evaluation methods cost-benefit analysis and · outline multi-criteria analysis, cost benefit...

FFEM Component 2 Methods and tools for socio-economic assessment of goods and services

provided by Mediterranean forest ecosystems

Evaluation methods

Cost-benefit analysis and

multi-criteria analysis

issues and implementation

Regional workshop

Tunis, 2-5 June 2014

Fabrice GOURIVEAU

Nicolas ROBERT

Outline

Multi-criteria analysis, Cost benefit analysis and other methods

• Goals and main differences

Multi-criteria analysis

• Principle & sort example

Cost Benefit analysis

• Principle

• Example

2

Evaluation of decisions

3

Labour

Material

Energy

Capital

Product 1

Product 2

Transformation system

Externality 1

Externality 2

T/€

Q/€

Q/€

Q/€,O

Q/€

Q/€

Q

Q?

€?

€?

Evaluation methods

Tools to support decisions

• Monetary only

Cost-Effectiveness Analysis (CEA)

Cost-Benefit Analysis (CBA)

• Indicator-based

Multi-Criteria Analysis (MCA)

Life Cycle Analysis (LCA)

4

Initial state

x0,y0,z0

Objective state 1 x1,y1,z1

Objective state 2 x2,y2,z2

C B

C

B–C with B=(Vx2–Vx1)+(Vy2–Vy1)+(Vz2–Vz1)

C

Project/product level

(B,C) with B=(x2–x1)+(y2–y1)+(z2–z1)

y x

z

Multi-criteria analysis

Objective: to structure a complex decision problem

to compare different management alternatives

When to use it?

• multi-objective or multiple criteria

• heterogeneous sets of criteria

• conflicting objectives

Expected results:

• rational, transparent, and comprehensive analysis

• qualitative and quantitative data at different scales

5

MCA: steps

Step 1: Aim of the MCA, key players

Step 2: Identify alternatives

Step 3: Identify criteria / consequences of each alternative

Step 4: Estimate performance of each alternative against the criteria?

Step 5: Weight criteria / relative importance

Step 6: Weight combinations of criteria overall scores

Step 7: Compare alternatives, prepare recommendations

6

Alternative 1

Person 1 Person 2 Person 3

Score Weight Score Weight Score Weight

Criterion A +1 1 0 1 +1 1

Criterion B 0 1 +1 1 -1 0

Criterion C -1 1 0 2 +1 1

Total score 0 0.25 1

MCA: Strengths and weaknesses

Strengths

• Includes impacts on non-monetary values

• Facilitates stakeholder involvement

• More transparent appraisal and decision-making process

• Can lead to a list of optimum choices

Weaknesses

• No built-in standard value (project specific values)

• Limited comparisons between studies

• Requires well developed participation processes

• Strongly depends on stakeholders’ willingness to participate

7

Cost benefit analysis

Objective:

• assess the relative desirability of competing alternatives

Extension of private CBA

When to use it?

• Analyze alternative policies / practices

• All variations in the provision of goods and (dis-)services

can be estimated in monetary terms

Expected results:

• Estimates of the net present value; cost/benefits ratios;

internal rate of returns; payback periods

8

Cost benefit analysis

9

Direct costs and benefits

Adjustment for imperfect

competition and other distortions

Assessment of environmental

impacts

Private CBA

Social CBA(without environmental

impacts)

Social CBA(with environmental

impacts)

Incl. transfer payments

Excl. transfer payments

Society

CBA Scope

10

Labour

Material

Energy

Capital

Product 1

Product 2

Transformation system

Externality 1

Externality 2

Transformation system Transformation

system Transformation system

Profit

Benefits

Incentives

CBA: Stages

Step 1: Event, project or policy definition

• Stakes and possible problems

• Drivers of change and levers / actors (who can decide/act?)

• Scenarios: base case & alternatives, time horizon

Step 2: Identification of relevant project impacts

• Resources used /

• Potential impacts on market and economic parameters and on

surrounding environment

NB: marginal effects / additionnality principle

Step 3: Physical quantification of relevant impacts

• What changes, which quantities/quality and when?

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CBA: Stages

Step 4: Monetary valuation of relevant impacts

• Marginal values of the changes

Step 5: Discounting of costs and benefits

• social discount rate:

Social time preference rate

• r = ng + p,

• p: rate of pure inter-temporal preference (utility discount rate),

• n elasticity of marginal utility of consumption

• g: growth rate of per capita real consumption

• Opportunity cost of capital

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0

2 000

4 000

6 000

8 000

10 000

0 5 10 15 20 25 30 35 40

EU

RO

Year

r=1%

r=3%

r=5%

r=10%

CBA: Stages

Step 6: Calculating the CBA performance indicators

Step 7: Performing sensitivity analysis

Make recommendations

based on indicators and the sensitivity analysis

13

T

tt

tT

tt

tT

tt

t

d

C

d

B

d

SSNPV

000 111)(

0

10

T

tt

t

IRR

SIRR

T

tt

tT

tt

t

d

C

d

BBCR

00 11

0

11 00

T

tt

tT

tt

tPayBack

d

C

d

BTT

CBA: Strengths and weaknesses

Strengths

• Based on well-understood theoretical foundations

• Built-in standard for value (monetary terms)

• Limited to beneficiaries which actually value the impact

• Common methodology: transferability to other studies

• Adapted to benefit transfer

Weaknesses

• Limited only to impacts measurable in monetary terms

• Strong influence of the selected CBA parameters

(e.g., discount rate, project duration, costs and benefits considered)

14

FFEM Component 2 Methods and tools for socio-economic assessment of goods and services

provided by Mediterranean forest ecosystems

Putting

Cost-benefit analysis

into practice

Regional workshop

Tunis, 2-5 June 2014

Fabrice GOURIVEAU

Nicolas ROBERT

Examples

Example 1: Social benefits of an afforestation project

Study using the results of a choice experiment valuation

Example 2: Costs and benefits of the natura 2000 network

Effect of an EU level policy

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Example 1:

Social benefits of an afforestation project


• Afforestation on abandoned agricultural land

• Land owners / Managers

• Financed by beneficiaries


• Positive impacts (benefits):

• Increased forest area

• Increased carbon sequestration,

• Increased diversity of plant species

• recreation access

• Negative impacts (costs):

• Initial investment

• Increased maintenance costs

17

(Mavsar, 2012)

Example 1:


Step 3: Physical quantification of relevant impacts

Step 4: Monetary valuation of relevant impacts

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Benefit Alternative 1 Alternative 2 Alternative 3

Forest area + 5%

(140,000 ha)

+ 15%

(420,000 ha)

+ 25%

(700,000 ha)

Number of additional

plant species +40 +90 +140

Recreation access No Yes Yes

Quantity of additionaly

sequestrated CO2 +9,320 t CO2 +18,640 t CO2 +27,960 t CO2

Benefit Unit Marginal Value

(€/year/person)

Forest area Ha 9.58

Plant Species 0.65

Recreation having access 38.60

CO2 t CO2 0.0053

Example 1:


Step 5: Discounting of costs and benefits

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Year Cost (in €)

Net present value of

cost (in €)

Benefit (in €)

Net present value of

benefit (in €)

Net present value (in €)

0 10688.8 10688.8 0.0 0.0 -10688.8 1 0.0 0.0 0.0 0.0 -10688.8 2 0.0 0.0 0.0 0.0 -10688.8 3 0.0 0.0 0.0 0.0 -10688.8 4 0.0 0.0 0.0 0.0 -10688.8 5 534.4 461.0 0.0 0.0 -11149.8 6 0.0 0.0 0.0 0.0 -11149.8 7 0.0 0.0 0.0 0.0 -11149.8 8 0.0 0.0 0.0 0.0 -11149.8 9 0.0 0.0 0.0 0.0 -11149.8

10 534.4 397.7 0.0 0.0 -11547.4

----- ------------------ ------------------ ---------------- ------------------ ------------------

42 0.0 0.0 17597.6 5085.0 106046.8 43 0.0 0.0 17597.6 4936.9 110983.7 44 0.0 0.0 17597.6 4793.1 115776.8 45 534.4 141.3 17597.6 4653.5 120289.0

Example 1:


Step 6: Calculating the CBA performance indicators

Step 7: Performing sensitivity analysis

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Indicator Alternative 1 Alternative 2 Alternative 3

Discount rate=3%

NPV 184,323 152,116 120,289

B/C ratio 15.0 12.6 10.1

IRR 7.69% 6.88% 5.88%

Discount rate=1%

NPV 372,281 309,206 246,874

B/C ratio 26.7 22.4 18.1

IRR 10.23% 9.45% 8.52%

Discount rate=5%

NPV 91,119 74,236 57,550

B/C ratio 8.3 7.0 5.6

IRR 5.04% 4.15% 3.02%

Recommendations?

Example 2:



• Afforestation on abandoned agricultural land

• Land owners / Managers

• Financed by beneficiaries


• Positive impacts (benefits):

• Increased forest area

• Increased carbon sequestration,

• Increased diversity of plant species

• recreation access

• Negative impacts (costs):

• Initial investment

• Increased maintenance costs

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evaluation methods cost-benefit analysis and · outline multi-criteria analysis, cost benefit...

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