs have to be calculated as needed to support the implementation of different policy instruments.

Conclusion

The Impact Pathway Approach provides a well-established framework for providing decision support in the context of INTARESE. It complies with the requirements described in the previous section. The valuation of impacts in monetary units is based on welfare economics and follows the principles of cost-benefit analysis. Alternative approaches for weighting different impacts (e.g. use of multiattribute utility analysis) are possible; however they have to be justified well.

References

European Commission (1999): ExternE: Externalities of Energy. Vol.7: Methodology 1998 Update (EUR 19083); Vol.8: Global Warming (EUR 18836); Vol.9: Fuel Cycles for Emerging and End-Use Technologies, Transport and Waste (EUR 18887); Vol.10: National Implementation (EUR 18528). Published by European Commission, Directorate-General XII, Science Research and Development. Office for Official Publications of the European Communities, L-2920 Luxembourg. Available at http://www.externe.info/

European Commission (2005): ExternE - Externalities of Energy – Methodology 2005 Update. EUR 21951 EN. Office for Official Publications of the European Communities, Luxembourg 2005, ISBN 92-79-00423-9. Available at http://www.externe.info/

Friedrich, R. and P. Bickel, (eds.) (2001): Environmental External Costs of Transport. Berlin Heidelberg, Springer-Verlag, 2001.