Value for Money in Environmental
Policy and Environmental Economics
David Pannell
Centre for Environmental Economics and Policy
Problems with the salinity policy
 Selection of projects
 Delivery mechanisms
 Design of projects
 Objectives
 Internal logic
 Focus on outcomes
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
Why value for money is important
 Limited resources for environmental actions
 Salinity program:
 Full mitigation cost:
$1.4 billion
$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
Why value for money is important
 Heterogeneity among potential investments
 Values at stake
 Threats
 Feasibility
 Time lags
 Adoption/
compliance
 Project risks
 Costs
100000
 Huge range
of benefits
and costs
1000
Benefit
10
 Best 5% =
BCR 330
times better
than
median
0.1
0.001
0.00001
0.0000001
1
100
10000
1000000
Cost
Source: Fuller et al. (2010). Nature
100000000
1E+10
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?
Value for money from
investment in environmental
programs
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
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 don’t do so beyond a
superficial level
 e.g. most agri-environmental programs
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
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?
 It’s hard, but more effort needed
Implication for programs
 Focus on actions rather than outcomes means
that most funded projects are not great
100000
1000
Benefit
10
0.1
0.001
0.00001
0.0000001
1
100
10000
1000000
Cost
100000000
1E+10
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 onground actions? Cost? Value for money?
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)
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
4. Use a sound metric
 The most common metric used to rank projects
is weighted additive
Score = w1.x1 + w2.x2 + w3.x3 + w4.x4 + …
Where
x1 = environmental threats
x2 = project risk
x3 = adoption
x4 = project cost
etc.
Implications for programs
 Very poor rankings
 Implies you can compensate for having no adoption by
having low technical risk, but you can’t
 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
Comparing project rankings
 R2 = 0.7%
Project rank using
weighted additive metric
100
90
 Cost divided
80
70
 Favours cheap
projects
60
50
40
 Of best 16 only 1
is actually best
30
20
10
0
0
10
20
 Loss  50%
(5% budget)
Project rank that maximises environ benefits
30
40
50
60
70
80
90
100
 Easy to fix
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
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
100
90
80
70
60
50
40
30
20
10
0
Benefits
0
10
20
Scale
30
Increasing marginal costs
1200
Cost ($A millions)
1000
800
600
400
200
0
0
10
20
30
40
% redn in P into lakes
BCR:
3.2
1.1
0.3
0.04
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
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
Each dot is a set
of land-use
changes on
specific pieces of
land = a project.
Which tool?
• Incentives
• Extension
• Regulation
• New technology
• No action
Perennials
Farm B
Public net benefits
Possible projects
0
Current
practice
Perennials
Farm A
Private net benefits
Forestry in
water
catchment
Simple rules
for allocating mechanisms to projects
1. No positive incentives for landuse change unless public net
benefits of change are
positive.
A
3. No positive incentives if overall
costs outweigh overall
benefits.
B
Public net benefit
2. No positive incentives if
landholders would adopt
land-use changes without
those incentives.
F
0
C
E
D
Private net benefit
Win/Small loss
Win/
Large loss
Positive
incentives or
technology
change
Public net benefit
Simple public-private benefits
framework
Win/Win
Technology
change
(or no action)
Extension
No action
0
Private net benefit
Small loss/
No action (or
Win flexible
negative
incentives)
No action
(or extension or
negative incentives)
Negative
incentives
Loss/Loss
Large loss/
Win
Pannell (2008) Land Economics
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
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)
Value for money from
investment in environmental
economics
Observations
 Huge potential
 Largely unrealised
 We could do better
 Apply economic principles to thinking about which
economics research to do
 Getting it across better
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
Policy agencies as consumers
 Optimal portfolio determined by
𝑀𝑈1 𝑀𝑈2
𝑀𝑈𝑖
=
=⋯=
𝑃1
𝑃2
𝑃𝑖
 We should not concentrate on production of too
few information products.
 Produce enough of each product for an optimal
consumption bundle.
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
2. Optimise depth/sophistication
 Fertilizer: maximum profit  maximum yield
$
900
800
Max
yield
Max
profit
700
Revenue
600
500
400
Cost
300
200
100
0
0
20
40
60
80
100
120
Fertilizer rate
 Information: max net benefit  maximum detail or
sophistication (diminishing marginal benefits)
1000
$
OK
NMVs
studies
900
Focus
Benefit groups
Expert transfer
judgement
Benefits
800
700
600
Excellent
NMVs
studies
500
400
Cost
300
200
100
0
0
20
40
60
80
100
120
Info depth/sophistication
 Approximate information might be optimal for
decision making (depending on context)
 Also more timely, less challenging
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 – it’s not obvious
 Training and support
 Cultural change
INFFER
Investment Framework for Environmental Resources
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
Asset types
Wetland
•Listed on register
•Last of its type
River reach
•Intact native veg
•Cultural heritage
•Woodland birds
Fauna species
•Flagship
•Critically endangered
Native vegetation
•Concentration of threatened species
•Near pristine condition
•Important location
Before INFFER
After INFFER
Regional application
International application
Final comments
 It’s 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
inffer.org
pannelldiscussions.net