Monetization of impacts

The content of this article is based on a presentation of monetization of impacts held in the Kuopio workshop by Alex Kuhn from USTUTT. The original presentation slides can be found here

Monetisation – why?

• Why do we monetise impacts?
  • To compare damages that cannot be compared per se -> use a common unit (monetary value: intuitively, comparable to costs, transferable)
  • To compare the damages with costs (e.g. the cost of abatement measures) -> conducting a cost-benefit-analysis (CBA)
• For which purposes do we need to monetise impacts?
  • Investment decisions / technology assessments
  • Impact analysis and ranking of alternative policies/projects
  • CBA for policies and projects
  • Aid for internalising external costs – getting the prices right
  • Green accounting / Sustainability and welfare indicator; assessment of impacts/damage categories

External costs

• What are external costs?
  • An external cost is a cost not included in the market price of the goods and services being produced, i.e. a cost not borne by those who create it.
  • We use avoided external costs as a measure of benefits of a strategy / mitigation scenario.

How to monetise?

• There is no natural measure for monetisation.
• Needed: Weighing factors for relative importance of impacts (in this case = certain health outcomes).
• Approach: Ask the population about their preferences. -> Assessment of impacts is based on the (measured) preferences of the affected well-informed population.

• Also to be addressed: Discounting -> time preference

Indirect valuation (taken from a lecture by Rainer Friedrich)

• Hedonic price method - prices of commodities contain implicitly the willingness to pay for the no-market goods
  • prices or rents of houses
  • wages for jobs with different risks
• Averting behaviour method - costs of products paid to reduce risks or damage
  • purchase of a safety equipment (airbags in cars)
  • installation of water filtering systems
• Travel cost method - number of trips to areas (e.g. recreation areas) with certain features as a function of expenses including travel time
• Contingent behaviour method - interviews to find out the changes in behaviour (number of trips), if a feature (e.g. environmental quality) of a good changes

Direct valuation (taken from a lecture by Rainer Friedrich)

• Contingent valuation method (CVM)
  • willingness to pay
  • willingness to accept compensation
• Attribute based choice modelling (ABCM)
  • choice experiments
  • conjoint analysis
  • contingent ranking
• Particpatory approaches
• Surveys asking public decision-makers for their preferences (corresponds to multi-attribute utility analysis)

Contingent valuation method - CVM

• Uses survey questions or experiments to elicit the preference of people for non-market goods
• asks people directly for their willingness to pay or willingness to accept compensation
• Advantage compared to indirect vlauation techniques:
  • contingent valuation techniques can be applied for all types of goods, i.e. also for goods where no market data or behaviour in the past can be found

Health impacts: Components of Welfare (from a presentation at Heimtsa Meeting by Alistair Hunt)

• 1. Resource costs i.e. medical costs
• 2. Opportunity costs i.e. the cost in terms of lost productivity (work time loss (or performing at less than full capacity)) and the opportunity cost of leisure (leisure time loss) including non-paid work.
  • 1 + 2 = Cost-of-illness

• 3. Dis-utility i.e. other social and economic costs including any restrictions on or reduced enjoyment of desired leisure activities, discomfort or inconvenience (pain or suffering), anxiety about the future, and concern and inconvenience to family members and others.
  • 1 + 2 + 3 = Willingness to pay (WTP)

Evaluation of health risks (taken from a lecture by Rainer Friedrich)

• Critical arguments often brought forward:
  • basic human right not to be subjected to physical harm by other people
  • people would value a certain human life infinitively high
• But:
  • in reality people weigh costs and benefits of investments into safety equipment carefully
  • a trade-off between health risks and income is found in day-to-day decisions
    • What is to be evaluated are changes in ex-ante risks, not ex-post risks such as the deaths of known individuals

Cost-Benefit-Analyses

• Method for overall assessment of the advantages of projects, measures, technologies etc.
• Comprehensive consideration of costs and benefits
• Monetary assessement of positive and negative effects (amongst others external costs and benefits)
• Positive appraisal if at a certain point in time the discounted difference between the benefits and the costs is positive

Cost-Effectiveness-Analyses

• In economics, cost-effectiveness refers to the comparison of the relative expenditure (costs) and outcomes (effects) associated with two or more courses of action.
• Costs are defined as in CBA. Benefits are not expressed in monetary values.
• Starting with certain aims (e.g. reduce the CO2-emissions by 10 %): Alternatives have to achieve these aims

Some first answers to questions popped up in the presentation

• When conducting a CBA do we compare increments (comparing things) or do we conduct comprehensive CBAs?
  • I said we are doing increments. Among other things it would be very difficult to quantify Bequemlichkeitskosten (e.g. changing from cars to public transport).
  • -> CBA compares alternatives, usually at least a do-nothing scenario with a do-something scenario; it is crucial to include all relevant differences of the alternatives, because otherwise one would not compare like with like.
• Monetary values for health outcomes: Per health outcome does there exist one ore more values?
  • I said a) we need to have one value for calculation b) uncertainties are extremely high so different values can be neglected and c) for measurement of lost life time there exist different concepts/methods which have different results.
  • -> for each consistent "set of assumption" there is only one value; due to measurement problems there may be a range, from which the most plausible would be taken and the impact of taking "the other" would be explored in a sensitivity analysis.
• Marko said that they were doing a study with sensitivity analyses and they found out that 2 things have the most impacts. One is discounting and I forgot the other one. But dose-response-relationships are not that important in this case.
  • -> discount rate important for "appraisal periods" of more than a couple of years; second: appraisal period?
• If indirect and direct methods are used, is there is difference in valuation? If you ask how much money one is willing to spend and if you look what money he then spends this might not be the same amount.
  • I said that contingent valuation method is the "best" and that the other ones are mostly used if the direct methods cannot be applied. But are there comparisons between different methods?
• Every method has its advantages and disadvantes; for indirect methods a relationship between the impact considered and the amount paid has to be established. For direct methods a realistic decision situation has to be created. And many other problems (sollten im Vorlesungsskript stehen).
• Do people who are already suffering from a desease willing to pay more than healthy people? this might make a difference in the value that results of a survey.
  • -> of course; the respondents must be a representative sample of the population to obtain a reliable result for the preferences of "the society".