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5 Efficiency and Effectiveness of the Proposed Standard

5.1 Overview

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 the achievement of the stated aims and objectives. It is, therefore, the most direct and effective option, [This will be considered further via the use of cost-effectiveness analysis in the overall appraisal.] assuming full implementation by local government.

Efficiency 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, usually assumes that benefits and costs can be quantified in monetary terms. In this case there are a number of 'intangible' benefits such as certainty and consistency. With this in mind the benefits identified in this section should be viewed as the baseline level of benefits, as the more intangible benefits will be additional to those identified.

5.2 Summary of methodology

As the proposed national standard only affects a small number of landfills, [The benefits modelling focuses on the landfills over 1 million tonnes affected by the proposals. Appendix 1 lists the landfill sites that will be affected.] the methodological approach for deriving the costs and benefits of the proposed standard is relatively straightforward.

Cost information was gathered through:

  • direct contact with affected landfill operators to determine the costs to them
  • discussion with operators to determine whether there would be any costs passed on to users of the landfill sites
  • discussions with local government to determine any additional costs of monitoring, reporting, and processing consents
  • discussions within central government to determine any costs in terms of administration, auditing or validation.

The method for estimating benefits has focused on the reduction in greenhouse gas emissions. This has involved:

  • determining current greenhouse gas emissions from landfill sites in New Zealand (this forms the baseline for the analysis)
  • determining greenhouse gas emissions from landfill sites under the national environmental standard option.

The derivation of emissions used methods recommended by the International Panel on Climate Change for generating greenhouse gas inventories. The difference between the two levels of emissions provides the benefits of the national environmental standards option. The greenhouse gas emissions are then converted into a monetary measure using the expected market value of carbon dioxide equivalents.

In both cases, the timeframe is assumed to be a transition period of three years, with the appraisal timeframe set at 10 years after this. Costs and benefits are discounted at 10%. [The process of discounting refers to the fact that society has a preference for 'a bird in the hand'; i.e., money today rather than at some point in the future. This is referred to as time preference, and values in the future are given less weight via the process of discounting. In this case, a discount rate of 10% has been used.]

The final stage is to compare the monetised costs with the monetised benefits. A further measure of cost-effectiveness has also been derived - cost per tonne of carbon dioxide equivalent. The following sections set out the costs and benefits in more detail.

5.3 Assessment of benefits

5.3.1 Statement of benefits

One of the drivers for the Resource Management (Energy and Climate Change) Amendment Act 2004 was to remove the potential for a double-up of greenhouse gas regulation at the local and national levels. The Government has stated that greenhouse gas emissions should be addressed and controlled at the national level because the climate change effects of local emissions are not observed locally. A national environmental standard for landfill gas collection and destruction fits well within this framework and will create consistent and even application of climate change policy across landfills and provide a clear indication to industry as to Government expectations.

The proposed standard will also compensate for the provisions of the Amendment Act 2004, which removed local government's ability to address landfill gas for climate change reasons. A standard will provide assurance that the current best practice of capturing and flaring gas is used in all present and future landfills over a certain threshold, and will thereby achieve a level playing field for all operators.

Initially the Government decided not to impose an emissions charge on landfill greenhouse gases for feasibility reasons and because the New Zealand Waste Strategy appeared to offer emission reductions over time through the application of a general waste levy. A waste levy is unlikely to be applied in the near future. The New Zealand Climate Change Office wishes to develop policy instruments to encourage methane reductions from the waste sector in light of current policy changes, and a national environmental standard will help achieve this.

In terms of the quantification of reductions in greenhouse gas emissions, the analysis has used a methodology recommended by the International Panel on Climate Change [The 'Tier 1' methodology has been used in this case. See IPCC (2001).] in order to determine emissions under both the 'status quo' and 'national environmental standard' options. Waste data from The 2002 Landfill Review and Audit (Ministry for the Environment, 2003 [Available from http://www.mfe.govt.nz/publications/waste.]) has been used to generate emissions estimates for the base data year, which is 2001. An annual increase of 1.5% of waste to landfill [Personal comment, Chris Purchas, Ministry for the Environment, 2004.] has then been used to extrapolate the waste contained in landfills to 2016 (the end of the analysis period - 10 years after the transition period). This then allows the derivation of greenhouse gas emissions per annum for the landfill sites of interest. Emissions have first been derived in terms of methane and then converted to their carbon dioxide equivalent (to reflect the fact that methane has a greater global warming potential than carbon dioxide).

The predicted emissions are shown in the spreadsheet tables in Appendix 2, and are summarised in Table 9.

Table 9: Estimated landfill gas emissions

Date year

Analysis year

Emissions (tonnes of carbon dioxide equivalent)*

CO2e (status quo)*

CO2e (NES

Benefits of NES

2004

0

1,680,000

1,600,000

Transition period

2005

1

1,710,000

1,610,000

2006

2

1,740,000

1,610,000

2007

3

1,770,000

1,610,000

158,000

2008

4

1,800,000

1,610,000

184,000

2009

5

1,830,000

1,620,000

211,000

2010

6

1,860,000

1,620,000

237,000

2011

7

1,880,000

1,620,000

263,000

2012

8

1,910,000

1,620,000

290,000

2013

9

1,940,000

1,630,000

316,000

2014

10

1,970,000

1,630,000

342,000

2015

11

2,000,000

1,630,000

369,000

2016

12

2,030,000

1,630,000

395,000
 

Total

2,765,000

* Rounded to three significant figures.

This means that over the period of analysis, greenhouse gas emissions from large landfills are reduced by 2.77 million tonnes of carbon dioxide equivalent (CO2e) by the introduction of a national environmental standard. This clearly signals the use of a national environmental standard as an extremely effective option in controlling greenhouse emissions from large landfill sites.

In addition to the reduction in greenhouse gas emissions, the installation of a gas collection system helps to address the problems of odour and explosive potential related to methane management at landfills. This is generally regulated well through the current consenting process, so additional benefits are not considered here.

5.3.2 Valuation of benefits

The reduction in greenhouse gas emissions has been measured in terms of the market value of CO2, as used for permit trading internationally. This represents the cost saving generated by a reduction in emissions (i.e., there will be no need to purchase credits to cover additional emissions). The value of CO2 will also go some way to reflecting the external costs of greenhouse gas emissions, and hence the value demonstrates the benefit to society of the reduction in harmful emissions.

It is currently predicted that the market price of CO2 will be around US$5 to US$25 (NZ$7.08 to NZ$35.38) [Source: www.CO2e.com, an internet-based emissions trading market. Using exchange rate as at 17/2/04. No adjustment for purchasing power parity has been made due to current purchasing power parity similarity between the US and New Zealand (The Economist, 15 January 2004).] per tonne. Using these values as a basis for benefits (with a lower and upper estimate) results in the benefit values summarised in Table 10. The full benefits spreadsheet can be found in Appendix 2. It is also worth noting that the maximum level of the proposed carbon charge in New Zealand will be NZ$25 per tonne of CO2.

Table 10: Estimated monetary benefits from reductions in landfill gas emissions

Date year

Analysis year

PV benefits (upper)*

PV benefits (lower)*

2004

0

Transition period

2005

1

2006

2

2007

3

$4,200,000

$840,000

2008

4

$4,450,000

$891,000

2009

5

$4,630,000

$925,000

2010

6

$4,730,000

$946,000

2011

7

$4,780,000

$956,000

2012

8

$4,780,000

$956,000

2013

9

$4,740,000

$948,000

2014

10

$4,670,000

$934,000

2015

11

$4,570,000

$914,000

2016

12

$4,450,000

$890,000
 

Total

$46,000,000

$9,200,000

* Rounded to three significant figures.

Table 10 indicates that over the 10 years of the appraisal period, benefits range from around $9.2 million to around $46 million (in present values). Clearly this is a wide range of benefits, but it does indicate the magnitude of the benefits and allows a degree of comparison with the costs of the proposals.

Wider benefits of standards such as certainty and providing a level playing field remain intangible, and as such no attempt to quantify these has been made.

5.4 Assessment of actual costs to stakeholders

In broad terms the affected sectors are:

  • local government
  • central government
  • landfill consent holders, both private and local government.

The proposed landfill gas standard reflects current best practice in New Zealand and other developed countries. This can be confirmed for New Zealand through the findings of the Ministry for the Environment's 2002 Landfill Review and Audit (2003), which indicates that only four landfills would have to alter existing practices.

5.4.1 Costs to landfill operators

On the basis of this report we estimate that 19 of New Zealand's 116 currently operating landfills exceed the 1 million tonne threshold. Appendix 1 shows a list of landfills over the threshold and gives more detail on each landfill. Of these:

  • three will be closed within the next three years, and therefore under the proposed transitional period would not be required to install a gas collection system
  • seven currently collect and destroy landfill gas
  • two are planning to install systems but have not yet placed enough waste to generate adequate gas volumes
  • three sites are designing systems
  • two sites have systems installed that are currently not operating
  • one landfill site may be required to design and construct a landfill gas and destruction system, or apply for dispensation through demonstrating that the site contains less than 5% biodegradable and putrescible matter, [This means that landfills which significantly divert organic matter from the site (down to less than x% organic matter) will not be required to collect and flare their gas as the amount produced would not be large enough to collect.] as a result of the standard.

To sum up, 75% of current landfills in New Zealand with a capacity of over 1 million tonnes (and which are not going to close in the next three years) already collect and flare landfill gas, or are planning to do so in the near future.

There will also be costs associated with the monitoring, reporting and enforcement of the standard. The costs of monitoring surface methane emissions will fall on operators, who then have to report back to their regional council. The cost of purchasing a surface methane monitor is $10,000 per landfill site and it is assumed that this will be purchased for all sites. This is a conservative estimate as sites may already own the equipment, or contracting in periodic monitoring may be a less expensive option.

The costs of the standard will be kept relatively low due to only four landfills having to change their practices because of the standard. The costs associated with these four landfills are now detailed.

Landfill 1

This landfill is planning to avoid collecting and flaring its gas by diverting its organic waste and applying for dispensation through containing less than 5% organic matter. It is planning on banning organic waste from landfills and setting up a fortnightly organic waste collection so that all of the district's organic waste can be converted to compost.

There will be two different kinds of costs associated with establishing this kind of system: set-up costs and per annum operational costs. The set-up costs are the costs of installing the equipment to be used to convert organic waste into compost, and setting up a workable system. These costs are believed to be between $1,000,000 and $3,000,000. It is also estimated that there will be a per annum operational cost of around $700,000. However, following discussion with the operators of this landfill, the decision to undertake this has already been made and the proposed standard was not a key driver. This is, therefore, a sunk cost and will not be considered further in the analysis.

Landfill 2

One of the landfills that would have incurred cost under the standard has recently received carbon credits under the recent Climate Change Office projects round. Any compliance costs the landfill faces will be of off-set by the revenue raised from the sale of carbon credits, and so these costs are not considered further in this analysis.

Two other landfills are affected by the standard. These landfills will need to restart their gas collection systems, which are currently not in operation.

Landfill 3

Landfill 3 has an out-of-date, inefficient system that needs to be removed and a new (more efficient) system installed. This particular landfill is considering two options:

  • design and install a new gas collection and destruction system at a cost of $1,000,000, or
  • design and install a system to collect landfill gas and generate electricity, estimated at $2,000,000.

In the case of the proposed standard, there is no specific requirement to generate electricity, so the lower figure will be used in the analysis. The operational costs to the landfill for collection and destruction would be around $50,000 per annum.

Landfill 4

Landfill 4 previously had a collection system that harnessed gas to generate electricity. However, this use has since been deemed economically unviable at the site. The landfill will, therefore, need to install a flare as the previous system did not destroy gas. The cost of this will be around $10,000.

This landfill will also have high operational costs as the current filling practices are not conducive to efficient gas collection. There will, therefore, be an additional per annum operational cost of around $50,000.

New landfills

It is considered best practice for large landfills to have gas collection systems. This means that it is unlikely that there will be additional costs for new landfills, as gas collection is more than likely to already be proposed.

5.4.2 Costs to regional councils

Regional councils will incur initial costs assessing which landfills in their region are required to comply with the proposed standard. Regional councils will incur further costs reviewing surface methane emission monitoring data. It has been estimated that this will result in costs of approximately $525 per landfill. [This figure is calculated by estimating that it would take two hours to make an initial assessment, and five hours to assess yearly landfill gas monitoring data, at a cost of $75 per hour. Personal comment, Glenn Wigley, Ministry for the Environment, 2004.] Regional councils may have policies that will result in these costs being charged back to the landfill consent holder.

5.4.3 Costs to the consumer

Some costs may be passed on to the consumer if operators' costs are high. These costs are likely to be in the form of increased gate charges and/or an increase in rates. However, given that these costs are first incurred by the landfill operator and then passed on to the consumer, they are considered transfer payments and so are excluded from the analysis in order to avoid double counting.

5.4.4 Costs to central government

There will be costs to central government in terms of the administration of the standards, plus any auditing and verification actions that may need to be undertaken. It is not expected that this cost will exceed 0.25 full time equivalent - an estimate of $35,000 per annum has been used in the analysis.

5.4.5 Summary of total costs

Table 11 provides a summary of total costs.

Table 11: Total costs of proposed national environmental standard for landfill gas collection and destruction over 10-year appraisal period

Area of cost

Total cost (undiscounted)*

Landfill operators

$2,300,000

Regional councils

$110,000

Central government

$350,000

Total costs (in present values)*

$1,900,000

* Numbers do not sum as the total figure is presented after being discounted.

As can be seen from the table, present value costs (which have been discounted at 10%) are $1.9 million over the period of the appraisal.

5.5 Options appraisal: measuring efficiency

In order to measure the efficiency of the proposed national environmental standard for landfill gas collection and destruction, the costs are compared with the benefits to provide an overall measure. In addition, it is also possible to use a cost-effectiveness measure in terms of cost per tonne of carbon dioxide equivalent reduced (CO2e). Both measures have been assessed in order to provide a fuller picture of the impact of the proposed standard.

Bringing together the benefits and costs as set out in the preceding two sections provides the basis to apply the key decision-making criteria:

  • net present value (NPV): the benefits minus costs over time (a positive result is deemed to be 'justified')
  • benefit-cost ratio (B/C): benefits divided by costs over time (a result greater than one is deemed to be 'justified')
  • cost-effectiveness ratio: the cost of achieving per unit reduction (in this case per tonne of carbon dioxide equivalent reduced).

An option is deemed to be efficient in pure cost-benefit terms when its benefits exceed the costs over time (i.e., a positive NPV or a benefit-cost ratio greater than one). Table 12 sets out the key appraisal data to determine whether the proposed national environmental standard is efficient (the full spreadsheets can be found in Appendix 2).

Table 12: Summary of key appraisal data

Benefits (total emissions reduced)

2,765,000 tonnes CO2e

Benefits (in present values)

$9.2 m to $46 m

Cost (in present values)

$1.9 m

Net present value

$7.3 m to $44.1 m

Benefit-cost ratio

4.80 to 23.98

Cost-effectiveness ($ per tonne CO2e reduced)

$0.69

From the above data it can be concluded that:

  • greenhouse gas emissions will be substantially reduced
  • quantified benefits in monetary terms are substantial
  • the net present value is always above zero, hence ensuring the option is efficient
  • the benefit-cost ratio is always above one, thereby ensuring the option is efficient
  • the cost-effectiveness ratio shows that the cost for reducing one tonne of CO2e is very low when compared to the expected market price of CO2e or the proposed carbon charge (with a maximum charge of $25 per tonne of CO2e).

From these results, overall it can be concluded that the proposed national environmental standard for landfill gas collection and destruction is efficient and effective.

5.6 Sensitivity analysis

Although the findings of the efficiency test have shown that the air quality standard is 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.

Sensitivity analysis is a process for testing the robustness of an appraisal by varying key parameters within the analysis. This process determines whether the results of the analysis are dependent on any particular variable. A number of sensitivity tests have been run:

  • discount rate decreased to 5%
  • predicted emissions increased by 25%
  • predicted emissions reduced by 25%
  • costs increased by 25%
  • costs reduced by 25%.

The results from these tests are shown in Table 13.

Table 13: Summary of sensitivity test results

Sensitivity test

Result

Change in decision-making parameters

Discount rate reduced to 5%

Benefits: $13.2 m to $66.9 m

Costs: $2.3 m

NPV: $10.9 m to $65.9 m

B/C: 5.83 to 29.17

C/E: $0.82

Increase predicted emissions by 25%

Emissions reduced: 3.5 m tonnes

Benefits: $11.5 m to $57.5 m

NPV: $9.6 m to $55.6 m

B/C: 6.00 to 29.98

C/E: $0.56

Reduce predicted emissions by 25%

Emissions reduced: 2.1 m tonnes

Benefits: $6.9 m to $34.5 m

NPV: $5.0 m to $34.5 m

B/C: 3.60 to 17.99

C/E: $0.93

Costs increased by 25%

Costs: $2.4 m

NPV: 6.8 m to $43.6 m

B/C: 3.84 to 19.18

C/E: $0.87

Costs reduced by 25%

Costs: $1.4 m

NPV: $7.8 m to $44.6 m

B/C: 6.39 to 31.97

C/E: $0.52

The results presented in the table indicate that the analysis is slightly sensitive to two key parameters: the level of predicted emissions and costs. However, even in these cases the key decision-making parameters are very positive. In terms of the estimate of emissions, the International Panel on Climate Change guidelines have been followed, along with advice from the New Zealand Climate Change Office. These estimates, therefore, are believed to be robust and defensible.

The key consistent measure throughout the sensitivity testing is the cost-effectiveness measure showing the cost per tonne of CO2e reduced. For all tests this is below $1. This value is very low when compared to the expected market price of carbon dioxide equivalent. In this respect, in the main analysis and with the sensitivity testing the proposed national environmental standard is extremely cost-effective.

It can be concluded, therefore, that the sensitivity tests show that the analysis is robust and defensible. The proposed national environmental standard is efficient and extremely cost-effective.

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