6.4 Evaluating projects and policies  (Page 2/14)

Transfers are not costs

Cost totals should only include real changes in behavior or resource use, and not transfers of money from one party to another. For example, imagine a program in which a wastewater treatment plant can pay a farmer for the cost of taking land out of production and installing a wetland on the land that will soak up nutrients that would otherwise flow into a local river. The cost of those nutrient reductions is the cost of installing the wetland and the opportunity cost of the foregone farming activity. If payments for multiple services are permitted, the farmer might also be able to get paid by a conservation group for the wildlife benefit associated with the new wetland. However, that additional payment to the farmer is a pure transfer. The social cost of the wetland has not gone up just because the farmer was paid more for it.

Use the correct counterfactual

Many cursory analyses of the costs of a policy find the difference between the cost of something before and after the policy was put in place and claim that any increase was caused by the policy. For example, the U.S. government put temporary restrictions on offshore oil drilling after the Deepwater Horizon explosion and oil spill to consider new environmental regulations on such drilling. After those restrictions were put in place, the price of crude oil in the U.S. went up. A sloppy analysis would attribute all the costs of that price increase to the drilling restrictions. However, during the same period of 2010, the U.S. economy was beginning to pull out of a very deep recession; this caused increased manufacturing activity and consumer driving, and thus an increased call for fossil-fuel energy. Therefore, some of the increase in oil prices might have been driven by the increased demand for oil. A careful analysis would compare the price of oil with the restrictions in place to what the price of oil would have been during the same time period if the restrictions had not been implemented—that hypothetical scenario is the true counterfactual    .

Additionality

A careful analysis of the costs of a program includes only costs that are additional, that is, new additions to costs that would have existed even in the absence of the program. For example, current regulations require developers to use temporary controls while constructing a new building to prevent large amounts of sediment from being washed into local rivers and lakes. Suppose EPA wants to estimate the costs of a new regulation that further requires new development to be designed such that stormwater doesn’t run off the site after the building is finished. A proper analysis would not include the costs of the temporary stormwater controls in the estimate of the cost of the new regulation, because those temporary controls would be required even in the absence of the new regulation ( Braden and Ando, 2011 ). The concept of additionality    has been made famous in the context of benefit estimation by a debate over whether programs that pay landowners not to deforest their lands have benefits that are additional; some of those lands might not have been deforested even without the payments, or the landowners may receive conservation payments from multiple sources for the same activity.