APPENDIX D Using Cost-Benefit Analysis in the Management of Contaminated Sediments1

Kenneth E. McConnell

To make decisions concerning contaminated sediments, project managers must weigh the relevant factors and make trade-offs. Just because a treatment technology is available does not necessarily mean it should be used in a given situation. Some technologies are merely prohibitively expensive, especially if large volumes of contaminated sediments are involved, but even after impractical techniques have been eliminated, a single approach must be chosen from a wide range of choices. Making decisions that must take into account multiple viewpoints and factors often necessitates making sophisticated analyses to compare the outcomes of various strategies. This appendix describes cost-benefit analysis, an analytical approach that can assist in decision making and serve as a tool for improving the management of contaminated sediments.

The first section presents an overview of the basis for cost-benefit analysis. The second section, through generic examples, discusses how this tool is applied to the management of contaminated sediments and explores the roles of costs and benefits in decision making. The third section examines the components of costs and benefits and how they are computed. This section concentrates solely on the concepts of costs and benefits, leaving aside complex issues, such as uncertainty. that arise in practical applications. (These issues are addressed in Appendix E). The final section examines practical issues involved in the application of cost-benefit analysis to the management of contaminated sediments.

Many federal agencies have guidelines that explain how costs and benefits are to be computed and used. These guidelines can be applied to making

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This appendix has been edited for grammar and style; accuracy is the sole responsibility of the author.



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--> APPENDIX D Using Cost-Benefit Analysis in the Management of Contaminated Sediments1 Kenneth E. McConnell To make decisions concerning contaminated sediments, project managers must weigh the relevant factors and make trade-offs. Just because a treatment technology is available does not necessarily mean it should be used in a given situation. Some technologies are merely prohibitively expensive, especially if large volumes of contaminated sediments are involved, but even after impractical techniques have been eliminated, a single approach must be chosen from a wide range of choices. Making decisions that must take into account multiple viewpoints and factors often necessitates making sophisticated analyses to compare the outcomes of various strategies. This appendix describes cost-benefit analysis, an analytical approach that can assist in decision making and serve as a tool for improving the management of contaminated sediments. The first section presents an overview of the basis for cost-benefit analysis. The second section, through generic examples, discusses how this tool is applied to the management of contaminated sediments and explores the roles of costs and benefits in decision making. The third section examines the components of costs and benefits and how they are computed. This section concentrates solely on the concepts of costs and benefits, leaving aside complex issues, such as uncertainty. that arise in practical applications. (These issues are addressed in Appendix E). The final section examines practical issues involved in the application of cost-benefit analysis to the management of contaminated sediments. Many federal agencies have guidelines that explain how costs and benefits are to be computed and used. These guidelines can be applied to making 1   This appendix has been edited for grammar and style; accuracy is the sole responsibility of the author.

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--> decisions about environmental issues but have not been used systematically in the context of contaminated sediments. Cost-benefit analysis can provide valuable perspectives on the best ways to manage contaminated sediments. OVERVIEW OF COST-BENEFIT ANALYSIS The allocation of scarce resources is a fundamental issue in public policy analysis. These resources include human labor, the natural assets of the environment and the resource base, and the capital stock created by human effort. Labor, natural resources, and capital are used to create goods and services for consumption in the present and to produce capital stock for the future. Choosing among alternative plans for the management of contaminated sediments involves trade-offs among the uses of society's scarce resources. The decision to dredge a harbor involves commitments of labor and equipment that cannot be used elsewhere at the same time. Dredging for navigation may entail other uses of the area. A dredged channel might enhance recreational boating, for example, with consequent stresses to the environment, or it might change fishing patterns by replacing shallow water habitat with deeper waters, increasing vessel traffic, and generally encouraging development. Navigation channels could spur reductions in the price of transportation services while also fostering the expansion of the coastal fishing fleet, thereby increasing pressure on fisheries. On the other hand, the decision not to dredge a harbor may deprive society of scarce navigation services. Many other trade-offs must be made in choosing tactics and strategies for managing contaminated marine sediments. When resources are allocated in a given market, the market participants must make these trade-offs; competitive forces typically allocate resources to their most valuable use. But in rivers, channels, and estuaries, where the problems of contaminated sediments arise, market forces allocate resources inefficiently because some of the costs and benefits cannot be captured by individuals or firms. For example, pesticides used for agriculture in drainage basins far from a port can contribute to the contamination of dredged sediments, raising the cost of downstream navigation for those who obtain no benefits from the agricultural practices. The implementation of management plans for contaminated sediments bestows economic gains on some groups and imparts economic losses to others Equally important, the absence of management plans and the failure to implement plans also bestows benefits and costs. Taxpayers may benefit by not having to pay for the handling of contaminated sediments, but revenues from a particular fishery may be curtailed by the presence of these sediments. In many cases, the gains of one group greatly exceed the losses of another group. Because the net gains-that is, the social gains-can be quite large, it makes sense to consider in an orderly way whether decisions are socially productive by comparing the gains or benefits from a sediment management plan with the costs.

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--> This approach is consistent with guidelines for cost-benefit analysis established by the federal government. One prominent set of guidelines is the Economic and Environmental Principles and Guidelines for Water and Related Land Resources Implementation Studies (Water Resources Council, 1983), which reflects more than 50 years of experience in the application of cost-benefit analysis to the allocation of water resources. The Principles and Guidelines applies the broad language of cost-benefit analysis to the specific tasks of evaluating water resource projects. The driving force is national economic development. Cost-benefit analysis is used by various government agencies, such as the Forest Service and the U.S. Environmental Protection Agency. Benefits are prescribed legally in the Oil Pollution Act of 1990 (United States Code, Title 33, Section 2701)2 and the Comprehensive Environmental Response, Cleanup, and Liability Act of 1980 (CERCLA) (42 USC §9601). The growing importance of cost-benefit analysis is described in Smith (1984). ROLE OF ECONOMICS IN MANAGING CONTAMINATED SEDIMENTS Generic Example The role of economics in managing contaminated sediments can be visualized using a simple graph, such as Figure D-1, which shows the basic trade-offs involved in decision making. (This type of graph can be found in leading environmental policy texts, such as Baumol and Oates [1992].) In this stylized view, the horizontal axis indicates the degree to which contaminants in the sediments are reduced. Associated with this variable are certain costs and benefits. The units on the horizontal axis could reflect the percentage of contaminants removed, the cubic yards of sediment removed, or a variety of other measures reflecting a reduction in contamination. For simplicity of discussion, the horizontal axis in Figure D-1 measures the percentage of contaminants removed. At the origin (far left), no contaminants have been removed; this is the level of contaminants prior to removal. At the 100 percent level (far right), all contaminants have been removed. The vertical axis measures both the costs and benefits of sediment removal. The costs pertaining to contaminant removal include all actions taken to remove and manage contaminants. Each vertical point on the cost schedule (the concave curve) is the least cost of attaining the given percentage reduction in contaminants. For purposes of illustration, imagine that dredging is the method of removal. The costs of dredging, including the costs of labor and capital to carry out the task as well as the costs of the natural resources or other methods of managing the 2   References to the United States Code will be abbreviated using the format: 33 USC §2701.

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--> FIGURE D-1 Conceptual illustration of the trade-offs involved in cost-benefit analysis. A = best decision point, B = benefits equal costs, C = worst decision point. dredged material, rise at an escalating rate as the percentage of contaminants removed increases. Removing the last 1 percent may cost as much as removing the first 99 percent or may not even be feasible. Some cleanup projects, or cleanup to some particular standard, may not be feasible at sites covered by CERCLA, commonly known as Superfund. In these cases, given the degree of cleanup required on the horizontal axis, the costs are so high on the vertical axis that they are beyond consideration. The benefits include improvements in navigation and in various human services as a result of the reduction in contaminant levels. For example, lowering contamination may mean that the exposure of humans to a potentially damaging substance is reduced or that a closed fishery can be reopened. How these benefits can be measured is explained later in this appendix. For the present, it is sufficient to assume that they can be measured and that all the effects of the contaminants are considered. As dredged materials are removed, benefits increase and the concentration of contaminants declines. However, the rate of increase in benefits declines (the concave curve). At a certain width and depth of the channel, no additional navigation benefits are provided. At very low levels of contamination, the removal of remaining contaminants may do little if anything to reduce health risks or to improve in ecological functions. This is a classic benefit schedule for the removal of contaminants. These cost and benefit schedules show how a decision maker can choose the optimal level of contaminant removal. At point A in Figure D-1, the difference between costs and benefits is at a maximum value for the entire graph. This is the

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--> best choice from an economic standpoint because the benefits outweigh the costs by the greatest possible amount. For contaminant removal rates to the right of point A, the extra costs exceed the extra benefits, and society is not making the best use of its resources. That is, society is devoting additional resources to removing contaminants but not getting commensurate value. At point B, for example, costs just equal benefits; there would be no net gain from contaminant removal because the gains (measured by the height of the benefit schedule) are just matched by the costs. At point C, the costs of cleanup exceed the benefits, and society has made a poor decision concerning resource allocation. At this point, additional contaminant removal increases costs substantially but provides few added benefits. When and How Cost-Benefit Analysis Is Applied The value of comparing benefits and costs stems from the need to make trade-offs. When decisions are made, one type of good or service is substituted for another. When there is a gain in navigation services, there is a loss in scarce factors of production used in dredging and the opportunities for dredging they created. When the scarce factors of production associated with dredging are used to provide an estuary free of contaminated sediments, the value of these scarce resources in other parts of the economy is relinquished. It is a fundamental tenet of economics that factors of production—human services, raw materials, equipment, natural resources—have many uses throughout the economy. When they are used in one part of the economy, opportunities for using them elsewhere are lost. Calculating costs and benefits ensures that when decisions to allocate resources are made, the lost opportunities are counted, and the costs and benefits will not be grossly out of balance. Cost-benefit analysis accounts for the scarcity of the factors of production in terms of their usefulness throughout the economy. Many objections have been made to weighing costs and benefits in environmental decision making, especially when human health risks are involved. There are two common objections: (1) it is ethically wrong to try to choose sundry economic values over human health; and (2) the benefits encompass many intangible services that are impossible to measure. But strong counterarguments can be made on each score. Consider the assertion that risks to human health should be minimized, regardless of the cost. This argument ignores the opportunity cost of resources (i.e., the cost of opportunities given up, as discussed later in this appendix). Moreover, even if the goal were to minimize the risk to human life at any cost, that goal could be most effectively achieved by taking some of the resources used to reduce the contaminants from point A to point C in Figure D-1 and investing them in other life-saving programs. With respect to the difficulty of measuring benefits, economists have made considerable strides in measuring the economic value of intangible services, some of which are directly connected with the functioning

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--> of marine ecological systems. These advances are described in Freeman (1993) and Mitchell and Carson (1989). Many of the problems inherent in measuring benefits of the marine environment could be resolved through a systematic effort, which might involve gathering simple data on how people spend their time and money—facts that are needed to measure economic values. This type of information can be obtained through straightforward, well-known survey techniques. The difficulty of computing benefits becomes less discouraging when one considers how cost-benefit analysis is generally applied. In practice, cost-benefit analysis is more likely to be used to compare a small set of projects than a continuum of cleanup possibilities. As long as benefits are calculated consistently, the outcomes will be comparable. For example, it is possible to compare the costs and benefits of several remediation strategies involving different volumes of dredged sediment, although it may not be possible to find consistent measures for comparing the social impacts of dredging to those of, say, incineration. Figure D-2 shows a hypothetical example. Four projects are arrayed in order of the amount of sediment removed. The difference is the net benefit, which, moving from project I to project 4, first increases but then becomes negative. (This generic example is comparable to the decision analysis test case described in Appendix E.) Cost-benefit analysis also can be useful for evaluating targets. Often, remediation projects are designed to remove contaminants to a given level, reduce risks to human health to a given level, or reduce contamination in a frequently monitored species to a certain level. An example of a species-level target would be 4 parts per million (ppm) of polychlorinated biphenyls (PCBs) in flounder. Such targets can be subjected to cost-benefit analysis just as individual practices can. An examination of the costs and benefits associated with particular goals, constraints, or targets can provide two types of insights. First, by determining whether the benefits of attaining the target exceed the costs, an analysis can indicate whether achieving the target is a good use of scarce resources. Second, the costs and benefits of strategies that achieve different targets can be compared. For example, suppose all the costs and benefits of attaining a 4 ppm ''body burden"3 of PCBs in a critical species (including the economic benefits of the reduced body burden) have been calculated. If the costs exceed the benefits, then it would make sense to examine a less stringent goal, say 8 ppm. Figure D-3 shows two hypothetical projects, one with a target of 8 ppm, the other with a target of 4 ppm. The former is placed to the left because achieving the latter (4 ppm) target requires more resources and involves a greater reduction in contaminant levels. By comparing the net benefits (benefits minus costs) of the two projects, it is evident that, in this hypothetical example, the less stringent target makes more sense economically than the higher target. 3   "Body burden" is defined as the concentration of a contaminant in the tissues of an organism.

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--> FIGURE D-2 Example of cost-benefit analysis with discrete projects. CALCULATING COSTS AND BENEFITS Calculating costs and benefits as part of the contaminated sediments management process does not imply that only costs and benefits matter. Obviously, the social desirability of projects is influenced by many other factors, such as the distribution of costs and benefits among groups with different income levels, legal and regulatory rectitude, and unmeasured but substantiated ecological changes. But it is also important to know how productive, in economic terms, a strategy will be. Calculating the projected economic gains and losses, and distributing this information to the participants in the decision-making process, should help determine the best use of resources. Over time, there will be significant

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--> FIGURE D-3 Costs and benefits of reducing body burden improvements in resource allocation, and hence increases in real income, when gains exceed costs on numerous projects. Components of Costs In practice, the trade-offs among different uses of the marine environment are complex. (These complexities can be handled systematically in decision analysis, as discussed in Appendix E.) Putting aside the complexities for now, there are really only three kinds of costs involved in the management of contaminated sediments: dollar costs of remediation and cleanup (dredging, sediment transport, ex situ and in situ treatment, land acquisition, capping, etc.) dollar costs of foregone port services as a consequence of capacity constraints and channel restrictions environmental costs (in dollars) of contaminants in the sediments (including damages to natural resources from foregone use of the natural environment as well as the costs to human health from exposure to contaminants)

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--> The costs of remediation and cleanup are the most obvious because they entail out-of-pocket expenses and, therefore, are likely to be the first costs considered. These costs pertain to any action taken to reduce the harm from and exposure to contaminated sediments. The second type of cost is associated with the impact of contaminants on ports. These costs reflect the value of opportunities foregone as a consequence of the contaminated sediments. Transportation and port services can be curtailed in several ways. Failure to maintain channels by dredging restricts shipping. Ships may be able to enter only at high tide, or they may have to lighten their loads by transferring cargo to other ships outside of port. Restrictions, delays, and extra handling add costs to the movement of cargo through the port. Ultimately, these costs are absorbed by the general public in the form of higher prices for transported goods. Port services are also impaired by barriers to the expansion of port capacity through the building of extra piers, slips, or other elements of port infrastructure. These costs are important but are probably the least understood, and the most difficult to quantify. The broad area of environmental costs encompasses several components. The best-quantified aspect is the damage to natural resources, which is roughly equivalent to the economic losses incurred as a consequence of injury to natural resources. In the case of contaminated marine sediments, damages are caused by the presence or resuspension of contaminants, which may alter the benthic ecology, change patterns of food availability for particular species of fish, or injure commercially or recreationally valuable species throughout the food chain. A once-viable fishery could be eliminated, or restrictions might be imposed on the catch for health reasons. In addition to damages to natural resources, there are ecological effects and direct costs from the health effects of contaminated sediments. In some instances, exposure to contaminants increases the risk of morbidity or mortality in humans. In a statistical sense, the excess risks of morbidity and mortality imposed by exposure to hazardous or contaminated sediments are part of the costs. The category of ecological effects is a catchall and reflects the fact that not all costs can be measured. Ecological functions of marine resources can be degraded in many ways; for example, the environment might lose its capacity to support rare or endangered species protected for the sake of ecological diversity rather than economic value. Only some types of degradation can be measured, and only a subset of these is amenable to economic valuation. Defining Costs and Benefits The components and logic outlined above apply not only to costs but also to benefits because the benefits of an action are simply the costs of not taking the action. One of the advantages of considering costs and benefits explicitly in public decisions is the conversion of different services into the common unit of money. But a common unit does not, by itself, ensure comparability. Costs and

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--> benefits of different management strategies and services must also be based on the same concepts. Whether the focus is on the treatment or removal of sediments, natural resource damages, or other aspects of costs, a common conceptual framework guides calculations. Only when the same ideas motivate the calculations of the costs is it reasonable to discuss trade-offs among actions. A consistent conceptual framework is outlined here. Economic benefits of a project, service, or access to a resource can be defined as the public's maximum willingness to pay for the project, service, or access to a resource rather than do without it. The public's willingness to pay is simply the sum of the willingness of private individuals to pay. Costs need to reflect opportunities given up. In other words, the cost of a certain action is the dollar value of the best alternative course of action that could have been pursued instead. This is the fundamental definition of cost as opportunity cost. For example, the cost of using an acre of land for the disposal of dredged material is the dollar value of the next-best alternative, which in most cases is the price of that acre of land. The cost of hiring an engineer for two months on a project is the opportunity cost of employment elsewhere, which would be the engineer's wages in most cases. The cost of preparing a site to receive contaminated sediments is the cost of labor and equipment that could have been used elsewhere. The notion of opportunity cost can be used whenever there is any doubt about exactly what the costs are. The use of opportunity cost as the fundamental basis of costs connects costs and benefits. Benefits are simply the reverse of costs: The benefits of an action are the costs of not taking the action. For example, suppose that the lost value of recreational use of a beach is one of the costs of not removing contaminated sediments. Then one of the benefits of removing the sediments is the incremental value of recreational use due to the removal. The arithmetic of cost-benefit analysis is illustrated in Box D-1. For the purposes of calculation, it is also essential to define which costs and benefits matter. For public decisions, social benefits and social costs are the key measures. These are any costs incurred (or benefits received) by anyone affected by actions (or the lack of action) concerning contaminated marine sediments. Social costs include all the usual private costs as well as costs not typically thought of as private. For example, a port pays the private costs of operating a dredge but does not cover the health and material expenses inflicted on others or on the ecosystem at the sediment placement site (although in some cases these costs are paid in mitigation elsewhere). The social cost is the sum of the private costs and the external costs (adding contaminants to the placement site). Alternatively, when a firm uses a toxic substance, it pays the material costs through the purchase but may not pay the costs imposed on others if the substance escapes into the marine environment. The social cost of the use of the toxic substance is the sum of both costs. The social benefits are the private benefits that accrue to ports and their users and are transmitted through the pricing system.

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--> Economists always take a human perspective in discussing costs and benefits. Only the costs that humans incur or the benefits that accrue to humans, currently or in the future, count in weighing costs and benefits. The human perspective on costs and benefits reflects the role of humans as decision makers. Humans cannot avoid the consequences of their decisions and so take them into account as explicitly as possible. This anthropocentric viewpoint makes some observers uncomfortable. What about future generations or nonhuman aspects of the natural environment, both now and in the future? Critics often believe, mistakenly, that these issues are ignored, simply because outcomes are valued monetarily. The mistake lies in equating costs and benefits with market outcomes. Just because economics measures the value of alternatives based on monetary returns to humans does not mean that future generations do not count or that nonhuman elements are not important. Those elements count to the extent that humans want them to count. Society can register concern for future generations by preserving resources or providing productive capital for the future. Humans demonstrate concern for the natural environment by protecting it, even when this effort requires giving up control over resources that could be consumed or used for production. In decisions concerning environmental issues, this concept is often introduced when adverse impacts are found to be unacceptable. Some adverse impacts are acceptable, and the features that make them acceptable can be incorporated into the cost-benefit analysis. When cost-benefit analysis is used properly, all aspects of the natural environment are considered, but from the human perspective. Costs and benefits incurred at different times have different values. A treatment process that costs $1 million has a different value today than one that will cost $1 million in two years. The difference is due to discounting: the notion that $1 one year from now is worth (or costs) $1/(l+r) today, where r is the appropriate interest rate (or the discount rate). The present value of the cost of $1 incurred 20 years from now is $1/(l+r)20. In the calculation of natural resource damages, which may be incurred for decades, the role of time is critical. Discounting and the selection of the discount rate have a substantial bearing on the magnitude of costs and benefits. The discount rate measures society's consensus concerning the value of postponing the use of a resource for a period of time. Thus, the discount rate is a critical consideration when decision making is delayed or has long-term effects. When decisions have long-term impacts, as is the case when contaminated sediments are deliberately left in place, the discount rate has a strong influence on costs and benefits; higher rates basically reduce the influence of future generations. In considering the value to society of public projects, a common mistake is to confuse economic impacts with costs and benefits. Economic impacts measure the dollar value of market transactions, such as beachfront rentals and hotel and restaurant revenues. Benefits minus costs (or economic welfare) reflect society's net change in well-being and measure the value to society of what is obtained,

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--> BOX D-1 Simplified Examples of Cost-Benefit Calculations Economic gains and losses are just other words for costs and benefits. To calculate net benefits, one subtracts costs from benefits. In the context of contaminated marine sediments, the costs and benefits are measured by how activities, such as port use and recreation, are influenced by the presence of the sediments and by the health and ecological effects of the contaminants. The use d accounting of costs and benefits are illustrated in the following examples. Consider two strategies for managing contaminated sediments in a waterway where dredging is necessary for navigation. One alternative foregoes dredging to cap the sediments at a cost of $3 million. Because there is no dredging, no navigation services are available. The second alternative dredges the sediments and removes them for ex situ treatment at a cost of $10 million. But as a consequence of the dredging, $12 million in navigation services becomes available. The first alternative has a net gain of - $3 million (i.e., the benefits, which are zero, minus the $3 million cost of capping). The second alternative has a net gain of $2 million ($12 million gain in navigation services minus the $10 million cost of dredging). If the plans were equal in all other respects, then the best alternative would be dredging with ex situ treatment. In another example, suppose, that dredging allows navigation but resuspends contaminants and as a consequence eliminates recreational fishing. Without the dredging, the value of recreational fishing is $5 million, dredging costs $1 million and permits an incremental gain in navigation services worth $2 million. Suppose the first alternative is natural restoration. The benefit of this plan is $5 million, the value of the recreational fishing. The dredging alternative is worth $1 million ($2 million gain in navigation services less the $1 million cost of dredging). In this example, natural restoration would be the preferred strategy from the perspective of gains and losses. The second example can be viewed in a different way without changing the substance. When the strategy of natural restoration is adopted, navigation services are forgone and hence may be considered a cost of natural restoration. But navigation services cannot then also be a benefit of dredging; that would be double counting. In the same way the foregone value of recreational fishing could be considered a cost of dredging but then could not be counted benefit of natural restoration. The

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--> important point is, whether such values are counted as costs of one alternative or benefits of another, there is no impact on the result of the analysis. This is evident from a comparison of the two ways of viewing the second example: Navigation counted as a benefit of dredging A. The net benefits of dredging are $2 million benefits to navigation—$1 million cost of dredging B. The net benefits of natural restoration are $5 million benefits from fishing—$0 cost B—A = 3—(—1)=4. Choose B. The result the same as above. Navigation counted as a cost of natural restoration A. The net benefits of dredging are—$1 million cost of dredging B. The net benefits of natural restoration are $5 million benefits from fishing—$2 million value of lost navigation B—A = 3—(—1)=4. Choose B. The result is the same as above. over and above the value of what must be given up. Economic impacts do not measure the net value of projects, and, in any case, impacts are often costs, not benefits. There is a close connection between economic impacts and so-called secondary benefits. Secondary benefits encompass the additional spending generated from initial expenditures. Spending does not stop with the paycheck for an engineer hired to help dredge a port, for example. The engineer spends income on food, housing, and other services. This spending, however, constitutes economic impact only, and not additional economic value, because the spending could have been generated just as well by dredging at another port. Economic impact is not the focus of cost-benefit analysis, which attempts to measure the net increase in economic value resulting from increased efficiency in the allocation of resources. Social costs and benefits can be distinguished from secondary effects and impacts using a simple test. If a household, firm, or economic agent is influenced directly, through a physical process or fear of such a process rather than through the market, then it is considered a gainer or loser and belongs in the social accounting. When a household or firm is influenced through the market as a result of someone else's direct response, then the reactions are secondary, or economic,

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--> impacts. For example, suppose a notice of contaminated sediments reduces recreational fishing in an area. A true social cost is the loss to recreational fishermen. This cost can be measured using various techniques outlined by Freeman (1993) that involve finding evidence for the reduction in anglers' monetary valuation of recreational opportunities. An economic impact is the reduced spending at the bait and tackle shop in the vicinity of the contaminated sediments. The bait shop operator may suffer, but someone else benefits as a consequence of the redirected spending of the recreational angler. The redirected spending represents a transfer, not a net increase or decrease in social benefits. The only certain, clear cost is absorbed by the recreational anglers. Costs of Remediation and Cleanup In the context of the management of contaminated sediments, most discussions of costs begin with disposal costs. Although there is considerable uncertainty about the magnitude of these costs, few ambiguous or controversial issues are involved in calculating them. These costs can be calculated based on market prices, and they involve tangible goods or services, such as wages and salaries, purchases of raw materials, rentals of equipment, and purchases of land. The calculation of these costs is an application of cost accounting. The uncertainty stems from lack of experience with different scales of operations. Measuring the Economic Cost of Constrained Port Capacity Many of the current cases of contaminated sediments involve ports. In a typical situation, port managers want to dredge to maintain or increase channel capacity. The process of dredging and managing sediments creates a threat to the environment and public well-being, a threat that can be considered an economic cost. (Economic costs are examined in the next section.) But without dredging, port capacity may be restricted to the point that higher costs are imposed on users of the port. With dredging, costs are lowered, thereby providing economic gains to port users and, hence, to society at large. The U.S. Army Corps of Engineers (USACE) has dealt with many of the issues that typically arise in addressing the opportunity costs of not dredging. The USACE generally is organized to consider the costs and benefits of new construction dredging projects, such as dredging a new channel. In its project analysis, the USACE would consider the benefits of the project as navigation benefits and the costs as the direct costs of dredging and similar activities. To compute navigation benefits, the USACE uses the Principles and Guidelines described earlier. There are two types of navigation benefits: benefits related to inland navigation and benefits for deep-draft navigation. Whereas the specific issues that arise for inland and deep-draft navigation may differ, the principles of benefit calculation are the same. According to the Principles and

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--> Guidelines, "The basic economic benefits from navigation management and development plans are the reduction in the value of resources required to transport commodities and the increase in the value of output for goods and services" (Water Resources Council, 1983). This definition is consistent with standard applications of cost-benefit analysis under most circumstances. In most applications, navigation benefits are simply the cost savings from reductions in restrictions. There are two types of cases in which USACE calculations of navigation benefits are incomplete. The first category includes cases in which additional traffic is induced at one port at the expense of traffic at another port; this situation is covered in the Principles and Guidelines but is not addressed in practice. The second situation arises when national policy affects prices for navigational services, in which case the effects of price changes, particularly on other port facilities, must be considered. Current USACE procedures for cost-benefit analysis do not account for possible changes in transportation prices as a consequence of investment projects. It is beyond the task of this committee to consider the economic effects of such large projects, but it is clearly an important issue. The problems of cost-benefit analysis in the case of price changes are discussed in Just et al. (1982). Understanding and Measuring Environmental Costs The growth of the environmental movement, as well as increased understanding of the ecological and environmental effects of the dredging and storing of sediments, has changed the cost-benefit calculation by introducing a third component, known broadly as environmental costs. These costs reflect injury or the threat of injury to a resource or to users of a resource. Recreational users may be prevented from using a certain site, for example, or households may incur health risks through the consumption of contaminated fish products, or the ecological productivity of a wetland may be impaired by contaminated sediments. These are all examples of environmental costs of contaminated sediments. Considerable progress has been made in developing methods for calculating natural resource damages. There is a wealth of work on natural resource damages in the context of Superfund, as amended, and the Oil Pollution Act of 1990, but the issue in the present context is more about the lack of understanding of the kinds of services that are lost and how they can be valued monetarily than it is about legalities. Kopp and Smith (1993) and Ward and Duffield (1992) provide valuable background on this subject. Natural resources generate two kinds of economic value: use value and nonuse (or existence) value. Use value, a widely accepted and frequently used measure, is simply the economic value provided by the opportunity to use resources for recreation, commercial fishing, and other direct uses. Nonuse value is the economic value of goods and services that a person who has no plans for using

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--> the resource, currently or in the future, will give up in order to preserve the resource in its current state. The idea of nonuse value, and especially the methods used to measure it, are subject to controversy (addressed in Federal Register, vol. 58, no. 10, January 15, 1993, pp. 4601-4614). A recent study of the economic losses attributed to contaminated sediments focused on the presence of PCBs and dichloro-diphenyl-trichloroethanes (DDTs) in the coastal waters off Los Angeles. These chemicals had various adverse ecological effects. Researchers estimated the present value of the economic losses per English-speaking household in California to be about $55 (Carson et al., 1994). When this amount is multiplied by the more than 10 million English-speaking households in California, the total losses come to approximately $575 million. Because most of these households never use the marine waters, it is reasonable to conclude that these losses would be passive use or nonuse values. Consider the case of PCBs in New Bedford Harbor. The chemicals, which originated from various manufacturing plants, were deposited into the Acushnet River and the harbor over a period of years. As evidence of the risks from PCBs became known, the Superfund provisions for the recovery of natural resource damages were implemented. Federal and state governments sued the principal responsible parties for damages resulting from the PCBs. Two kinds of uses were impaired: recreational use and the general enjoyment of housing services for waterfront or near-waterfront housing. The housing services are discussed in Mendelsohn and Huguenin (1992). The intuitive meaning of the damage calculation emerges in the broad context of resource allocation. The figure of $3 million in damages over a 20-year period implies that households would be willing to give up control over valued resources (as measured by their own incomes) to prevent or eliminate PCB contamination at several beaches. Thus, if it were discovered that remediation costs were well in excess of $3 million, then such expenditures would have to be justified on grounds other than the efficient use of resources for households. The lost value of housing services was estimated to be more than $30 million (Mendelsohn and Huguenin, 1992). There are two additional components of environmental costs: health costs and ecological costs. Health costs are the costs of increased morbidity and mortality resulting from exposure to contaminated sediments. The calculation of these costs is explained in considerable detail in Freeman (1993). The increased morbidity imposes costs through lost work, pain of illness, and medical costs. The costs of mortality are measured by studies demonstrating what society would pay in social terms to prevent an increase in mortality in a statistical sense. This approach involves assigning a value to a statistical life. For example, a substance that imposes a human risk of mortality of 1 in 10,000 would induce 5 statistical mortalities if 50,000 people were exposed. Given an estimate of society's willingness to pay to prevent the loss of statistical life, the benefits of preventing the

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--> exposure to the substance could be calculated. Evidence that contaminated sediments induce morbidity or mortality is rare, although not unheard of, so these measures typically are not needed to assess management plans. A discussion of the economic costs of increased morbidity and mortality can be found in Cropper and Freeman (1991). The last component, ecological costs, includes the economic costs of damage to the ecological functioning of a natural resource. These costs can sometimes be measured, for example when wetlands provide habitat for a species that is harvested commercially. In most cases, however, the term ''ecological cost" is an admission that some aspects of the environmental effects of policies cannot be measured and must be assessed qualitatively. Examples of cases in which the value of some service can be measured include the Exxon Valdez spill and the PCB-DDT contamination of the Los Angeles Bight. USING COST-BENEFIT ANALYSIS IN DECISIONS ABOUT CONTAMINATED SEDIMENTS The discussion so far has dealt with the role of cost-benefit analysis in resource allocation and the nature of costs and benefits in the context of contaminated sediments. An obvious practical question at this point is how cost-benefit analysis can be used in the decision-making process. It is useful to think of applying these ideas at two levels. On the broad level, decisions about contaminated sediments are part of a larger set of decisions about scarce resources, and in that context it is reasonable to ask whether the benefits to society that result from the decisions warrant the costs to society. On the more concrete level, the role of cost-benefit analysis depends on the nature of the decision and on the legislative and regulatory setting. Some type of cost-benefit analysis is warranted in any decision concerning contaminated sediments. The point is to introduce into the debate a particular way of thinking on the part of project proponents, opponents, mediators, and other interested parties. Costs and benefits must be considered and weighed seriously by decision makers. When the costs exceed the benefits, there must be cogent reasons to proceed with the project, which is not, in broad economic terms, in the public interest. Cost-benefit analysis also has a role in large maintenance dredging projects and new-work projects. The USACE guidelines require cost-benefit analysis for new projects. But many controversial projects involve maintenance dredging. Dredged sediments now have to meet biological criteria, which depend on density but not on the dispersion of toxic materials. For very large maintenance dredging projects, social decision making can be improved if costs and benefits are considered as well as whether the dredged sediments meet the specified criteria

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--> SUMMARY This appendix has outlined the role of economic principles in the choices that confront decision makers and society in determining the efficacy of dredging, the disposition of dredged material, the nature and extent of cleanup, and the general nature of social trade-offs in the managing of contaminated sediments. The basic principle is that activities should be undertaken if the social gain, correctly measured (i.e., in an acceptable manner), exceeds the social cost, correctly measured. These measurements become particularly important when the stakes are large. There are, however, some abiding themes that suggest likely qualitative relationships, even for small projects in which the measurement of costs and benefits does not seem practical. First, the cleanup of contaminated sediments tends to become increasingly costly as the concentration of contaminants declines. Furthermore, the social gains from cleanup tend to increase ever more slowly as the concentration of contaminants declines. However, there are situations in which certain initial measures taken to reduce contamination could be relatively inexpensive, whereas the corresponding social returns could be quite high or vice versa. Decision makers need to take due account of such considerations in weighing costs and benefits. REFERENCES Baumol, W.J., and W. Oates. 1992. The Theory of Environmental Policy, 2nd ed. Englewood Cliffs. New Jersey: Prentice-Hall. Caison, R.T. W.M. Hanemann, R.J. Kopp, J.A. Krosnick, R.C. Mitchell, S. Presser, P.A. Ruud, and V.K. Smith. 1994. Prospective Interim Lost Use Value Due to DDT and PCB Contamination in the Southern California Bight La Jolla, California Natural Resource Damage Assessment, Inc. Cropper, M.L., and A.M. Freeman, III 1991. Environmental health effects. Pp 165-211 in Measuring the Demand for Environmental Quality. J.B. Braden and C. Kolstad, eds. New York: Elsevier Science Publishing Company. Freeman, A.M., III 1993. The Measurement of Environmental and Resource Values. Washington, D.C.: Resources for the Future. Just, R.E., D.L. Hueth, and A. Schmitz 1982. Applied Welfare Economics and Public Policy. Englewood Cliffs, New Jersey: Prentice-Hall. Kopp, R.J., and V.K Smith, eds 1993. Valuing Natural Assets. Washington, D.C.: Resources for the Future. Mendelsohn, R.O., and M. Huguenin. 1992. Measuring hazardous waste damages with panel models. Journal of Environmental Economics and Management 22(3): 259-271. Mitchell, R., and R. Carson. 1989. Using Surveys to Value Public Goods. Washington, D.C.: Resources for the Future. Smith, V.K., ed. 1984. Environmental Policy under Reagan's Executive Order: The Role of Benefit-Cost Analysis. Chapel Hill: University of North Carolina Press. Ward, K.M., and J.W. Duffield, eds. 1992. Natural Resource Damages: Law and Economics. New York: John Wiley & Sons. Water Resources Council. 1983. Economic and Environmental Principles and Guidelines for Water and Related Land Resources Implementation Studies . Washington, D.C.: U.S. Government Printing Office.