Download Integrating Ethics into Graduate Training in the Environment

Integrating Ethics into Graduate
Training in the Environment
Sciences Series
Unit 4: Ethical Dimensions of Benefit-Cost
Analysis in Environmental Project and Policy
Evaluation
AUTHOR: JAMES SHORTLE
Department of Agricultural Economics and Rural
Sociology
The Pennsylvania State University
With input from Nancy Tuana, Ken Davis, Klaus Keller, Michelle
Stickler, Don Brown, and Erich Schienke
Integrating Ethics into Graduate Training in the Environmental Sciences: Unit 4 – Benefit-Cost Analysis in Environmental Project
and Policy Evaluation
Slide 1
Integrating Ethics into Graduate Training
in the Environment Sciences Series
Unit 4: Ethical Dimensions of
Benefit-Cost Analysis in Environmental
Project and Policy Evaluation
AUTHOR: JAMES SHORTLE
Department of Agricultural Economics and Rural Sociology,
The Pennsylvania State University
With input from Nancy Tuana, Ken Davis, Klaus Keller, Michelle Stickler, Don
Brown, and Erich Schienke
Slide 2
Benefit-Cost Analysis (BCA)
• An analytical technique for evaluating the economic
efficiency of projects or policies based on evaluation
of economic benefits and costs
• Has become common in the U.S. and other countries
• Widely used by EPA and Congress for many statutes
in the US. (Hahn 2000 & Adler and Posner 1999)
Definition of Benefit Cost Analysis. BCA is a tool for evaluating
projects or policies based on the resulting economic benefits and costs.
Environmental BCA is applied to projects or policies with
environmental consequences.
Historical background on BCA can be covered here. History of BCA
is that it started with analysis of public works projects in the 1920’s
and 30’s. Duprice (sp?) developed environmental BCA, which was
used in the U.S. to look at investments in resevoirs. How much in
concrete, flood control, power, outdoor recreation and other nonmarket goods. By 1969, conservation was being reconsidered,
particularly in terms of non-market values that were not previously
taken into account in land-use management. The development of
environmental services became a means for evaluating non-market
goods in evaluating preservation benefits of intact ecosystems and
their services. Instructor is advised to add further detail depending on
the specific course.
Range of types of BCA and applicable projects. Ecological restoration,
wetlands protection, etc. Chesapeake Bay, emissions targets, GHGs,
ozone standards and many others all used BCA to review target levels.
Often used to incentivize environmental protection for services not
usually considered directly.
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Rock Ethics Institute – Pennsylvania State University. Funded by US National Science Foundation
Integrating Ethics into Graduate Training in the Environmental Sciences: Unit 4 – Benefit-Cost Analysis in Environmental Project
and Policy Evaluation
Slide 3
Ethical Issues in BCA
• Issues within the welfare economics paradigm
– BCA is emerges from an explicit set of value judgments
– Ethical issues arise when applications and uses are
inconsistent with the underlying norms
• Issues about the paradigm
– Disagreement with the underlying value judgments
• Conduct of BCA
The ethical issues internal to Environmental BCA are issues that
extend from the “welfare economics” paradigm. BCA emerges from
an explicit set of value judgments implying that public projects and
policies should be selected to maximize social welfare. Ethical issues
arise within the paradigm when applications and uses are inconsistent
with the underlying norms of the decision-making context (politics,
culture, institutions, etc). This can be summarized as problems that
occur with the context in which the paradigm is being applied.
Issues about the paradigm stem from ethical objections to the
underlying value judgments of welfare economics or when BCA
comes into conflict with other societal values. The question is whether
the paradigm is accepted as is, or is ratified in some way. This can be
summarized as problems that occur with accepting the paradigm.
Slide 4
Uses of BCA
– Ex ante evaluation
•
•
•
•
Systematic & logically consistent accounting of impacts
Tool for ranking competing projects or policies
A filter for negative sum rent seeking projects,
Inform policy makers about economically efficient outcomes
– Ex post evaluation
• How well did policies actually work?
• Tool for improving future policy based on actual experience
Environmental BCAs are used often by governments, agencies, and
organizations. Refer here to some examples from the included
readings.
Ex Ante BCA is used prospectively, as an influence but not a
determination of decisions, as such decisions are usually also subject
to political persuasions (points of advocacy). Environmental policy
based in BSA has a positive past.
Ex Post BCA is used after the project has been implemented, to
evaluate improvements and failures of various aspects of a project.
Effectively, it is a way to improve the trial and error aspect of the
policy-making process.
Slide 5
Normative Foundations of BCA
• BCA emerges from an explicit normative
foundation that seeks to answer the
fundamental question of applied welfare
economics:
What is the impact (both sign and magnitude)
of a change in resource allocation on social
welfare?
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Rock Ethics Institute – Pennsylvania State University. Funded by US National Science Foundation
Integrating Ethics into Graduate Training in the Environmental Sciences: Unit 4 – Benefit-Cost Analysis in Environmental Project
and Policy Evaluation
Slide 6
The Values of Welfare Economics
Welfare economics makes some fundamental assumptions about an
individuals well-being, compared to the wider well-being of society.
– Social welfare is an aggregation of human welfare
• Any consideration for nature in BCA is a derivative of the
contribution of the same to human welfare
– Individual human welfare is a function of “goods”
consumed
• The focus is on outcomes, not procedures
• Individual’s preferences are the basis for evaluating their welfare
outcomes
– Individual’s preferences are the basis for evaluating their
welfare outcomes
• Consumer sovereignty
• No moral judgments about individual preferences
The historical context for social welfare emerged, historically, out of
the context of utilitarian thinking in the 1800s. (Some on ethical
philosophy would be good here.) Extending from theories emerging at
this time, social welfare is defined as the aggregation of the well-being
of individual humans in society within and across generations.
Individual well-being is a function of “goods” consumed. The question
here is to understand what goods are, but this falls more on an
evaluation of the ends, as opposed to the means. (Derivative more of
Bentham than Kant and deontology.) Thus, more emphasis is place on
outcomes as opposed to procedures.
Individual’s preferences are the basis for evaluating their welfare
outcomes. These include factors such as consumer sovereignty, the
fact that goods are defined in reference to preferences, and normal
judgments about individual preferences. These factors can be subject
to problems such as the dictatorial determination of preferences, the
prioritization of granting people rights, and issues around human rights
and autonomy.
Slide 7
Evaluation of Social Welfare Change
• Simple cases – welfare impacts are beneficial or detrimental
for all
– If beneficial, such a policy/project would either have all favorable votes
or some favorable but no unfavorable votes in a referendum
– If detrimental, the reverse would be true
• Contentious cases – changes in resource allocation benefit
some, harm others
– Such a policy or project would have some favorable and some
unfavorable votes in a referendum
An emic (from within the paradigm) evaluation of social welfare
change usually results in two possible cases. First, simple cases are
identified as such because the impacts are clearly determined to be
either beneficial or detrimental for all. Contentious cases (complex)
tend to arise from decisions that will result in changes in the allocation
of resources that will lead to disproportionately benefits for some but
harm for others.
• Question:
– How to evaluate these cases?
Discuss: how to evaluate the contentious cases? What mechanisms are
available and need to be used or developed for resolving contentious
cases?
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Rock Ethics Institute – Pennsylvania State University. Funded by US National Science Foundation
Integrating Ethics into Graduate Training in the Environmental Sciences: Unit 4 – Benefit-Cost Analysis in Environmental Project
and Policy Evaluation
Slide 8
Criteria for evaluating social welfare
change
• Pareto Criterion
• Compensation Criteria
• Samuelson-Bergson Social Welfare Functions
Here, we will look at three criteria used for evaluating social welfare
change. First is the Pareto Criterion, which is a form of social welfare
analysis that tends not to resolve problems and often reinforces the
position of the status quo.
The compensation criteria are the basic assumptions to current BCA
practices.
While the Samuelson-Bergson social welfare functions are concerned
with more than simply an evaluation of costs and how to divide the
pie. Here, issues are raised within the paradigm that challenge the
paradigm, asking whether it improves the distribution of income.
However, only evaluating the relevancy of the paradigm from with the
paradigm proves to be an incomplete test. An evaluation from outside
the paradigm is also often necessary.
Slide 9
Pareto Criterion
UA
Pareto Optimal State
B
A
D
C
UB
• Given two social
states A & B, B is
preferred to A if
in moving from A
to B at least one
individual is
made better off
and no one is
made worse off.
Initial Allocation
Slide 10
Here, working with the Pareto Criterion, we are given two social states
A & B. Here, B is the preferred state to A if in moving from A to B, at
least one individual is made better off and no one is made worse off.
A comprehensive ethical discussion of this criterion would need to
know what is involved in these three areas, and would we want to use
them to develop more comprehensive evaluations. (Pareto Criterion
seems like a possible place to begin a broad evaluation, but not a place
to end one.)
Some of the significant limitations of the Pareto Criterion include:
Limitations of the Pareto Criterion
• Incomplete ranking of social states
– Alternative optima are non-comparable, for
example B, C, and D.
• Conservative Re-enforcement
The fact that valuations are often based on an incomplete ranking of
social states, often times resulting from the fact that evaluations of
changes require the application of interpersonal welfare comparisons
that are often put in incomparable terms.
– Favors the status quo when trade-offs are involved
That the criterion tends to favor doing nothing, i.e. the status quo,
which leads to a generally conservative re-enforcement in the status
quo. This is a result of favoring the status quo when trade-offs in the
welfare of individuals are involved.
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Rock Ethics Institute – Pennsylvania State University. Funded by US National Science Foundation
Integrating Ethics into Graduate Training in the Environmental Sciences: Unit 4 – Benefit-Cost Analysis in Environmental Project
and Policy Evaluation
Slide 11
(Pull some text from the readings and put it into the notes here.)
Compensation Criteria
• Test whether changes in resource allocation are potential
Pareto Improvements. Based on the concept of potential
compensation
– Hick’s Criterion- maximum WTP of losers greater than minimum
WTA of gainers. Property rights lie with gainers
– Kaldor’s Criterion- maximum WTP of gainers greater than minimum
WTA of losers. Property rights lie with losers
• BCA is the empirical implementation of compensation tests
Historical context. Applied in measures of benefit, keeping costs to a
minimum, net benefit of putting money into the system, what amount
are people willing to put into a system, which is an aspect that often
depends on local legal frameworks and infrastructure concerning
property rights.
• Compensation criteria are efficiency tests that ignore
distributional issues
Economists, philosophers, and policy analysis have used the Pareto
approach in some form and critiqued it. Potential improvements to
Pareto, i.e. compensation criteria, would take different forms
depending on the accounting stance, for example, are property rights
in the status quo or alternative state. Two versions of the compensation
criteria are called the Hick’s criterion and the Kaldor criterion.
In the Hick’s Criterion- Consider a reallocation from A to B. Can
gainers from the reallocation hypothetically compensate losers such
that no one would be worse off and at least someone be better off? If
so, the reallocation is a social welfare improvement given that property
rights are in the status quo.
For example: Test Sum WTP for change > Sum WTA, if so then
accept change (Benefits exceed costs)
Slide 12
Attributes of Compensation Criteria
• Compensation tests are tests of economic efficiency gains
– More complete ranking than Pareto Criterion. Allows comparison
between
• Second best social states
• First best and second best states
– But still incomplete…
– Cannot rank different first-best states
– Possibilities of logical inconsistency
• Intransitive rankings
• Possibility of reversal
Compensation criteria are tests of economic efficiency gains within the
frontier to the frontier. They provide a more complete ranking than
Pareto Criterion and allow comparisons between Second best social
states, and First best and second best states. However, they are still
incomplete in that they cannot rank different first-best states.
Possibilities of logical inconsistency also need to be addressed,
particularly in the case of intransitive rankings, or in considering the
possibility of reversal of the projected (states or outcomes?)
6
Rock Ethics Institute – Pennsylvania State University. Funded by US National Science Foundation
Integrating Ethics into Graduate Training in the Environmental Sciences: Unit 4 – Benefit-Cost Analysis in Environmental Project
and Policy Evaluation
Slide 13
Social Welfare Functions
• It is a real-valued function that maps from the
welfare of individuals to the welfare of society
W=W(UA, UB.....)
• Can provide a complete ranking of social
outcomes
Slide 14
Challenges in SWF analysis
• Choice of the social welfare function
– Two approaches
• Axiomatic Approach- form of function on the basis of axioms
about individual preferences (Arrows Impossibility Theorem)
• Moral Justice Approach- functional form arrived at on the basis of
moral considerations (Which rule?)
– Measurement of Individual Welfare
A SWF is a real-valued function that maps from the welfare of
individuals to the welfare of society and can be expressed as
W=W(UA, UB.....)
The goal of the SWF is to provide for a complete ranking of social
outcomes…. To provide someone with comprehensive analysis of the
distribution of income, moving to the frontier, and a determination of
more fair or less.
But, these functions tend to be unimplementable. Most often, this is
because the social welfare functions are not know explicitly. The are
two approaches to deriving SWFs. First, the Axiomatic approach is a
form of function that is derived from individual preferences (i.e.,
Arrow’s Impossibility Theorem). Second, is the moral justice
approach, which is the functional form arrived at on the basis of
normal considerations (i.e., which rule should be used to determine the
greatest good?) and is derived from non-dictatorial preferencing, or
takes into account issues such as voting rules.
However, even if the SWF is known, measurement and comparison of
individual welfare is not possible.
Slide 15
What does this mean?
• BCA is only one part of the economic welfare
assessment
– Welfare assessment entails deliberation on
economic efficiency - BCA provides information
to the effect
– When working within the paradigm, information
should be combined with conclusions arrived at on
the basis of equity principles using other methods
7
Rock Ethics Institute – Pennsylvania State University. Funded by US National Science Foundation
Integrating Ethics into Graduate Training in the Environmental Sciences: Unit 4 – Benefit-Cost Analysis in Environmental Project
and Policy Evaluation
Slide 16
Ethical Issues within the Paradigm
• To be developed: Issues will include
– Appropriate uses
– Issues related to the implementation of the
technique
A variety ethical issues arise from within the context of assumptions
made in a BCA approach.
Research misconduct (e.g., falsification, fabrication of data)
Misstatement of or overconfidence in results
Whose benefits/costs to count (jurisdictional spillovers of benefits or
costs)
Whose benefits/costs to count (within jurisdictions)
Treatment of future generations
Choice of accounting stance (WTP vs. WTA)
Uncertainty emerges in how to implement Procedures and in having
enough Confidence in the assessments to move forward.
A variety of cases will exhibit ethical issues such as these, but if
approached properly, the ethical spillovers are beneficial in
jurisdiction, the development of laws, and the inclusion of a wider
variety of perspectives. Choosing proper procedures for addressing
uncertainty is also a significant factor, and will tend to increase
confidence in the measurements and models. If approached with
ethical conduct, BCA is a very useful research tool for developing or
enhancing policy analysis paradigms.
Slide 17
Ethical Issues about the Paradigm
• Outcomes versus decision making processes
– Procedural justice- regarding how a decision is made
– Citizen participation- regarding whether there is democracy
• Rights and Duties
– BCA focuses on anthropocentric welfare only
– Importance of nature in BCA contingent on nature’s
importance to man
– BCA figures do not reflect the impact of the project or
policy on nature
There also a variety of ethical issues about the BCA paradigm more
generally. The focus is to much on the outcome and not enough on
process. As such, proposed outcomes need to be weighed versus the
value of participating in decision making processes. Attention or
critiques about procedural justice, regarding how a decision is made,
need to be addressed. Following this, the level of citizen participation
in both problem definition and problem solution are important aspects
to take into account, particularly regarding whether there is democracy
or not in the political-economic context.
Rights and Duties would require paying attention to the dichotomies
between interests in nature and personal interests. Consumer
sovereignty is not the same as rights and duties. There are good and
bad preferences people hold, particularly in terms of self interest.
Any consideration of nature in BCA is a derivative of the contribution
of the same directly or indirectly to human well-being. Problems are
that BCA focuses on anthropocentric welfare only. The importance of
nature in BCA contingent on nature’s importance to man. In turn,
BCA figures do not reflect the impact of the project or policy on
nature. All ethically charged situations when applying BCA to
environmental evaluations.
8
Rock Ethics Institute – Pennsylvania State University. Funded by US National Science Foundation
Integrating Ethics into Graduate Training in the Environmental Sciences: Unit 4 – Benefit-Cost Analysis in Environmental Project
and Policy Evaluation
Slide 18
Discussion issues:
Discussion Issues
• When would we be comfortable using BCA?
– How much importance should we place on the
absent ethical issues?
• When can decision making solely depend on
BCA?
• How to consider catastrophic effects like
hurricanes and other natural disasters in BCA?
When would we be comfortable using BCA?
How much importance should we place on the absent ethical issues?
When can decision making solely depend on BCA?
How to consider catastrophic effects like hurricanes and other natural
disasters in BCA?
Slide 19
THANK YOU!
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Rock Ethics Institute – Pennsylvania State University. Funded by US National Science Foundation
9
Rock Ethics Institute – Pennsylvania State University. Funded by US National Science Foundation