An economist’s view of BCAs

1. An economist’s view of BCAs • I. Why conduct a Benefit Cost Analysis (BCA)? • II. What’s in a BCA? • III. What’s a BCA for a NRCS program look like? • IV. The Road Ahead • V. Summary

2. I. Why conduct a BCA? Four-Fold Reason: • Meets an OMB requirement • Distills Important Information • Informs Policy Makers • Identifies Cost-effective Program Options

3. (1) OMB requirement • If done poorly, policy and program introduction could be delayed. • EO 12866 is basis for action by agencies to respond to concerns of the public with respect to spending and cost effectiveness; assure that direction of social dollars to worthwhile “ventures”.

4. EO 12866 • Analysis of the risks, benefits, and costs associated with regulation must be guided by the principles of full disclosure and transparency. Data, models, inferences, and assumptions should be identified and evaluated explicitly, together with adequate justifications of choices made, and assessments of the effects of these choices on the analysis.

5. EO 12866 (continued -1) • Requires a statement of the need for the proposed action: • Usually, need is related to address a “market failure”: • Externalities; • Market power, such as natural monopoly; and/or, • Information asymmetry. • With respect to NRCS, market failure usually centers around: • Externalities (spill-over effects of agricultural production).

6. EO 12866 (continued -2) There are guidelines as to what triggers different kinds of BCA’s.

7. (2) Helps Present Information • Considers all major likely cost impacts. • Costs and benefits are put on a common footing (ideally in dollars and cents). • Organizes information carefully to compare net benefits derived from policy options. • Acts as a “funnel” for lots of information.

8. (3) Assists Policy Makers • Can help design and later explain policy actions and program features. • Encourages policy makers to look at policy alternatives and gives them information to help compare or rank them. • Can explore ramifications of Government /non-Government interventions.

9. (4) Can lower program costs • Can allow others to understand policy intent and offer viable alternatives. • Can help policy makers to select most cost-effective policy alternatives. • Can provide performance-based measures for programs which can assist in meeting other Government requirements, i.e. Performance Assessment Rating Tool (PART).

10. II. What’s in a BCA? • Identification of who/what is being affected. • Establishment of cause-and-effect relationships. • Determination of behavior of those individuals or the environment affected. • Ideally, placing monetary values on costs and benefits.

11. Benefits (Assets or Credits) Direct: Observable, Cause and Effect can be seen/may be able to be measured. Indirect: Hidden in many cases. Care needed to use multipliers. Can be great in the case of public goods. Unintended: Not anticipated. Difficult to assess beforehand, even qualitatively. Costs (Liabilities or Debits) Direct: Borne by producer, consumers, and the Government. Indirect: Borne by third parties who, in many cases, can not participate in the market. Unintended: Not anticipated. Possibilities need to be discussed. “T-Account” for a BCA

12. III. What’s a BCA for a NRCS program look like? • Consider the following sequence of events: • Field-level (or on-site) conservation efforts tie-in to edge-of-field benefits; • On-site environmental improvements tie-in to larger-scale (or off-site) benefits; and, • Off-site benefits translate into economic benefits (or environmental index) for society in the future.

13. Field-level (or on-site) conservation efforts tie-in to edge-of-field benefits • Develop possible sets or bundles of field-level conservation practices. • Arrange them by effectiveness and increasing cost. • Estimate the edge-of-field environmental impacts of the field-level practices. • Example for sediment loss (soil erosion).

16. Figure 1. Improvements in lowering field level sediment loss on cultivated cropland. • High • Y-axis: Reductions in tons per acre per year • “Dose Response” • Low • Low • High • X-axis: Conservation System Intensity (in dollar terms)

17. This process needs to consider all resource concerns (as reported in CEAP): • Now: • Sediment Loss (Soil) • Later: • Phosphorus Loss • Nitrogen Loss • Pesticide Loss • Wind Erosion • Soil Organic Carbon

18. This process also needs to consider all major land uses: • Current Example: • Cropland • Must consider: • Grazing land • Pasture • Others?

19. Figure 2. Transfer of On-site Effects to Off-site Locations. • High • Y-axis: Off-site reductions in sediment at watershed level. • Low • Low • High • X-axis: Reductions in tons of field sediment loss from cultivated cropland

20. Number (s) National Aggregate Estimate 1 5 to 8 Sub-National 8 to 50 Regional or State Level > 50; < 400 ? Watershed > 400; < 800 ? Major Land Resource Area (MLRA) Common Resource Area (CRA) 1,350 (minimum)

21. Figure 3. Cumulative Effect of Conservation Efforts (in dollar or index terms) on watershed level. • High • Y-axis: Value of the Increased Flow of EGS. • Low • Low • High • X-axis: Off-site reductions in sediment at watershed level.

22. Preceding Figures Establish Links to Benefits: • Figure 1. Links conservation efforts to edge-of-field environmental effects. • Figure 2. Links edge-of-field environmental effects to more macro-level benefits. • Figure 3. Creates an index or dollar-value for over-all environmental improvements. • We can link these individual figures to match original set of conservation efforts to over-all environmental improvements.

23. Figure 4. Linking Conservation to Benefit Gains • Local Level Positive Environmental Effect(s) Axis • High • Panel 1. Soil Loss Reductions from Conservation Efforts • Panel 2. Soil loss to Regional EGS improvements • Conservation Intensity Axis • Regional EGS Axis • B • D • High • High • Panel 3. Regional EGS Improvements converted to Index (or Economic) Unit Gains. • A • C • Panel 4. Implied Gains comparison to Conservation Efforts. • Potential Gains ($ or Index) Axis • High

24. Let’s look at benefits side • Soil erosion affects yields and water usage at the farm production site. • Soil erosion affects sediment delivery to near-by streams and rivers. • Soil erosion can affect air quality.

25. Soil erosion • Soil erosion can reduce yields 9 to 34 percent on corn/soybean farms in Indiana • Why? • Organic matter decreases • Soil’s ability to hold water decreases • Cation exchange capacity declines • Next Table is from “Effects of Soil Erosion on Soil Productivity and Soil Quality”, USDA, NRCS, Soil Quality Institute, 1998

28. Benefits ($18.62) Direct on-site benefits: $5.83 $4.39 through higher yields and enhanced nutrient use and $1.44 through improved water usage. Indirect: $ 12.79 Air quality improvements of $3.16 in health and $3.31 in property. Water quality improvements of $6.32 Unintended: Labor savings? Time Allocation? Costs (? $) Direct technology adoption costs. Opportunity costs? Indirect: ? Unintended: Increased herbicide applications with no-till conservation practices? “T-Account” for Soil Loss Benefits(per ton)

29. Need to aggregate per acre impacts across all participants in watershed • Need to establish baseline of current sediment loss and calculate change. • Aggregate across all participants in each watershed. • Aggregate across all watersheds. • Produce regional estimates and aggregate them to produce national estimate.

30. Recap: Impose framework for each major land use and resource concern • Start with cropland and then move to: • Grazing land • Pasture • After soil loss, focus on other resource concerns: • Phosphorus loss • Nitrogen loss • Pesticide loss • Wind erosion • Soil Organic Carbon

31. What, Where and How • Need to estimate expected program changes. • How do program changes entice producers to participate? • What kinds of producers would be enticed and what are their resource concerns? • What kinds of actions would producers take? • What are the potential costs for producers and NRCS? • What is the nature of the potential environmental gains, i.e. time lags?

32. IV. The Road Ahead • Break Tasks into Four Major Areas: • Program formulation • Cost-side considerations • Impact on Producers and Consumers • Impact on NRCS budget and work force • Benefit-side considerations • Long-term value with widespread beneficiaries • Slow realization of benefit stream • Modeling of “Parts” • Simplify and condense key elements of program, costs and benefits • Conduct sensitivity analysis

33. How to tackle problems. • Obtain better data and develop better science (takes additional time and effort). • Use sensitivity analysis to explore how results differ with different baseline numbers, etc. • Apply risk framework to analysis to do much the same as in a sensitivity analysis. • Abandon monetary estimation of benefits. • Develop environmental indices, or • Do cost-effectiveness analysis. • Abandon benefit estimation altogether. • Do impact analysis only (pro’s and con’s of actions)

34. Discuss non-economic factors • There are many non-quantifiable, important considerations: • Human well-being. • Widespread ecological benefits to the public. • Land Fragmentation. • Keeping agriculture viable in rural communities. • Other non-economic factors. • Put findings into broader discussion of human activities and sustainability. • Link into past and current research and findings.

41. V. Summary • Program assessments require best science and techniques available and sustained efforts. • Bio-physical effects are the building blocks for any economic assessment. • This is a team effort. • Economic evaluation might not be possible for benefits – may need to simply list out key variables or representative index or indices. • Need to conduct BCAs will not go away; incorporation of their needs makes sense (but not necessarily “dollars and cents”).

42. Many ways to “skin a cat”: Any framework must provide a means to: • Link the original cost of conservation measures with the eventual environmental and economic benefits from those measures. • Illustrate the influence of NRCS programs to encourage producers to take those measures (behavioral component). • With above, produce an estimate of benefits and costs of NRCS program costs taking into account other factors, such as impact of regulatory policies, producer self-motivations.