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David Pannell Centre for Environmental Economics and Policy Value for Money in Environmental Policy and Environmental Economics

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Problems with the salinity policy Selection of projects Delivery mechanisms Design of projects Objectives Internal logic Focus on outcomes

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Observations The problems of the salinity program occur in many other programs and agencies Cause enormous loss of environmental benefits Readily avoidable (some trivially easy) Low awareness

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Why value for money is important Limited resources for environmental actions Salinity program: $1.4 billion Full mitigation cost:$65 billion Achieving significant outcomes can be expensive Gippsland Lakes, Australia Target 40% reduction in nutrients over 25 years Budget: PV $30m Min cost: PV $1000m

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Why value for money is important Heterogeneity among potential investments Values at stake Threats Feasibility Time lags Adoption/ compliance Project risks Costs

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Huge range of benefits and costs Best 5% = BCR 330 times better than median Source: Fuller et al. (2010). Nature

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Questions 1.What is required for public environmental programs to deliver value for money? 2.What can economists do to increase the chance that investment in environmental economics analysis provides value for money?

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Value for money from investment in environmental programs

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1. Be selective Target resources to the best investments Which environmental issues? In which places? Which people to involve? Best = expected to provide most valuable environmental benefits

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2. Focus on outcomes Decisions about project priorities, project design, program design, should explicitly consider the environmental outcomes likely to be achieved Very commonly, programs dont do so beyond a superficial level e.g. most agri-environmental programs

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e.g. Environmental Stewardship program Entry-level scheme has 200 priority options e.g. permanent grassland with very low inputs legume- and herb-rich swards uncropped cultivated areas for ground-nesting birds

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Outcomes? Program indicates type of environmental benefits e.g. dragonflies, newts, toads, bats, dormice, soil erosion Ideally, allocate funds to actions/places most valuable environmental outcomes Would need to account for How many extra bats? How much improved water quality? How much does the community care? Its hard, but more effort needed

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Implication for programs Focus on actions rather than outcomes means that most funded projects are not great

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Implication for programs A suggested strategy: start with outcomes you want and work backwards Outcome: Reduce frequency of algal blooms in Gippsland Lakes from 1 year in 3 to 1 in 10 by 2025 Working backwards: What on-ground actions would be required to achieve that target? Where? How much? What policy actions would be required to bring about those on- ground actions? Cost? Value for money?

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3. Consider all relevant info Bio-physical factors Condition without (current condition, future threats) Effectiveness of management Time lags (in threats, in response to actions) Project risks (technical) Socio-economic factors Importance of the environmental values Adoption/compliance level Time lag (adoption) Discount rate Project risks (social, political, financial)

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Implications for programs If you leave some out, project prioritisation can be greatly weakened Most programs that do prioritise miss several out values effect of on-ground actions adoption/compliance maintenance costs time lags

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4. Use a sound metric The most common metric used to rank projects is weighted additive Score = w 1.x 1 + w 2.x 2 + w 3.x 3 + w 4.x 4 + Where x 1 = environmental threats x 2 = project risk x 3 = adoption x 4 = project cost etc.

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Implications for programs Very poor rankings Implies you can compensate for having no adoption by having low technical risk, but you cant Where benefits are proportional to a variable, it should be multiplied, not added To max benefits, must divide by cost, not subtract it Logic leads to a very different metric Can make huge difference to environmental benefits ultimately achieved

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Comparing project rankings R 2 = 0.7% Cost divided Favours cheap projects Of best 16 only 1 is actually best Loss 50% (5% budget) Easy to fix

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5. Comparing scale/intensity Typically only one scale/intensity is considered for a project But value for money can be highly sensitive to scale/intensity

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Diminishing marginal benefits Width of riparian buffer strips in Germany (Sieber et al. 2010, Land Use Policy) 3m wide: 61% reduction in pesticides in river 30m wide: 94% reduction 50m wide: 96% reduction Technical vs psychological

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Increasing marginal costs BCR:0.040.31.13.2

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6. Select good policy mechanism Salinity policy: spent most of its money on extension Promoted practices that were not adoptable on the required scale Needed a simple tool to help people think through the choice of mechanism Public: Private Benefits Framework

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Definitions Private benefits & costs relate to the landholder making the decisions (internal) Public benefits & costs: all others (external) neighbours, downstream water users, city dwellers interested in biodiversity

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Possible projects Each dot is a set of land-use changes on specific pieces of land = a project. Perennials Farm A Perennials Farm B Forestry in water catchment Current practice Which tool? Incentives Extension Regulation New technology No action

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Simple rules for allocating mechanisms to projects 1. No positive incentives for land- use change unless public net benefits of change are positive. 2. No positive incentives if landholders would adopt land-use changes without those incentives. 3. No positive incentives if overall costs outweigh overall benefits.

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Simple public-private benefits framework Pannell (2008) Land Economics Win/Win Win/Small loss Win/ Large loss Large loss/ Win Small loss/ Win Loss/Loss

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7. Other Review proposed projects for accuracy, logic Monitoring, learning, adaptation (uncertainty) Training and support for decision makers Incentives for environmental managers to pursue outcomes Remove incentives that conflict with that

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What vs How? Both 1.Be selective (what) 2.Outcomes (what and how) 3.All info (what) 4.Metric (what) 5.Scale (how) 6.Mechanism (how) 7.Logic (how)

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Value for money from investment in environmental economics

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Observations Huge potential Largely unrealised We could do better Apply economic principles to thinking about which economics research to do Getting it across better

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1. Optimising portfolio of EE Many information products to choose from: non-market values market values human behaviour (e.g. adoption of new practices) risk, uncertainty environmental production functions discount rates time lags costs curves transaction costs policy mechanism choice mechanism design metric design

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Policy agencies as consumers

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Do we comply with that? Some info products relatively well-supplied non-market values discount rates Others much less so costs vs scale transaction costs environmental production functions (effectiveness of management) human behavioural responses to policy metric design

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2. Optimise depth/sophistication Fertilizer: maximum profit maximum yield Information: max net benefit maximum detail or sophistication (diminishing marginal benefits)

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Approximate information might be optimal for decision making (depending on context) Also more timely, less challenging

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3. Recognise users limitations Most are not economists Easily psyched out by economics Another reason for simple information Need help to see how to use economics information in their decisions its not obvious Training and support Cultural change

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INFFER Investment Framework for Environmental Resources

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INFFER Addresses the identified common weaknesses Outcome-oriented (works backwards) Includes all key bio-physical and socio-economic variables Theoretically sound metric to rank projects Includes Public: Private Benefits Framework Asks consistency check questions to get the logic right Can cope with expert judgement or high-quality scientific information Simplifications usable by non-economists Structured, documented, supported, training

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River reach Intact native veg Cultural heritage Woodland birds Wetland Listed on register Last of its type Fauna species Flagship Critically endangered Native vegetation Concentration of threatened species Near pristine condition Important location Asset types

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Before INFFERAfter INFFER

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Regional application

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International application

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Final comments Its possible to embed economics thinking in environmental organisations/agencies Many challenges Culture, timeliness, transaction costs, communications, aversion to the results, attitudes to economics Enormous opportunities to deliver greater environmental outcomes worth the effort Keen to support a UK pilot of INFFER

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inffer.org pannelldiscussions.net