COST BENEFIT ANALYSIS
FRST 318-MARCH 5, 2013
WINNING BID!
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Licence Number:
A 89069 * February 28, 2013
A89069
Closing Time:*11:00 am Opening Time:11:00 am
Geographic Area: McNeil Lake
BCTS Area: Strait of Georgia (Campbell River)
District Area: Sunshine Coast
Volume: 22,349 m3 Term: 12 months
Species: Hem 43%, D-Fir 35%, Ced 18%, Ald 4%
Upset Stumpage: $21.60
Tender Type: Bid Tender (sec 20) Category: Cat 1,2 or 3
Stand Type: 86% 2nd Growth
Logging System: Hoe Forwarding
silviculture: CCWR, Windfirm treatment
Season: Dry Season
Road Building: New rd. construction 1.8 km
Sechelt/ Hwy 101/ Menacher Rd./
McNeill Lake FSR/ MNL034
Contact:Mike Romalis(604)485-0717
Avg Piece Size: .90 m3/tree
Net merch 717 m3/ha. 32.8 ha area.
3,669 m3 non-competitive($.25)(no bonus)
4 Blocks
Comments: *Amendment#1 changed closing Feb.7 to Feb.14
*Amendment #2 extends closing Feb.28, 2013.
(1.7 ha BLK nearest McNeil Ll. was deleted)
*Amendment #3 includes the tender package
documents to be used.
Amendment #4 Replaces TSL document.
Access:
February 22, 2013
February 20, 2013
February 12, 2013
January 09, 2013
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Total
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BURN DRY WOOD
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JFI FORESTRY
$4.38
$25.98
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WHAT IS COST-BENEFIT ANALYSIS?
• Cost-Benefit analysis is used to
evaluate public actions and
decisions
• Goal is to provide information
on what action provides
society with the most
economically beneficial use of
its resources (Loomis 1993 in
Ward 2006)
• Converts costs and benefits
into a common denominator
(most often money)
APPLICATION
• Can evaluate
introduction of
regulation; or
consideration of
alternative
instruments (tax,
regulation);
• programs-for
example green
transformation (what
Mark mentioned);
• projects
• The analogy to the
private sector-instead
if revenues to a
private firm, CBA
substitutes benefits to
society; and instead
of private costs for
the firm; CBA
substitutes
opportunity cost; and
the equivalent of
profit is benefit minus
cost
DECISION RULE
• A simple decision rule-benefits must exceed costs
• Comparing different actions with same goal, the
one that provides the highest net benefit is the
preferred action and should be adopted if
economic efficiency is the goal
• Other criteria
•
•
•
•
equity
administrative ease
Transparency
Predictability of implementation
ESTABLISHING ASSUMPTIONS AND
SCOPE
• Analysis should consider all those people and
values affected
• Goal is to capture all benefits and costs
regardless of to whom they accrue
• International not typically included unless these are
meant to be specifically evaluated
• Unless specifically restricted should span sectors
and contingent costs
• Benefits and costs should be measured with the
program versus without it
ALTERNATIVES
• Cost Effectiveness analysis
• Where benefits difficult to
measure or quantify or
undesirable to do so (i.e. lives
saved, endangered species)
• Multi-criteria Analysis
• Set of criteria against which
policy options are evaluated
• Environmental Impacts
Assessment
• Provides raw information, with
no common value-some
prefer because it does not
assign values
http://paperdarts.org/storage/1500JoeUchill-High-school-popularity-Acostbenefit-analysis.png
An example of multi-criteria analysis for a major information technology project where
scores are out of a maximum of 100 might look something like the following:
Table 4.5: Multi-Criteria Analysis Example
Unweighted Scores (out of 100)
Criteria [weight]
In-house
Supplier 1
Supplier 2
NPV [60%]
20
100
65
Robustness [20%]
82
90
96
Flexibility [20%]
80
50
78
44.4
88
73.8
Overall Weighted
Average
In this case, supplier 1 is likely to be the preferred option.
Importantly multi-criteria analysis provides decision-makers with an audit trail as the
results are transparent, explicit and documented.
4.7
Concluding Comments
Decision-makers need a consistent basis for assessing competing proposals and to be
fully informed about the implications of using economic resources. By quantifying all
significant costs and benefits in monetary terms it is possible to determine the net
benefits or costs of a given proposal. However some significant benefits or costs may
be subject to uncertainty and/or may not be able to be quantified in monetary terms. This
chapter has outlined a number of analytical tools to unable analysts to assess the effects
of risk and uncertainty, and to allow decision-makers to make informed trade-offs
between the quantitative and qualitative factors that would influence the choice of
OWLS VERSUS DOLLARS
The Policy Question
• Should we reduce old
growth logging to protect
more spotted owl
habitat?
• Note that we could
frame and answer this
question in several ways,
especially in regards to
the prospects of seeing a
species become
extirpated
CONSTRUCTING THE CBA FRAMEWORK
Executive Summary
The spotted owl is one of British Columbia’s most endangered species and its population is
dwindling as logging continues in the coastal old growth forests upon which it depends for
survival. Many other species depend on this habitat, some of which are endangered as well, and
old growth forests provide a host of other benefits to humans. The two major land use options at
issue are logging or protection of these old growth habitats. Protection of old growth forest
carries an opportunity cost in terms of the foregone surplus (producer surplus or economic rent)
from timber harvesting. However, the harvesting of old growth timber carries an opportunity cost
in terms of other foregone values, such as certain recreation opportunities, stored carbon and
ecosystem services (e.g. watershed protection).
The goal of this study was to take a first step towards a rigorous examination of the main land
use
coastalthe
oldheight
growth
with the
intent of determining
oneowl
is optimal
haveoptions
not yetfor
reached
andforest
structural
requirements
to constitutewhich
spotted
habitat. for
society. We do not estimate the value of all costs and benefits associated with the different land
use
instead,
we focus on
the forest
values related
to timber,
Theoptions;
net forest
value estimates
areestimating
present values
for a stream
of annual
benefitsnon-timber
over a 100 forest
year
products,
recreation
and
carbon
sequestration/storage.
We
do
not
attempt
to
estimate
other
period. Once the net forest values are estimated for each of the three scenarios, the opportunity
ecosystem
services
as watersheds,
nutrient
control ofscenarios
soil erosion.
The study
cost associated
withsuch
implementation
of either
ofcycling,
the two and
preservation
is calculated
as
assesses
the
opportunity
costs
of
preservation
of
old
growth
forests
with
adjustment
for
these
the difference in net forest value between the preservation scenario on question and the baseline
selected
benefits
from preservation.
such,
is concerned
with spotted
scenario.potential
We include
sensitivity
analyses for As
many
of the
our study
parameter
assumptions,
such as owl
log
conservation
but
not
exclusively
so.
prices, harvesting costs, the shadow price of carbon and the choice of discount rate for adjusting
future values.
The study methodology involves an economic analysis of preserving old growth forest habitat,
based
on welfare
economics
criteria.
wereofable
to use forest
data generated
frombe
a spatioOur results
suggest
that under
a broadWe
range
parameter
assumptions
there would
a net
temporal
model
designed
by Gowlland
Technologies
and forest
management
scenarios
benefit rather
than
an opportunity
cost associated
withLtd.
increased
preservation
of old
growth
previously
by the
Spotted
Owl Recovery
Cortexrecreational
Consultants and
forests. In designed
other words,
theCanadian
benefits of
preservation
in terms Team,
of increased
Gowlland
Technologies
forforest
their products,
recent report,
A Framework
to Support
Landscape
Analyses
opportunities,
non-timber
and carbon
sequestration
and storage
outweigh
the of
Habitat
Supply
and
Effects
on
Populations
of
Forest-dwelling
Species:
A
Case
Study
Based
on
costs in terms of lost producer surplus from timber harvesting. The only exception occurs when
the
log Northern
prices areSpotted
allowedOwl.
to rise in future and a low value for sequestered carbon is used; in this
case, the opportunity cost turns positive. For most set of assumptions, however, our estimates
Our study considers a specific forest area, the Fraser Timber Supply Area (TSA), which is
SELECTED VALUES
•
•
•
•
Timber
Carbon
Recreation
Non-timber forest products
METHODOLOGY
• Three scenarios are established
• Values are measured over a 100 year period and
summed up
• Sensitivity Analysis is used for the three most
important variables
• Timber prices, carbon prices, and discount rate
• Timber harvest simulation model is used to calculate
changes in forest growth, forest volume, and total
timber stock
SCENARIOS
• Maintaining Current Approach (SOMPcurr)
• Specific area preserved can change so long as 67% of
productive forest within long term activity centres is 100
years old
• Preserving 100% of existing suitable stands are
preserved (SUIT100)
• Habitat is expanded (TERR100)
• Packed territories are defined where contiguous areas of
suitable habitat are not harvested
MEASURING TIMBER VALUES
• Measure producer surplus
• Rely on market values for log prices and harvesting
costs
• The difference is producer surplus
LOG PRICE ASSUMPTIONS
RECREATION VALUES
4.2.1 Consumer Surplus from Outdoor Recreation
We measure the benefits to recreationists from the forests of the Fraser
TSA as their consumer surplus (see Chapter 3). For recreation,
consumer surplus is the difference between how much consumers
value outdoor recreation and how much they spend on outdoor
recreation. There are many different methods for estimating
consumer surplus, the most common of which is the contingent
valuation method. Consumers are asked how much they would be
willing to pay in a hypothetical market for outdoor goods, such as
wildlife habitat and provincial parks, over and above their
expenditure on equipment, travel, and fees or licenses. There have
not been any contingent valuation studies done for BC provincial
forests in the last decade, so we use estimates from the Outdoor
Recreation Survey 1989/90 to form an estimate of current willingness
to pay. This survey covered recreation activities on provincial forests,
which coincides with the area being analyzed in this report, the
Fraser TSA.
MEASURED VALUES
• Consumer surplus
from outdoor
recreation
• Adjusting these
values for forest
harvesting
• Hunting ($0.82 per ha)
• Water-based and
human-powered
recreation activities
($59.70 per ha)
 Angling
 camping,
 hiking,
 backpacking
 paddling, skiing and
snowshoeing
 hot springs
 motorized activities
 hunting
MEASURING NTFP’S
• Commercial Mushroom harvesting (producer
surplus) ($1.27 per ha)
• Recreational mushroom picking (consumer surplus
from hiking plus market value) ($0.45 per ha)
• Floral greenery and other NTFP’s (no value
assigned)
MEASURING CARBON VALUES
• Two main carbon flows
• Carbon sequestration and storage through net
timber growth
• Also carbon emissions from timber harvesting
• Here only looked at decay of timber products
• Did not look at changes in carbon content in the soil and
understory biomass, carbon emissions during harvesting
VALUING CARBON
• Pick three values to test sensitivity of results
• $20, $75, and $150
• Assume different decay rates for timber products
• 38% becomes construction lumber (5% loss 1st year, then
approximately 1% thereafter)
• 16.3% other type of lumber (40% 1st year, then approx. 1%)
• 45.7% becomes chips (50% 1st year, then 9% for next 5 years)
• So net value of Carbon for each scenario equals
that sequestered over the period minus the losses
RESULTS FOR ONE SET OF
ASSUMPTIONS
BREAKING DOWN THE COMPARISON
1%, rising log prices
In this scenario it does not
make sense to reduce
harvests; note that Baseline
scenario has highest value
Timber
Revenues
Costs
Producer
surplus
Hunting
Other
recreation
NTFP's
Carbon ($20)
total
Amount by
which
SOMPcurr is
bigger
(smaller)
SOMPcurr
SUIT100
Terr100
7747.8
5220.5
5039.8
7020.5
4883.2
4732.4
Amount by
which
SOMPcurr is
bigger
(smaller)(for
Terr100)
727.7
337.3
307.4
420.3
15.11
14.81
14.55
0.56
3404.5
3515.2
3544.9
-140.4
28.04
25.81
28.16
-0.12
-3.8
4171.55
111
4004.12
131.8
4026.81
-135.6
167.43
144.74
144.74
ANSWER
• Yes, that we should
reduce old growth
logging
• They find that the
economic benefit of
preserving more old
growth (which leads
to lower harvest
levels) yields greater
economic benefits
• They do not attach
any value to the
spotted owl
SENSITIVITY ANALYSIS
Table 4.5
Summary of Parameter Assumptions
Parameter
Units
Value
Old Growth Log Prices
Cedar
Douglas fir
HemBal
Pine/larch
Spruce
Deciduous
$/m³
$/m³
$/m³
$/m³
$/m³
$/m³
135.83
104.10
61.72
43.83
85.61
60.00
Second Growth Log Prices
Cedar
Douglas fir
HemBal
Spruce
$/m³
$/m³
$/m³
$/m³
121.08
75.85
54.05
63.83
Harvesting Costs
$/m³
79.98
Average per hectare Recreation Values
Hunting
Water-based and human-powered
$/ha
$/ha
0.82
59.70
Non-Timber Forest Products
Commercial harvesting
Recreational harvesting
$/ha
$/ha
1.27
0.45
$/tonne
20, 75, 150
%
1, 4, 7
years
100
Shadow Price of Carbon 32
Discount Rate
Time Horizon for Modeling
in the region or country.
Are all the costs and benefits realisticall y valued? Use the previous points to assess
whether you have either overvalued the benefits or undervalued the costs. If you have
had to rely on figures provided by those promoting the project, check them for the
optimism bias. Seek evidence of benefits and costs from reputable sources.
SENSITIVITY ANALYSIS
If the NPV is very high, why hasn’t the proposal been implemented earlier? If the
NPV is very large, a useful check is to ask why it hasn’t been done earlier. A large
NPV suggests a very high return, and possibly higher than the existing programmes.
Are there any variables that really influence the results? Often there are one or two
variables (prices, values, capital cost) that drive the whole project, usually the capital
cost of the project and the level of benefits. As these costs/benefits can be hard to
estimate, you can check the robustness of the analysis by undertaking a sensitivity
analysis, which is simply a second analysis with a sensitive variable changed by
±10% or ±50% or whatever is a realistic and possible variation. If the benefits of a
project are uncertain, a sensitivity analysis will show the impact on the NPV of (say) a
100% variation to the estimated benefits. If the NPV remains positive or negative
(whichever is the case) despite the change in the assumption, you can be much more
comfortable of the robustness of your result.
Have you considered too few options? Decisions where there are no realistic choices
are rare. There is always the “do-nothing”/“status quo” option and there will usually be
choices as to the size, scope, form, or timing of projects. It is important that options
are not ruled out solely because of differences in technical performance without an
examination of comparative costs.
60
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COST BENEFIT ANALYSIS PRIMER – DEPARTMENTAL CFISNET RELEASE | 43
Table 4.5
Summary of Parameter Assumptions
Parameter
Units
Value
Old Growth Log Prices
Cedar
Douglas fir
HemBal
Pine/larch
Spruce
Deciduous
$/m³
$/m³
$/m³
$/m³
$/m³
$/m³
135.83
104.10
61.72
43.83
85.61
60.00
Second Growth Log Prices
Cedar
Douglas fir
HemBal
Spruce
$/m³
$/m³
$/m³
$/m³
121.08
75.85
54.05
63.83
Harvesting Costs
$/m³
79.98
Average per hectare Recreation Values
Hunting
Water-based and human-powered
$/ha
$/ha
0.82
59.70
Non-Timber Forest Products
Commercial harvesting
Recreational harvesting
$/ha
$/ha
1.27
0.45
$/tonne
20, 75, 150
%
1, 4, 7
years
100
Shadow Price of Carbon 32
Discount Rate
Time Horizon for Modeling
ALLOWABLE CUT EFFECT (ACE)
• The Allowable Cut
Effect exists where
there are
regulations or
policies that
constrain harvest
levels
• Examples in BC are
the metering out of
old growth timber
(key for it to work)
• Improvements in
growth and yield
are spread out over
the entire rotation
• Conversely losses in
timber are also
spread out
(regardless of
whether or not timber
was close to
harvesting age)
USING ACE AS AN INCENTIVE
A New Silviculture Framework for British Columbia:
Options and Recommendations Report
Prepared by
Resource Practices Branch
Ministry of Forests, Lands and Natural Resource Operations
May, 2011
EFFECT OF ACE
Standard CBA
Effect of ACE
• Cost of improving the
stand -$1000 per hectare
• Result-doubling of growth
(an additional 995 cubic
metres)
• Standard cost-benefit:
• If you can take additional
volume over the 58
years… ($13,187/58)
• Discounted Benefit:
$13,187/1.0558=$778
• Cost: $1000
• So NPV =-$222
• Then it looks quite different
• Using a formula-the
present value of a finite
annuity
• Result with ACE
• Discounted benefit =
($13,187/58)*((1.05)581)/.05*(1.05)58 = $4,546
• Same cost but NPV=$3,546
EXPERIENCE WITH ACE