Miljøprojekt Nr. 1180 2007 – Metoder til samfundsmæssig vurdering af miljøeffektiv teknologi

Metoder til samfundsmæssig vurdering af miljøeffektiv teknologi

Summary

Study objective and methodology
The need for broader assessments
Conclusions and recommendations

Study objective and methodology

This study provides a first attempt to analyze the merits and constraints of the traditional Cost Benefit Assessment (CBA) methodology in regard to providing useful and relevant assessments of environmentally efficient technologies. The study also provides recommendations on the possible supplementary use of other additional methods in order for such analyses to produce a sound basis for decision-making in regard to innovation in and promotion of environmentally efficient technologies. It is the intention that the results of this study will feed into the Agency's further considerations in regarding to defining the appropriate methods to put in place in regard to this issue.

The methodological analysis builds on theory as well as on the lessons learned from four case studies. The case studies have been carried out simultaneously with the assessment and development of the relevant methodology. The case studies build on factual observations but are nevertheless of a very hypothetical nature. The main purpose of the case studies has been to provide a testing ground for the methodological recommendations and observations. Hence, the case studies have provided inputs and feedback into the methodological considerations. The case studies cannot therefore be reviewed independently from the methodological exercise. Further, it should be stressed that this study considers economic and societal implications of the environmentally efficient technologies per se, and hence, it does not consider the means by which to bring such technologies about such as projects, programs, policies or other interventions.

The study was launched by the Danish Environmental Protection Agency in November 2005 and was completed one month later. Given the short period of time, the assignment consisted in three parallel processes, viz.:

Mapping of the methodological challenges and possible solutions
Specific analyses of selected cases:

o Manure separation

o particle filters

o substitutes for phthalates

o biofuels

Ex post review of the experience from the development of the Danish windmill industry

The above cases were selected on the basis of pre-defined selection criteria to ensure, among other things that the selected cases represent different levels of innovation and that sufficient data can be provided within the short time horizon.

It should be underlined that the sole purpose of the cases has been to support the methodological analyses in terms of illustrating whether the method can be de facto applied and whether the results obtained are sound, relevant and applicable. The cases have thus served a purely illustrative purpose, and their assumptions and scenarios are base don a relatively weak set of data and information, and in the absence of the stakeholder consultations that would normally constitute an integral and important part of the exercise. The case studies cannot and should not be used to derive any conclusions whatsoever with regard to the perspectives and opportunities of the technologies in question - a more thorough and stakeholder based analyses would not only provide more detailed and verified results, but could very well result in the provision of data and knowledge that could change the directions of the conclusions.

The need for broader assessments

The CBA methodology has its merits and constraints which are unaffected, in principle, by the issue under consideration. In regard to assessing environmentally efficient technologies, the following issues have been identified to be of particular importance:

The determination of the costs of the new technology
The definition of scenarios including the determination of the relevant time horizon and of the potentials of the technology
The need to provide a process that facilitates strong stakeholder involvement

Cost benefit assessments rest on a number of crucial assumptions including the assumption of known technology. In other words, it is a basic assumption that technologies and their costs are well known. This provides for the construction of the supply curve and the consequent determination of prices. In regard to the development of environmentally efficient technologies, this condition is often not fulfilled because the technology in question is not yet fully developed or fully matured. This implies that the costs as well as the specific product features are not known at the time of carrying out the analysis. The case studies have shown that the failure to comply with the basis condition can have a significant impact on the CBA calculations.

Partly related to this, the case studies have also shown that the establishment of scenarios is a very critical task when attempting to perform economic analyses of innovation in environmentally efficient technologies. Normally, one establishes a base scenario and one or more analytical, or alternative, scenarios, and the assessments consist of comparing the base scenario with the alternative. However, in the case of environmentally efficient technologies, there are not only many possible alternative scenarios, but also a range of possible base scenarios. The latter follows from the fact that it is often very difficult to establish the situation that would prevail in the absence of the technology in question.

Another crucial decision relates to the discount rate to be used. Typically, this rate has a significant impact on the result in regard to environment, because the benefits materialize over a long time horizon. The issue of environmentally efficient technologies further accentuates the importance of this, because the effects and their distribution over time are highly uncertain, which in turn adds further to the uncertainty of the analysis.

The cases have also shown that the assessment of the potentials of the technology can be a fairly complex exercise. This relates to the technical potential (the full potential) as well as to the possible (likely to be realized) potential. The complexity arises among other things because of the lack of knowledge about the opportunities for substitution. Again, this adds to the uncertainty of the analyses and it calls for estimates being formulated as intervals rather than exact figures.

In addition, the development of new technology in Denmark can have effects that extend beyond the Danish border. A well timed development of environmental technology in Denmark can thus involve environmental benefits not only in Denmark, but also abroad and present good export opportunities to Danish industry. Similarly, the development of such technologies abroad can impact upon Denmark. It is not immediately possible to include international environmental benefits into the economic analysis, because the method assumes correspondence between costs and benefits - i.e. the costs and the benefits must apply to the same population.

There are thus a number of methodological and practical challenges and problems involved in the conduct of cost-benefit analyses to assess environmentally efficient technologies. The level of information and knowledge is low which leads to substantial uncertainties and a lack of quantification and valuation of many of the effects.

In addition, one should note that there may also be relevant effects that are of a more "subjective" nature such as for example distributional implications. To a large extent, the determination of whether such effects should be taken into account will be case-specific and based upon a subjective or political judgment. This observation applies of course to any economic assessment, but one may argue that it is of particular relevance in this case because of the many uncertainties that are involved. A regional methodological approach could in some cases constitute a good means by which to approach this.

Stakeholder consultations are typically an integral part of producing analyses that support policy making. Among other things, this serves to provide a solid and well-founded basis with regard to data and assumptions. In this present context, this issue becomes particularly critical because of the many important and critical uncertainties, and because more subjective issues can prove to be politically important. The Impact Assessment methodology developed and used by the European Commission is a good source of inspiration in this regard. The impact assessment methodology bases itself on a CBA approach, but emphasizes also the relevance of unfolding many of the underlying gross effects such as social impacts, effects on competition and employment, and effects on other countries. Further, the impact assessment methodology explicitly considers the appropriate consultation processes to accompany the analyses.

The cases have shed light on the need to pay attention to the level of the development of the technology in question. Thus, this will affect the availability of sound and relevant information and the level of uncertainty of the estimates of costs and market potentials. It is thus critical to appreciate the different levels of technological innovation - from idea to a fully matured product. Innovation theory considers such relevant aspects as framework conditions, drivers for innovation and the process of innovation which involves a range of key factors (level of innovation, cost structures, marketing etc.) as well as the pure chronological aspect. A successful move from idea to fully matured products thus involves not only the appropriate blend of the different critical factors, but also a right timing. In regard to the object for this study, it can thus provide good value-added to integrate innovation theory more into the analytical approach - for example to use innovation theory prior to the economic analysis in order to properly define the technology in regard to the both the critical factors and the chronology.

Conclusions and recommendations

The CBA methodology constitutes a strong starting point for assessments of environmentally efficient technologies. Not least, because the method provides for a systematic and theoretically well-founded approach. However, environmentally efficient, and not yet matured, technologies, are typically less well described and characterized by lack of sufficient knowledge with regard to cost structures, market potentials, market conditions and framework conditions. In the light of this, a broadening of the CBA method can substantially add to the relevance and applicability of the results. Thus, the fact that the basic assumption of the CBA of known technologies is not complied with calls for a careful assessment that considers different possible scenarios and which integrates sensitivity analyses explicitly into the resulting outputs. Further, innovation theory can bring about good insights as well with regard to defining the stage of the technology in question. In this regard, one should also be aware of it that if the relevant markets are characterized by a lack of internalization of the external costs, price formation in the market can constitute an important barrier for the technology to penetrate the market. It will not be possible for the technology to obtain a price that justifies its costs, because the environmental gains that the technology can bring about are not priced in the market.

To the extent that more subjective effects are considered important, such as distributional implications, it becomes even more important to provide for an open and participatory stakeholder process. Another issue that accentuates this importance is the many uncertainties of the analysis, and where stakeholder consultations can provide for more and broadly founded bases for addressing these uncertainties. The EU Impact Assessment method is one such method that integrates substance and process into one analytical framework.