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Regulatory Impact Assessment
ANNEX 2: COSTS AND BENEFITS: METHODOLOGY
Costs and benefits of additional remediation
The approach to assessing the costs and benefits of additional remediation required under ELD uses the past as a guide to the future. The first step was to establish which cases of damage from the recent past would have been caught had ELD been in place. Data from one year was reviewed in detail to identify actual cases, with information from other years to moderate estimates. This provided an annual sample of ELD cases in Scotland (and in parallel exercises for England and Wales).
The cases in England and Wales were then examined to see what actions were taken under existing legislation and what would additional measures would have been required under ELD. In most cases it was found that some primary remedial measures were already taken but further measures would have been required as complementary and compensatory remediation. Recognising that there are occasionally more severe cases with wider ranging consequences, in addition to the cases that might typically arise year on year, authorities were asked to identify the most serious cases from recent decades on the basis of which an estimate of the frequency of significantly larger cases was made.
Costs
The costs of the additional measures that would have been required were assessed with cost information from the Environment Agency of England and Wales, Scottish Natural Heritage and from Natural England. An estimate of costs per case was derived and applied to the estimated number of cases in Scotland. The potential costs of larger cases was assessed by characterising the nature and extent of these cases and the remedial requirements in response to them . A proportion of the costs of these larger cases was added to the annual estimates.
Benefits
In order to assess the benefits of remedial measures taken, the expected outcomes of measures was first identified: for example, number of kilometres of river improved to a particular standard or number of hectares of a particular type of habitat improved. The next stage was to assign a value to those outcomes. Valuing the benefits of environmental improvements is a challenging area but economic techniques have been developed in recent years and these have been applied to derive values for a wide range of environmental assets and improvements.
In general terms these techniques are either based on 'stated preferences' which involves interviewing people to find out how they would value 'non-market' environmental goods in a market situation; or on 'revealed preferences' which examines statistical data on actual market decisions such as where people choose to live in order to work out implicitly how people value environmental goods.
For this assessment it was considered that rather than undertaking a primary assessment, 'benefits transfer' which draws on primary valuation studies was the appropriate approach. Benefits transfer imputes a value for similar environmental goods or improvements from one or more existing studies to a policy scenario making adjustments for key differences between study and policy sites. For example, in one case it was estimated that ELD would require improvement to 30 hectares of moorland. A 'per hectare' value of improving similar moorland was transferred from an existing study to provide a value of the benefits of improving 30 hectares. In each case differences between the study and policy scenarios were considered and in some cases adjustments were made. Overall the benefits of ELD remedial measures were found to exceed their costs.
Uncertainties
Uncertainty arises because estimates of future damage are based on past cases. The number of past cases is small and therefore circumstances of individual cases significantly influence the conclusions. Percentages which result from small numbers sometimes suggest precision, where the intention is more to show relative weight of the factors. Tables 2-4 in Annex 1 show the ranges of possible costs, from which the estimated figures have been taken. There is also uncertainty in the assessment of benefits which relies on recently-developed approaches for benefits valuation and is constrained by the benefits studies that were available. In some areas of the assessment where Scottish data has not been available at this stage we have relied on extrapolation from UK work.
Efforts have been made to overcome the above shortcomings, for example, use of workshops nevertheless consultees are asked to provide any further evidence that may help to validate or develop this first partial RIA.
Business response to ELD
Costs
The approach to assessing how businesses might respond to ELD was to ask the businesses themselves. A first series of workshops was set up with each workshop dedicated to a business sector that was assessed as likely to be exposed to additional liabilities once ELD is transposed into national law with representatives of different sized businesses within each sector. Workshops began by establishing what the new provisions were and how they would change existing rules for responding to environmental damage. Participants provided their view of what they, and other similar businesses, might do in response to the new rules and on the costs of any measures that they might take.
Estimates were then extrapolated to cover all UK businesses on the basis of data on the number and sizes of businesses in each sector. The overall results were then presented to representatives of each sector in a second series of workshops and adjusted according to comments received. This exercise was undertaken by Defra on behalf of the UK. The estimate for Scotland has been made by reference to the numbers of businesses in Scotland in comparison with the rest of the UK.
Benefits
Measures that businesses take in response to a change in liability rules will lead to environmental benefits to the extent that those measures reduce the amount of environmental damage that occurs or the consequences of incidents that do occur. It is important to note that in addition to reducing the likelihood of ELD damage, measures taken may reduce the overall environmental impact of the operation. It is difficult to establish exactly what benefits measures that businesses choose to take will have but it is possible to draw some general conclusions by examining the circumstances under which businesses are likely to choose to take measures.
Businesses will choose to take action where they perceive that the costs of doing so would be lower than the costs of bearing the additional risk. Assuming businesses understand their risks accurately and how their actions can reduce those risks, they will take measures where it is cheaper to do so than to bear risks. Studies used as indicators for comparison of costs and benefits of remediation measures suggest that on average the environmental benefits of ELD remedial measures in future should exceed the costs of those measures. Taking these two relationships together it follows that the environmental benefits of avoided damage should on average be greater than the costs of the measures taken to avoid that damage; and therefore that the total environmental benefits of measures should exceed their costs. This is a simplification but provides an indication of the relationship between the costs and benefits of measures that operators may take.
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