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The value of air quality standards

• Preface
• Executive summary
• Introduction
• Framing the analysis
• Review of 2004 cost benefit analysis
• Updating the analysis and scenario analysis
• Conclusions
• References
• Appendices

Executive summary

Introduction

This report updates the cost benefit analysis undertaken in 2004 of the National Environmental Standards (NES) on Air Quality that underpinned the Section 32 assessment for introducing the standards. The NES does this by setting a target level of pollutants in ambient air quality in defined airsheds, prohibiting some activities and setting standards for others that contribute to pollutant emissions, with the aim of reducing the frequency of dangerous levels of air pollution in urban locations.

Introduced in 2005 with the expectation of progressive achievement of the ambient air quality standards across all regions by 2013, the NES is implemented primarily by regional councils. In achieving the ambient air quality targets in their airsheds, regional councils they may adopt measures more stringent than those in the NES.

Limitations of the 2004 cost benefit analysis (CBA)

The 2004 analysis estimated costs and benefits over 17 years (2004-2020), discounted at a real rate of 10% per year, and concluded the NES would achieve a net present value of $318 million and a benefit cost ratio of 3.9.

It had a number of significant shortcomings (and some other less critical limitations) which have been addressed in this update:

• The largest benefit is the avoidance of premature death, hospitalisation and restricted activity days (RADs) and is probably understated because:
  • The benefit calculation attributed only 75% of the value of statistical life (VOSL) per life saved by introducing NES, on an assumption that air quality affects only elderly people and their VOSL is lower than the all-ages average. There is no empirical basis in New Zealand for either of these assumptions.
  • No allowance was made for the qualitative effects of lingering ill-health, the on-going welfare loss from gradual impairment due to prolonged exposure, or the adverse effects of air pollution on infants and those under the age of 30.
  • No explicit allowance was made for medical costs saved by reducing bad air days and their associated adverse effects on health.
• The costs to local, regional and central government in administering and monitoring implementation were probably overstated, because:
  • Recurring costs were attributed to local territorial authorities, but the NES places no direct requirements on them so they are unlikely to face any cost
  • Costs expected to fall on regional councils were substantially higher than those actually observed in the four years of NES implementation
  • Other costs to councils/government in subsidising households to convert to compliant wood burners assumed a subsidy scheme that did not eventuate.
• Costs assumed for industry may have understated the mean compliance cost for emitting sites and restraints on new consents if NES targets are not reached, but there does not appear to be any evidence that this is so.
• The private costs of households converting to compliant wood burners were omitted from the 2004 analysis but should be included, with due allowance for trends in home heating and the effects of recent government subsidies.

Because of data limitations and uncertainties the 2004 analysis tended to be conservative, erring on the high side for costs while being frugal on benefits, to reduce the possibility of a false positive result. The updated analysis does the same.

Updated CBA approach

The updated cost benefit analysis retains the structure of the 2004 analysis but updates it in light of new information. The update is not a retrospective analysis of implementation to date, but rather a forward looking analysis covering the period 2008-2020. If the air quality NES is successful in bringing down the ambient level of pollution, benefits will continue beyond that date.

The comparisons in the updated analysis have changed from a choice between implementing and not implementing the NES, to a choice between:

• Holding the achievements of the NES to date and allowing air quality to progress as business as usual (the counterfactual).
• Continued pursuit of full implementation of the NES and target attainment by 2013.
• Continued pursuit of full implementation of the NES and target attainment by 2020.

Two other scenarios which are more difficult to quantify are examined in a qualitative assessment. These were applying fines to incentivise regional councils that fall behind on their NES ambient air quality target achievement, and requiring non-compliant air plans in regions that fall behind on target achievement.

The updated analysis differs from the 2004 analysis principally in revising the value attached to benefits, updating the costs to industry and local and central government, and estimating a potential cost for households in upgrading their wood burners to comply with the NES. In particular:

• The value attached to lives saved and hospitalisation costs are higher than in the earlier analysis.
• Costs for territorial authorities, schools, hospitals and road authorities in the 2004 analysis have been removed as they are no longer relevant in the update.
• Costs on householders for upgrading wood burners to meet the standards, which were omitted from the 2004 analysis, have been explicitly modelled.
• The discount rate has also changed, from 10% in the 2004 analysis to 8% in the updated analysis, in line with the Treasury’s current default discount rate.

Differences in assumptions and inputs used between the 2004 CBA and the 2009 CBA are summarised in the table below.

Summary of coverage of initial and updated analyses

Updated CBA results

The results of the updated cost benefit analysis are shown in the table below. They indicate the NES would be worthwhile, with the same benefit cost ratio as in the 2004 CBA but substantially higher net present value. If the standard is achieved by 2013, the early realisation of health benefits would result in a net present value of $955 million and a benefit cost ratio of 3.9. If standard achievement is postponed until 2020, deferral of benefits is greater than the reduction in costs, reducing the NPV to $159 million with a benefit cost ratio of 3.2.

Summary of updated CBA with baseline assumptions
Period to 2020 discounted at 8%

There are large differences in the distribution of costs across the community. The level and distribution of costs are predominantly driven by the number of households that incur costs in meeting the wood burner standard, which in the analysis is modelled as potentially having rather more impact than the NES prescribes, as more stringent measures may be applied by regional councils in pursuit of their ambient air quality targets under the NES. To the extent that the household impact is less, the cost and distribution of implementing the NES will also change.

Sensitivity analysis

Sensitivity analyses indicate this pattern of results is robust to large changes in some of the inputs used. In particular, the result that deferring target attainment saves implementation costs but incurs larger societal costs due to more deaths and hospitalisation is a recurring result of these analyses.

The size of the net benefit and benefit cost ratios indicate the analysis could accommodate substantially increased costs, and a reduction in benefits, before overturning the positive result.

Uncertainties and caveats

The timing and resources committed to this updated analysis mean that it has relied on existing gathered material, and been undertaken at a national level without delving into detail of local impacts. As it deals with issues over which uncertainty exists, this analysis cannot be viewed as a “precise” depiction of the implementation of the standards, but it can identify the main effects, magnitudes and uncertainties that affect the result.

The calculated net benefit is understated to the extent that benefits from improved air quality beyond 2020 are not counted; and also understated by the wood burner compliance costs assuming greater stringency than is likely under the NES. The main uncertainty on the cost side is the scale of compliance costs for industrial emitters and the possible opportunity cost for industrial emitters if consents are declined because emissions exceed the targeted level – but no such instances have yet been reported.

Key uncertainties that have not been possible to resolve in this analysis include:

• the precise relationship between measures applied, air quality and resulting impacts on health;
• the localised impacts on air quality and activity levels; and
• the likely value of benefits to the young and long term quality of life from improvements in air quality.

There are some omissions in the updated analysis which could be filled with more time and resources committed, for instance further work on localised impacts and consenting restraints. But further analysis is not costless and will only be net beneficial if it yields information that changes the interpretation of the results. The updated analysis has quantified the main effects of the NES and after qualitative assessment concluded that omissions are unlikely to be significant.

This analysis focuses on concentrations of particulate matter (e.g. PM₁₀) which nationally and internationally receives most attention in air quality control because of its adverse health impacts and correlation with other types of pollutant. Pollution levels fluctuate from year to year with the influence of weather and random variation, so recent observations that suggest the current level of PM₁₀ pollution is on average lower than it was in 2002 before the NES are not conclusive proof of any actual, permanent improvement in air quality. Even if there has been a permanent reduction, it is not possible yet to determine how much of this can be attributed to the NES.

Conclusions

If the reductions in fatalities, hospitalisations and restricted activity days are as large as indicated in the baseline analysis, and values attached to those reductions are consistent with health and safety benefits elsewhere in the economy, the air quality NES would deliver a substantial benefit which is likely to be well in excess of its costs across New Zealand.

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