Impact pathway approach

The Impact Pathway and Cost-Benefit Modelling Review

Peter Bickel, Rainer Friedrich, IER, University of Stuttgart

In this review we present the Impact Pathway Approach (IPA), which has been developed to support policy decisions in the context of reducing environmental and health impacts from energy use. After sketching the need for quantifying health damage costs we explain the procedure of the IPA, we discuss the central requirements for a decision support methodology and finally draw conclusions.

Purpose of Quantifying Health Damage Costs

Human activities cause damages and impose risks on human beings, ecosystems and materials. For instance, a power plant when producing electricity may emit pollutants that are transported in the atmosphere and then when inhaled can create a health risk or after deposition can disturb ecosystems. In order to be able to assess and compare the damages (often referred to as “external effects”) with each other and with costs, it is advantageous to transform them into a common unit; the choice of a monetary unit here has advantages described later. Thus converting external effects into monetary units results in damage costs or external costs.

Why would we want to calculate external costs and for what purposes do we need or use them? There are a number of purposes, which are described in the following.

When investment decisions are made, e.g. about which power plant technology to use or where to site a power plant, it is evident that it would be of interest for society to take environmental and health impacts into account and include the external effects into the decision process. To support the decision process, the social costs of the investment alternatives, i.e. the sum of internal and external costs, can then be compared. If decisions are to be taken now, but the consequences of the decisions reach decades into the future, the possible future costs have to be estimated.

In a similar way external cost estimates are useful for carrying out technology assessments, and thus to find out the principal weaknesses and strengths of a technology and to be able to assess the overall performance and usefulness of a technology; this would for example help to answer questions about whether and where the technology would need further improvement, and whether subsidising it or supporting further research might be justified.

A third very important field of application is the performance of cost-benefit- analyses for policies and measures that reduce environmental and health impacts. Policies and measures for reducing environmental pollution generally imply additional costs for industry and consumers. Thus it is important for the acceptance of the measure to show that the benefits, for example reduced health risks, outweigh or justify the costs. The benefit can be expressed as avoided damage costs. To calculate these it is necessary to create two scenarios: a baseline scenario, which describes a development without the implementation of the measure or policy and a scenario including it. Then the impacts occurring for the two scenarios are calculated. The difference of the impacts is monetised; this gives the avoided damage costs or benefits (provided that the impacts of the scenario with the measure are lower than for the baseline scenario). These benefits can then be compared with the costs. If benefits are larger than costs, the policy or measure is beneficial for society’s welfare.

The fourth area of application is the assessment of health and environmental impacts occurring in a region due to activities of different economic branches, in short green accounting. For example one could monetise the health effects occurring due to emission of different pollutants, and can then rank different source categories, economic sectors or pollutants according to their health impacts, compare health effects in different countries or imposed from one country to another or to compare health effects of different years to find out whether the situation is improving.

The Impact Pathway Approach

The general idea of the Impact Pathway Approach is illustrated in Figure 1. A human activity (e.g. electricity production) causes changes in environmental pressures (e.g. air pollutant emissions), which are dispersed, leading to changes in environmental burdens and associated impacts on various receptors, such as human beings, crops, building materials or ecosystems (e.g. emissions of air pollutants leading to respiratory diseases). This change in impacts leads either directly or indirectly (e.g. through health effects caused by air pollutants) to a change in the utility of the affected persons. Welfare changes resulting from these impacts are transferred into monetary values. Based on the concepts of welfare economics, monetary valuation follows the approach of ‘willingness-to-pay’ for improved environmental quality. It is obvious that not all impacts can be modelled for all pollutants in detail. For this reason the most important pollutants and damage categories (so-called “priority impact pathways”) are selected for detailed analysis.

One of the strengths and main principles of the IPA is the valuation of damages (e.g. additional respiratory hospital admissions) and not pressures or effects (e.g. emissions of fine particles). The monetary valuation of concrete casualties (e.g. hospital admissions) is more reliable and transparent than deriving a general willingness-to-pay for reducing air pollution.

Many of the impact pathways include non-linearities, due to air chemistry for example, therefore impacts and costs from two scenarios are calculated: a reference scenario reflecting the base case concerning the amount of pollutants or noise emitted, and a modified scenario, which is based on the reference scenario, but with changes in emissions due to the activity considered. For the marginal analysis this may be an additional road vehicle, for the sectoral analysis this may be the emissions from the electricity production sector in one country. The difference in physical impacts and resulting damage costs of both scenarios represents the effect from the activity considered.

The principle of modelling the pressure (e.g. emissions), resulting burden (e.g. pollutant concentration increase), response of receptors (e.g. health damages) and monetary valuation can and should be applied for all impact categories. The main bottleneck of this procedure is the availability of the models required for the different stages.

The IPA was developed, made operational by providing the models required on each stage and updated for air pollution impacts in the ExternE project series (see e.g. Friedrich and Bickel, 2001; European Commission, 1999 and 2005). Besides the different phases of ExternE the methodology has been used and applied to support several policy decisions and legislative proposals, e. g. of DG Environment, such as to perform economic evaluations of the:

• Draft directive on non-hazardous waste incineration.
• Large combustion plant directive.
• EU strategy to combat acidification.
• Costs and benefits of the UN-ECE Multi-pollutant, Multi-effect protocol and of proposals under this protocol (e. g. NOx and VOC control).
• Costs and benefits for the emission ceilings directive.
• Air quality limits for PAHs.
• Diversion of PVC from incineration to landfill and recycling.
• Benefits of compliance with the EU environmental acquis: quantification of the benefits of air quality improvements.
• Costs and benefits of acidification and ground level ozone (as input to negotiation on the ozone directive 1998).
• Air quality guidelines on CO and benzene.
• Second NOx Protocol (for the UN-ECE Task Force on economic aspects of abatement strategies).
• Clean Air for Europe (CAFE) Programme