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Energy Policy & Economics Group

Cost-Benefit Analysis (CBA)

The Energy Policy and Economics Group provides estimates of the monetary and non-monetary benefits and costs of specific technologies, policies, and projects, including energy projects, environmental cleanup, major capital construction, and changes in energy efficiency. Tools include life cycle cost analysis, travel cost method, contingent valuation method, hedonic pricing method, and ecological evaluation method.

Life Cycle Cost Analysis (LCCA) is an evaluation technique applicable for the consideration of certain project's investment decisions. Specifically, when it has been decided that a project will be implemented, LCCA will assist in determining the best -the lowest-cost -way to accomplish the project.

The LCCA approach enables the total cost comparison of competing project's alternatives, each of which is appropriate for implementation of energy, environment, or capital contrcution project. All of the relevant costs that occur throughout the life of an alternative, not simply the original expenditures, are included. Also, the effects of the project's construction and maintenance activities on users, as well as the direct costs to the project, are accounted for. LCCA analysis considers both the public (society) costs and benefits and private (project) cost and benefits by accounting for both positive and negative externalities to the society and the project's owner(s).

Travel Cost Method (TCM) seeks to place a value on non-market environmental goods and services by using certain consumption behavior in related markets. In TCM, the cost of consuming the goods and services of the natural resources are used as an approximation for their prices. TCM cost include all relevant travel to environment site costs, entry fees, on-site spending and the depreciation on all capital equipments necessary for this consumption.

Cost-Benefit Analysis (CBA)

Contingent Valuation Method (CVM) enables economic values to be estimated for a wide range of goods and services not traded in markets. CVM economic value is measurable in relation to utility (satisfaction) functions through the concepts of willingness to pay (WTP) and willingness to accept (WTA) compensation, as well as through the related measure of consumer surplus (consumer surplus measures the difference between what is person's maximum willing to pay for a commodity and the amount he/she actually is required to pay).

Hedonic Pricing Method (HPM) identifies environmental service flows as elements of a vector of characteristics describing a marketed good, typically housing. HPM seeks to find relationship between levels of environmental services (such as air pollution level or noise level), and the prices of the marketed good (houses).

Ecological Evaluation Method (EEM) estimate the damage cost avoided, replacement cost, and substitution cost. EEM estimate values of ecosystem services based on either the costs of avoiding damages due to lost services, the cost of replacing ecosystem services, or the cost of providing substitute services. These methods do not provide strict measures of economic values, which are based on peoples' willingness to pay for a product or service. Instead, they assume that the costs of avoiding damages or replacing ecosystems or their services provide useful estimates of the value of these ecosystems or services. This is based on the assumption that, if people incur costs to avoid damages caused by lost ecosystem services, or to replace the services of ecosystems, then those services must be worth at least what people paid to replace them. Thus, this method is most appropriately applied in cases where damage avoidance or replacement expenditures have actually been, or will actually be, made.

Over the past two decades, EP&E has developed a wide range of signature capabilities in the Cost-Benefit Analysis area. The services we provide to our clients at the national, regional, state and local levels help solve complex economic, energy, and environmental problems, while demonstrating a full understanding of the social, economic, institutional and regulatory implications. EP&E host all the capabilities to serve the needs of our clients in the areas of Cost-Benefit Analysis. These capabilities include 30 experienced staff of which there are 15 economists, availability of tools and resources, along with significant multidisciplinary linkages to PNNL staff in other discipline areas.

For further information on CBA, contact Dave M. Anderson, Pacific Northwest National Laboratory (PNNL), at (509) 375-6781.

Energy Policy and
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