Assessing the value of intangibles
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Investing in infrastructure: Costs, benefits and effectiveness of disaster risk reduction measures. Presentation made by: Sabrina Lavarone Economist – Economics and Social Science Team
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Assessing the value of intangibles
- 1. Assessing the value of intangibles Sabrina Iavarone Economist – Economics and Social Science Team 18th September 2019 High Level Risk Forum: Investing in infrastructure resilience - Costs, benefits and effectiveness of disaster risk reduction measures, OECD Headquarters – Paris, France.
- 2. Contents • Environment Agency (England) • Benefit values & decision- making • Examples • River Basin Management Plans - Water Framework Directive – Environmental values of water bodies status’ improvement • Flood risk - The mental health impact of floods 9/20/20192 We hold our natural environment in trust for the next generation. By implementing the measures in this ambitious plan, ours can become the first generation to leave that environment in a better state than we found it and pass on to the next generation a natural environment protected and enhanced for the future. - 25 Year Environment Plan
- 3. 3 Environment Agency (England) • Department for Environment, Food and Rural Affairs (DEFRA) • Main responsibilities: • flood risk management, • regulation of discharge to air, water and land, • conservation and ecology specifically along rivers and wetlands • Supporting users of the rivers and wetlands, including anglers and boaters. 9/20/2019 ~10,000 staff ~10 economists
- 4. 4 Economic and Social Science Team • Main asks: • Appraisals • Business cases • Integrate valuation in the decision making (monetary & non-monetary) • Economic analysis of regulated businesses • Guidance & tools • Planning & strategy • Business areas: • Flood and coastal erosion risk management (FCERM) • Industrial regulation • Water, land and biodiversity • Future funding (new funding streams) • Cross-cutting issues 9/20/2019
- 5. 5 Example of intangible values integrated in the EA’s decision making 9/20/2019 Floodriskmanagement • Cost Benefit Analysis • For decisions around spending and funding • By local EA staff • Based mainly on avoided damage costs • Environmental values • In the future, health values with mental health impacts IndustrialEmissionsDirective • Disproportionate Cost Analysis • Carried out by the company asking for a derogation • Based on damage costs of emissions • Mainly health (air emissions) • Only partially environmental values (emissions to water) WaterFrameworkDirective • Disproportionate Cost Analysis • To inform minister’s decisions on WFD targets • Carried out by local EA staff • Based on stated preference values • Mainly environmental values
- 6. 6 Water Framework Directive - River Basin Management Plans • Strategic, national scale Benefits valuation • Monetised benefits • Aesthetic, non-use, recreational • Non-monetised benefits • Droughts/floods mitigation • Climate change adaptation • Soil protection • Aesthetic & existence landscape value 9/20/2019 Approach to estimating benefits Based on six aspects of water quality: • Fish • Plants • Other animals • Water clarity • Human modification • Suitable for contact Benefit values covered: - Recreation - Amenity - People’s value for knowing water environment is in good condition (‘non-use’)
- 7. 7 Water Framework Directive - River Basin Management Plans • High-level economic appraisal • 330 catchments • Qualitative ecosystem service assessment • Baseline state • Baseline evolution – “do nothing” scenario • Benefits of “do measures” scenario • Distributional impacts on stakeholder groups 9/20/2019 Example summary results of a catchment ecosystem service assessment
- 8. 8 Water Framework Directive - River Basin Management Plans - results • Catchment scale appraisals • National-scale Impact Assessment • £17.5bln investment • £22.5bln minimum benefits over 37 years • Strategic Environmental Assessments 9/20/2019
- 9. Flood and coastal erosion risk management (FCERM) • Partnership Funding (PF) policy • Flood Incident Management (FIM) • Benefit values: • Market values • Non-market values: environment, health 9/20/20199
- 10. 10 FCERM – The mental health impact • New evidence on mental health impacts of flooding • Move on from focus on only assessing property damage • Non-market benefits - wider effects on people • Cost-effectiveness – prioritise investment • FIM as public health measure 9/20/2019
- 11. 11 FCERM – The mental health impact • FIM: saving valuables vs saving items of sentimental value • Fielding et al. for the Environment Agency (2007) • Wider mental health effects 9/20/2019
- 12. 12 FCERM - The mental health impact • Models • Qualitative • Quantitative • Data on impact of flooding on mental health • 2013/14 floods • 2015/16 follow-up work • 2014 longitudinal study on impact of flooding on mental health • CBA including medical and public health interventions 9/20/2019
- 13. 13 FCERM - The mental health impact • Experimental stage • Peer-reviewed, need for additional testing • Large, multi-regional flood event • Reasonably infrequent • People’s specific experience • Protective impact of FIM on people’s mental health 9/20/2019
- 14. Conclusion • Integrating non-market benefits to valuation: • Reducing hazard costs • Justifying funding decisions • Future work: • Including health impacts across the EA business areas • Improving the benefits values available to assess changes in water bodies’ quality 9/20/201914 We will break the model of the last century where growth and prosperity have often come at the expense of our natural capital assets - our water, air, soil or wildlife - and tread a new path toward economic and environmental prosperity. - 25 Year Environment Plan
- 15. Sabrina Iavarone Sabrina.Iavarone@environment-agency.gov.uk Thank you very much for listening Any Questions?
Editor's Notes
- Good afternoon everyone, I’m Sabrina Iavarone and I work as an Economist for the English Environment Agency. Within the next fifteen minutes, I will give you an overview and some examples of how my organization places a value on non-market goods and incorporates this into the costing of environmental incidents and natural disasters.
- In this presentation, I will first give you some background on the Environment Agency for England, then I will briefly cover some of the areas where the benefit values are impacting on the Environment Agency’s decision-making, and finally I will provide you with some examples of projects where we carried out an economic valuation of non-market goods. Quoted here, you can see a sentence taken from the 25 Year Environment Plan, the UK government’s environmental framework for the next generation, with the ambitious aim of leaving the environment to the next generation in a better state than we found it.
- The Environment Agency is a non-departmental public body, that is a government agency, sponsored by the UK government’s Department for Environment Food and Rural Affairs (DEFRA), so we are funded partly by the UK government and in part by the businesses we regulate through charges. The Agency was established by the Environment Act in 1995 and it is responsible for environmental protection, regulation and enhancement in England. Scotland, Wales and Northern Ireland have their own environmental protection agencies. The Environment Agency employs roughly 10,000 people, of which approximately ten work as economists.
- The responsibilities of economists at the Environment Agency are mostly to design and carry out appraisals to make a case for spending, produce business cases, integrate valuation in the decision making, both monetary and non-monetary, deliver economic analysis of the businesses that the Environment Agency regulates – that is, sectoral analysis - producing guidance and tools, and contribute to the wider planning and strategy of the Agency. We do not set overarching policy and our analysis mostly impacts practical actions in local areas, rather than advising ministers and policy-makers. We work across all the business areas of the Environment Agency to tackle a wide range of issues, that is Flood and coastal erosion risk management (FCERM), industrial regulation, water, land and biodiversity, future funding, that is how to find new funding streams for the Agency, and a wide range of cross-cutting issues such as natural capital and the valuation of health benefits into environmental impacts. Our work leads to a range of outcomes from strategic level investment through to more local scale projects, such as sustainable design, flood defences and eco-system valuation.
- This is an example of three business areas within the Environment Agency for which we produced economic tools and integrated them with intangible values to affect the decision-making. These business areas are: water, land and biodiversity, and more specifically the application of the European-level Water Framework Directive; air quality – so with the application of the European-level Industrial Emissions Directive; and flood risk management. For the water framework directive, local teams of specialists carry out disproportionate cost analysis, based on stated preference values, to inform the minister’s decisions on the directive’s targets. In terms of assessing the value of intangibles, we mostly take into account of the environmental benefits. For the industrial emissions directive, we ask companies to carry out a disproportionate cost analysis, based on the damage costs of the emissions, for them to ask for a derogation from the requirements of the directive. In terms of valuating non-market benefits, we mostly take into account of the effects of emissions to the air and water on human health and the environment. For flood risk management, local teams of specialists will carry out a cost benefit analysis in order to make decisions around spending and funding, based mainly on the avoided damage costs. In terms of intangible values, in this area we mostly take into account of environmental values, although there is ongoing work aiming at integrating also health values, and in particular mental health impacts.
- The River Basin Management Plans is a strategic, national scale plan to meet the requirements established by the Water Framework Directive. The plan has been implemented through a series of six-year cycles. Now we are entering the third cycle. A primary study was carried out across the UK, involving the valuation of the total economic value of the improvements of the water bodies’ ecological status as part of developing the plan. More specifically, the valuation regarded the willingness to pay for improvements of the water body status. The values that were created were based on stated preferences. The plan adopted a quantitative approach, looking at different characteristics, and involving six components. The main drivers of the newly-assessed decision-making were the willingness to pay values, known as NWEB values. Benefits valuation (WTP) studies were used to monetise the benefits, primarily capturing aesthetic, non-use and recreational ecosystem service values, expressing the willingness to pay. The main non-monetised benefits include: mitigation of droughts and floods, climate change adaptation, soil protection, and aesthetic and existence value of the wider landscape.
- During the second cycle of the plan, the Agency also conducted a high level economic appraisal of each of over 330 catchments, to establish whether there was sufficient evidence to justify less stringent objectives than the default of Good Status on the grounds of disproportionate costs. The economic appraisals also gave evidence to support saving over £9bn of expenditure, which would have an expected benefit of approx. £0.5bn over 37 years. Each monetary valuation was supported by a qualitative ecosystem service assessment, assessing the baseline state, baseline evolution under ‘do nothing’ scenario, the benefits of the ‘do measures’ scenario and some headlines of distributional impacts on stakeholder groups. Where the monetised assessment had a BCR of 0.5-1 and significant non-monetised benefits were identified, we tried to identify additional monetised benefits or assess whether the scale of non-monetised benefits was sufficient to alter the choice of measures and environmental objectives. We ensured that the conclusions reached were not just about what we could monetise. It got non-economists involved in thinking about benefits, ecosystem services, winners and losers and they have greater ownership over the economic planning for their area – the economic work done 5 years ago has been continuously used and developed by local teams since. The assessment was structured on the natural capital framework, and during the third cycle of this project the aim is to include even more natural capital concept and framework.
- The catchment scale appraisals underpinned a national-scale Impact Assessment and made the case for £17.5 billion investment in protecting and improving the state of England’s waters to deliver £22.5 billion minimum benefits (values are NPV over 37 years, Green Book declining social discount rate). The ecosystem service assessments also formed the basis of the Strategic Environmental Assessments (Directive 2001/42/EC) of the RBMP.
- Decision-making in FCRM is regulated by the current Partnership Funding policy. The policy establishes how much of the financial contribution towards a flood defence scheme should come from the government, and how much from third parties, such as local authorities and businesses. The PF policy takes into account the economic benefits of protecting households against flood damages and coastal erosion. It also takes into consideration the increased risk of climate change, the risk to people (in terms of decreased productivity), and local economy/deprivation measures. This is in terms of preventing flood hazards. In terms of responding to the natural hazards, part of the Agency deals with Flood Incident Management. This mostly takes into account the valuation of monetary benefits, such as property values, and non-monetary environmental and health benefits.
- Due to a series of recent studies by public health government agencies in England looking at the mental health impacts of natural hazards, there is a wider awareness within the Agency that we should move on from a focus on only assessing property damages to include the wider effects that natural disasters have on people. Including non-market benefits to the valuation of flood incident management would help the Agency to prioritise investment and fully appreciate the value of environmental interventions. Re-framing flood incident management as a public health measure, based on the benefits it brings to the affected population could potentially make it more cost-effective, as it would help us to reduce the health costs arising from natural hazards and poor environmental quality.
- For example, there are studies that have assessed how, while during flood incident management, people are usually encouraged to save valuables, which are replaceable and covered by insurance, actually people value more saving items which have a sentimental value attached to them, and this seems to affect their mental health.
- This study makes use of a qualitative element, the value chain analysis, and a quantitative one through the use of Bayesian statistics as part of a systems model and Quality of Life Years calculations. The data are mostly provided a Public Health England 2014 longitudinal study on the impact of flooding on mental health, and a cost-benefit analysis on medical and public health interventions by the National Institute for Health and Care Excellence. The data refer to the 2013/14 floods and a follow-up work done in 2015/16 on the same cohort.
- This study is still at an experimental stage, as it has been peer-reviewed, but it needs to go through additional testing. Some caveats are that the data relate to a large, multi-regional flood event, which is reasonably infrequent, and as a longitudinal study it relates to the specific experiences of those affected. The study has produced some initial indications on the protective impact of flood incident management on people’s mental health. The main outcome of this preliminary study was an estimate of treatment cost savings to the National Health Service. This is an important results because it quantifies the protective impact that Flood Incident Management has on people’s mental health. Based on our preliminary knowledge of this area, it seems like accounting for the mental impacts of floods does make a difference to the wider FIM.
- To summarise, we could say that for us the importance of integrating non-market benefits into our economic valuations is twofold. First, it helps us being more efficient and cost-effective by reducing the health costs arising from natural hazards, which eventually helps us adding value to the economy as a whole. Second, this helps a government agency like ours shedding some light not only on the more evident and obvious benefits of responding to natural hazards, such as protecting lives and properties, but also on the wider positive impacts that it can have on people, such as their long-term mental health, which is crucial for justifying funding decisions during belt-tightening times. Leaving economics aside, we can also argue that accounting for intangibles is important because it is fair towards people: reducing their burden from natural hazards and improving their benefits from a better access to the environment. This will always eventually lead the rationale for our decision-making. At this regard, we are planning future work which will include health impacts across all the Agency’s business areas. The Environment Agency has started a partnership with Public health England, another government agency, to produce further research looking into how the health economics approaches could help us with our environmental economics work. In particular, we are looking into valuing environmental-health impacts. We are also interested in looking at productivity and welfare losses. We are also interested in improving the benefits values available to assess the changes in the quality of water bodies, modelling how our interventions could improve health outcomes, such as river quality. This is as part of a larger research programme looking into improving the health benefits of nature, e.g. by improving the environment, better access to green spaces.
- So, this is the end of my presentation, thank you very much for listening, and if you have any questions please feel free to ask now or get in touch via email.