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Proposed National Environmental Standards for Air Quality Resource Management Act Section 32

Executive Summary

1 Introduction

2 Statement of the Issue

3 What are the Options?

4 The Proposed Air Quality Standards

5 Efficiency and Effectiveness of the National Environmental Standards for Air Quality Package

References

Appendix 1: Design Standard for Woodburners - Costs and Benefits

Appendix 2: Council Plans and Proposed Activity Bans

Appendix 3: Cost Summary Spreadsheet

5 Efficiency and Effectiveness of the National Environmental Standards for Air Quality Package

5.1 Overview

As discussed earlier, effectiveness considers whether the policy option will actually be effective in achieving its aims and objectives. In this case, the setting of national environmental standards provides firm regulation for achieving the stated aims and objectives. It is, therefore, the most direct and effective option - assuming full implementation by local government.

In terms of efficiency, this measure needs to consider the benefits and costs of any policy intervention. If the benefits outweigh the costs over time, then the policy is deemed to be 'efficient'. This, however, assumes that benefits and costs can be quantified in monetary terms. In this case there are a number of 'intangible' benefits such as certainty, consistency and improvements in health.

With this in mind the benefits identified in this section should be viewed as the baseline level of benefits, and the more intangible benefits will be on top of those identified. The main focus of this analysis is the improvement in health brought about by anticipated improvements in ambient air quality. These benefits are more readily quantified than any others, and will be analysed within a cost-benefit analysis framework.

Within this framework, the measure of efficiency will consider the national environmental standards package as a whole rather than breaking it down into its constituent parts. This means that individual components of the package will not be justified on their own, and the national environmental standard package should be viewed as a whole. Costs relating to specific standards are dealt with in the sections below, while benefits are derived only for the whole package.

The analysis is, by its nature, national in scope and does not include specific regional or local measures. Nevertheless, local measures - introduced via regional councils and unitary and territorial authorities - are likely to be important in achieving any air quality standard.

In practice there will probably be local measures for achieving reductions in pollutant levels which prove more cost effective than the national measures quantified and costed in this work. We want to emphasise that the whole package of measures - based on national measures - is both illustrative and very much a high-end of cost estimates for the measures that are likely to be implemented (and therefore the reductions in concentrations that are likely to be achieved).

5.2 Summary of methodology

The appraisal in this document has taken a number of steps to reach an overall picture of the impact of the proposed national environmental standards for air quality. This section summarises these steps to help the reader to understand the process undertaken.

The process for calculating benefits can be summarised as follows.

1. Construct a health effects model to determine the current situation and the situation under a regime of standards.
2. Construct an economic model that relates health outcomes to the impact on the economy.
3. Derive an adjusted monetary value for each death brought forward by poor air quality.
4. Merge the health and economy model to provide the economic benefits of reducing premature mortality.
5. Integrate the health model with the monetary value of each death brought forward.
6. Derive the total benefits over the period of the analysis (to 2020).

Cost information was gathered through:

• direct surveys with industry, regional councils and key stakeholders.
• technical working groups, to receive feedback on what the costs of the standards may be
• a literature review and in-house data gathering at the Ministry
• deriving costs over the period of the analysis (to 2020).

The costs and benefits were then brought together to provide the overall impact of the proposed standards.

5.3 Defining the baseline

The baseline option in any policy appraisal is crucial. This is the option with which all other options are compared, so the specification of this option underpins the whole analysis. In this case, the baseline option is represented by the 'status quo'. This option assumes that current practices continue along the lines of Ministry guidelines and regional council plans.

In order to derive the health effects associated with the status quo option, modelling was conducted for 24 sites in New Zealand. These sites are areas where air quality is considered to be problematic and in some cases results in frequent exceedances over the Ministry's air quality guideline values. [These sites include Christchurch, Nelson, Taupo, Tokoroa, Hamilton, Auckland, Alexandra, Dunedin, Lower Hutt and Upper Hutt.]

To evaluate concentrations of contaminants in the absence of air quality standards, estimates of projected emissions and concentrations were made for the years 2001-2021. This took into consideration the impacts of existing legislation and integrated assumptions about trends in heating methods, and motor vehicle and industrial discharges.

The impact of the proposed standards was then evaluated by comparing these projections and estimates with the required concentrations dictated by the air quality standards. It is the differencein projected concentrations that determines the health benefits associated with the introduction of the standards.

A number of general assumptions have been applied to estimate the projected concentrations of contaminants in the absence of more detailed information. These were:

• a 45% decrease in the number of multi-fuel burners from 2001 to 2021 in areas where these are not legislated
• a 10% decrease in open fires from 2001 to 2021 in areas where these are not legislated
• other solid-fuel burners are replaced with new solid-fuel burners 15 years from the date of installation
• a linear relationship between emissions and concentrations for all areas (i.e. any reduction in emission would result in a proportional reduction in concentrations)
• no impact of differences in the time of day of different sources relative to meteorological conditions, except in Christchurch (in Christchurch, a box model was developed by the National Institute of Water and Atmospheric Research to describe this relationship, see Gimson and Fisher, 1997)
• an ageing population, with the proportion of the population over 30 increasing in each area by 20% of the 2001 proportion by 2021 (these estimates are based on limited data provided by Statistics New Zealand)
• a 10% increase in industrial emissions in all areas except those with negative population projections
• a 70% decrease in PM₁₀ emissions from motor vehicles from 2001 to 2021 in areas where area-specific modelling and projections have not been carried out. (This is based on New Zealand Transport Emission Rate model (NZTER) emission rate projections, allowing for some increased traffic growth and congestion. Assuming NZTER estimates of emission rates are accurate this should be a conservative (underestimate) of the reductions for most areas.)

Table 7 provides the health outcomes for the status quo option. The health outcomes are measured in terms of:

• anticipated premature deaths brought about by air pollution
• estimated hospitalisations due to the effects of air pollution (e.g. asthma, bronchitis)
• estimated restricted activity days (i.e. RADs - days when an individual's normal activity is restricted due to the effects of air pollution).

Table 7: Health effects associated with air pollution: status quo

View health effects associated with air pollution: status quo (large table)

5.4 Assessment of benefits

5.4.1 Overview of the approach

There is a range of benefits associated with the introduction of national environmental standards for air quality. These can be split into two main types: tangible and intangible. Intangible benefits are those that are more difficult to quantify and hence are problematic to include in a full consideration of the costs and benefits. The tangible benefits are much more easily quantified and readily fit into an appraisal framework.

Intangible benefits address issues such as certainty, providing a level playing field, and achieving national consistency. National regulations will mean there will be a reduced need to seek legal recourse during the consenting process. There could be major cost savings for both the applicant and consenting authority in this respect. Major consent hearings have been known to stretch to tens of thousands of dollars. Although such avoided costs will be benefits of the standards, they have not been included in the analysis.

During the consultation process the argument was made that national consistency is lost because the RMA allows for local government to introduce stricter controls. The Ministry does not fully agree with this argument. Any council that wishes to be stricter than the national standards will need to present a robust case that such a change is appropriate, effective and efficient. This is likely to be difficult, as the proposed standard values are consistent with internationally accepted standards (see Table 5). Through this process, submitters will be able to be heard and challenge any alteration of the 'level playing field'.

Tangible benefits are those that are more easily quantified and so are more readily fed into an appraisal. In the case of national environmental standards for air quality, the key tangible benefits are improvements in health and the linkages to New Zealand's economy. Further detail on the modelling of these benefits is provided in the next section.

Table 8 presents a summary of the benefits associated with national environmental standards for air quality.

Table 8: Summary of the benefits of standards

5.4.2 Modelling the benefits

In order to quantify the tangible benefits as far as possible, consultants were commissioned to build two models.

• Health model: relating air quality to the health outcomes. This is the same model that was used to develop the baseline option. In this case it was assumed that the air quality standards are achieved within three to four years following implementation.
• Economic model: relating health outcomes to the wider impact on the economy. This is a relatively simple general equilibrium model that relates working days lost (due to premature mortality and ill health) to productivity in the economy. This 'cost of illness' approach is well established and has been used worldwide to examine the impact of pollutants on economies.

A number of key assumptions have to be made for the economic model, and these are set out in Box 1.

This economic model was then linked to the health model, and then two scenarios were modelled:

• the status quo (i.e. continue with current policies and plans)
• with standards in place.

The difference between these two scenarios provides the level of benefits (as measured by cost of illness) of introducing national environmental standards for air quality.

5.4.3 Results of the benefit modelling

In order to fully analyse the impact of the proposed standards, we have modelled three scenarios of when the standards would actually be achieved: 2008, 2013 and 2020. Health improvements are modelled to begin five years before these achievement dates to reflect the council planning process. Table 10 sets out the different health impacts for these scenarios.

Table 10: Scenarios of differing dates for achieving standards

View scenarios of differing dates for achieving standards (large table)

Figures 3 and 4 show the difference in total premature mortality brought about by achieving the standards at different points in time.

These two figures show the impact of delays in meeting the air quality standards. In order to maximise the number of lives saved, the standards need to be achieved as soon as possible.

We realise that achieving the (ambient) air quality standards by 2008 is unrealistic given current constraints and planning time horizons for local government. Achievement by 2013 is a much more realistic prospect - this also matches the requirements in section 4.1.1. The 2013 scenario has been taken forward for the economic modelling and is the scenario used in the cost-benefit analysis. Table 11 show the different health effects if the standards are achieved by 2013.

Table 11: Health benefits from the standards (as compared to the status quo option)

View health benefits from the standards (as compared to the status quo option)

As can be seen from the above, over the analysis period premature mortality is reduced by 625, hospitalisations by 571 and RADs by over 1,000,000.

Running the economic model with these figures provides the economic benefits of the proposed standards. The monetary values have been discounted to reflect the fact that economic values in the future are given less weight in the analysis (reflecting a time preference in society). A discount rate of 10% has been used.

The benefits analysis includes a monetary value for premature mortality, based on the value of a statistical life (referred to as VoSL). This uses an adapted value from Transfund (of $2.5 million per fatality) adjusted to reflect age, as shown in Figure 5. In the current model, the 'value of life' figure has been adjusted to 75% to reflect impacts on older members of the at-risk population. This leaves a value per premature death of $1.88 million.

The economic modelling shows that the benefits of national environmental standards for air quality are large, saving over 625 lives, adding over $9 million to the economy [Derived via the economic model that relates working days lost to GDP.] and generating over $420 million in benefits accrued from avoided premature mortality.

5.5 Assessment of total costs

5.5.1 Sectors affected and sources of cost information

In broad terms the affected sectors are:

• local government
• central government
• industry
• households.

In order to research the magnitude of these costs, the Ministry undertook three key data-gathering exercises:

• a survey of industry
• five technical workshops with stakeholders, where the cost-benefit process was discussed and data requested
• a survey of local government.

Although able to discuss the concept of standards in general terms, many respondents were concerned that not enough detail was available at the time to make a precise estimate of costs.

Regional council costs, over and above those that currently occur through the implementation of the Ambient Air Quality Guidelines, are unlikely to increase significantly, for the following reasons.

• The standard will not require all regional councils to monitor for every ambient air quality parameter. A judgement will be made by each regional council on what parameters are an issue in their airshed. However, there is likely to be a need to install further ambient monitoring equipment in some regions.
• The national environmental standard automatically supersedes any existing regional plan, so there will be no need for every regional plan to be reviewed upon release of the standard.
• Existing resource consents are not affected - though regional councils may elect to review any existing consents that are a majority emitter of one of the pollutants.
• Resource consent holders will be required to monitor individual point source compliance with the standards, as is the existing situation.

The national environmental standards do not require a regional plan change, but the production of an air quality action plan will incur some costs. With this in mind, respondents to surveys were encouraged to be conservative in their estimates and the Ministry has used these estimates to provide the most likely actions to be undertaken to implement the air quality standards. We must emphasise that it is likely that these estimates are an overstatement of costs, and more cost-effective methods will be utilised during implementation of the standards. All costs, therefore, are Ministry estimates based on primary data and data derived through a umber of assumptions. Table 12 sets out the sources of costs and their magnitude.

Table 12: Sources of costs for the air quality standards package

View sources of costs for the air quality standards package (large table)

Four specific areas are worth examining in more detail:

• costs to industry
• costs associated with the prohibitive standards
• costs associated with home heating
• 'strategic' costs.

In general, industry is not a major contributor to air quality problems in New Zealand, so it is highly unlikely that industry will be required to make major upgrades. However, regional councils will need to ensure that appropriate technology is being used in order to ensure that industry does not become a major polluter. A Ministry survey of industry estimated that costs would range from a few thousand dollars to $100 million. However, the 'best guess' estimate for any required upgrades was up to but not exceeding $100,000. For the analysis we have assumed an ongoing programme of improvement with 10 (different) sites upgrading each year. This results in total costs to industry of $1 million per annum.

It must be stressed, however, that costs will tend to be minimal given that the levels used in the national environmental standards are entirely consistent with the existing air quality guideline levels. Flexibility for industry is also provided by specifying that the point of compliance with the ambient air quality levels is where people gather or are living. It excludes sites where people are not living or are unlikely to be present.

The costs associated with the prohibitive activities reflect the fact the majority of these activities are currently prohibited and deemed unacceptable by regional councils. Appendix 2 provides a summary of current (and immediate) plans. With this in mind, many of the proposed bans will be zero (or minimum) cost. Alternative technologies exist for many of the applications (such as water blasting for roads), and so development costs will be minimal.

The costs associated with home heating have been approached in terms of upgrading and replacement costs of open fires and 'dirty' wood burners. It is assumed there will be an assistance scheme operating by central and local government. The feasibility of such a scheme is currently being investigated by the Ministry for the Environment, Energy Efficiency and Conservation Authority and the Climate Change Office. The vision for this funding is $5 million per annum for 10 years to help eliminate the 'worst' polluting open fires and inefficient burners.

'Strategic' costs have been mentioned by some stakeholders with reference to the larger 'big picture' costs. Examples include road design and construction, alteration / new road designations, urban design and town planning. It has been argued that costs may be incurred in order to accommodate design or planning within the air quality standards framework. Re-routing of roads to avoid already polluted airsheds is one example of this. Costs of this nature are wholly uncertain, and environmentally and socially responsible design should be business as usual. These costs are, therefore, excluded from this analysis.

5.5.2 Summary of costs

Given the above assumptions, the total costs of the air quality standards package has been calculated to be $111 million over the appraisal period up to 2020 (in present values discounted at 10%). The spreadsheet of total costs can be found in Appendix 3.

5.6 Options appraisal - measuring efficiency

Efficiency, in the context of economic appraisal, refers in simple terms to an option (be it a policy or project) where the benefits exceed the costs over time. The previous sections have set out the relevant costs and benefits associated with the proposed national environmental standards for air. This section brings together these values to provide a determination of the efficiency of the proposals. Table 13 summarises the findings of the cost and benefit analysis.

Table 13: Summary of total costs and total benefits

The three critical decision-making criteria are shown in the last three rows of the table. These are:

• net present value (NPV, benefits minus costs over time): $318.4 million
• benefit-cost ratio (B/C, benefits divided by costs over time): 3.87
• cost per life saved (costs divided by premature mortality avoided over time): $177,000.

In terms of cost-benefit analysis, a policy is said to be efficient if the benefits outweigh the costs over time. In this case, the proposed standards for air are certainly efficient and economically justified.

With regard to the cost incurred per premature death avoided, given that government (in its road-funding programme) deems $2.5 million as an appropriate investment to avoid a fatality, then the proposed air quality standards are extremely cost-effective.

5.7 Sensitivity testing

Although the findings of the efficiency test have shown that the air quality standards are both efficient and cost-effective, we need to test how sensitive the analysis is to the variation of key parameters. This testing process shows how uncertain and reliable the conclusions of the analysis are. Table 14 presents the findings of this testing procedure.

Table 14: Summary of sensitivity testing

View summary of sensitivity testing (large table)

From these sensitivity tests it can be concluded that the analysis is robust and no one parameter dominates the analysis. A further conclusion we can draw is that the level of costs would need to be substantially higher compared to the level of avoided premature mortality for the standard not to be economically justified. The already conservative nature of the assumed costs suggests that the proposed standards will be appropriate, effective and efficient.

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