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HELM TALKS: Natural Capital Lecture 3

  1. 1. QUESTIONS What is cost-benefit analysis? What are the main techniques? How does discounting work? When can it be applied?
  2. 2. WHAT IS COST-BENEFIT ANALYSIS? FOCUS: all that matters is utility rest of the economy is competitively priced everything comes in discrete marginal bits distribution does not matter on utility and ecosystem services, not natural capital assets AN ATTEMPT TO: assumes assets are simply the NPVs of the ecosystem services Correct market prices to take full account of externalities Put prices on non-market goods and services Calculate the net present values of projects ASSUMES:
  3. 3. Trying to elicit valuations by asking people about their preferences vs. Looking at the capitalisation of valuations in asset prices vs. Looking at what people do, and inferring valuations from their choices WHAT ARE THE MAIN TECHNIQUES?
  4. 4. WILLINGNESS TO PAY vs. TO ACCEPT • Stated preferences, questionnaires and strategic behaviour • The physiological problems: framing, lack of information • Risk aversion and inconsistency in results • Taking the pictures from different angles - do the answers vary a lot? • Upper and lower bounds with investment decisions • The Twyford Down example
  5. 5. HEDONIC PRICING AND CAPITALISATION • All prices (and taxes and subsidies) are capitalised in asset values • This includes natural capital • Trying to isolate the particular externality from all the other background conditions • Example: Noise and Heathrow airport’s expansion
  6. 6. INFERRING VALUATIONS FROM CHOICES • Working on North Sea oil rigs vs. similar land based jobs - values risk against higher wages • Value of life studies • Travel time studies - the HS2 example • Walking, swimming, bird watching and nature study - how much time multiplied by wage rates/cost of time
  7. 7. DISCOUNTING THE FUTURE TO GET NPVs • The conventional approach • The social time preference rate • The social opportunity cost • The pure utility discounting and impartiality • Example: the Stern Review and climate change
  8. 8. WHEN CAN CBA BE APPLIED? • General utilitarian approach: only utility is sacred, everything else can be sacrificed • The natural capital approach and the aggregate rules and the thresholds and safe limits • Calculating enhancement values above the thresholds and safe limits • Projects, not systems • A useful set of tools in limited circumstances, not a deciding criterion • Still the basis of the Treasury’s Green Book. State of Natural Capital Second Report
  9. 9. SUMMARY • CBA is the main tool used by economists and the Treasury • The different techniques give different answers • Role confined to enhancements in a natural capital asset-based approach