ENVIRONMENTAL DAMAGE VALUATION AND COST BENEFIT NEWS
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VOLUME III # 3-4 PART 1
MARCH-APRIL, 1996
Font Courier 12 with 1 inch margins recommended.
CONTENTS
GENERAL
SUPPORT AND CAUTIONS FOR COST BENEFIT ANALYSIS
SAVINGS FROM INTEGRATED CROP MANAGEMENT PROGRAM
COMPARISON OF MAIL & TELEPHONE SURVEY RESULTS
EDUCATION INDUCES SUPPORT FOR ENVIRONMENT
LANDFILL RULES TIGHTENED
GUIDE FOR REVIEWING ENVIRONMENTAL POLICY STUDIES
AIR
EMISSIONS TRADING LABELLED SUCCESS BY RFF ANALYST
AUTO EMISSIONS CONTROL THROUGH ZEOLITE
COST EFFECTIVE AIR QUALITY IMPROVEMENT
ILLEGAL OZONE IMPORTS COST $200 MILLION IN DUTIES
LAND
BROWNFIELD TAX LOSSES
LUST FINE
APPRAISAL OF CONTAMINATED PROPERTY
CLEANUP COST & NATURAL RESOURCE DAMAGE CONSENT
RECYCLING SAVINGS
EFFECTS OF CERCLA ON DEVELOPMENT
ENERGY
PRICE OF WIND POWER HAS FALLEN
EXPLAINING HIGH DISCOUNT RATES
NURSING HOME CUTS ENERGY COSTS
NON-USE BEACH VALUES NEAR GLEN CANYON DAM
SAVINGS FROM CUTTING POLYMERS IN WASTEWATER
GENERAL
SUPPORT AND CAUTIONS FOR COST BENEFIT ANALYSIS
In February, a group of prominent economists led by Robert Hahn
and Paul Portney, which was funded by the American Enterprise
Institute, Resources For the Future, and the Annapolis Center for
Environmental Quality published a report which concluded that
decision makers should formally consider the economic costs and
benefits associated with environmental, safety, and health
regulations. The economists were brought together due to the
mischaracterization and misunderstanding of benefit cost analysis
in recent congressional regulatory reform debates. Members of
Congress failed to comprehend the uses and limits of these tools.
The economists noted that Republican supporters of cost benefit
analysis did not disclose how imprecise the analysis can be,
while Democrats need to learn that it is a tool which should be
taken more seriously. They strongly recommended that laws which
have been interpreted to prohibit the consideration of costs
should be revised. A copy of the 13 page report is available
free from Megan Hayward at the Annapolis Center for Environmental
Quality (419) 268-3302
Benefit-Cost Analysis in Environmental Health and Safety
Regulation Annapolis Center for Environmental Quality (419)
268-3302
SAVINGS FROM INTEGRATED CROP MANAGEMENT PROGRAM
Through the East River Integrated Crop Management (ICM) Program
in northeast Wisconsin farmers in the 219 square mile East River
watershed adjusted their use of fertilizer to actual crop needs,
saving money and improving the environment. The program showed
farmers how to take into account nutrient levels already in the
soil and the value of nutrients in manure applications.
In 1993, farmers in the program saved, on average, $5,700 ($18.26
per acre) by cutting back on the use of commercial fertilizers.=20
In 1994 the program kept 2,500 tons of unneeded nutrients from
being applied to fields, reducing potential pollution from excess
nitrogen. Figures for 1994 were slightly lower than the 1993
results, as savings depend on weather conditions, feed needs, the
number of fields in the program, and crop rotation.
The government subsidized program included 52 producers with a
total of 16,000 acres, while another 52 producers practiced ICM
on their own or through other programs, bringing a total of
22,000 acres under ICM.
During the fall, farmers gather information on weeds and insects
whose larvae will hatch in the spring. In addition, soils are
tested periodically. Producers then plan their use of nutrients
and chemicals based upon research regarding precisely how much
their crops need--and how much can be supplied by existing on
site nutrients like manure and legumes. A consultant calculates
the additional nutrients needed from fertilizer. Fields are
monitored frequently by a professional crop consultant, who then
recommends treatment with chemicals only if crop losses will
exceed the cost of control. Each producer is required to file a
comprehensive crop plan at least 30 days before planting.
In 1993 $771 per farm was saved on starter fertilizer which is
used to warm the soil and encourage early crop growth. An
additional $1,276 was saved by taking credit for nitrogen already
introduced into the soil by legumes. Legumes convert atmospheric
nitrogen into a form that plants can use. The greatest savings
($3,977 per farm) was obtained by crediting and analyzing the
nutrient value of manure, and by spreading manure more
efficiently on fields that need it most. A ton of dairy manure
contains three pounds of phosphate and eight pounds of potash.
A survey before the program began found that over 60 percent of
farmers were applying more nitrogen then University of
Wisconsin-Extension recommendations, while 84 percent were
applying more phosphorus than necessary. By 1995 manure
application rates had decreased by 47 percent. Soil phosphorus
levels were high from repeated manure application. Monitoring
and improved analysis of pests saved approximately $188 per farm.
The authors also point out that 77 percent of the phosphorus
entering Green Bay via the Fox River is from rural and urban
on-point sources. A survey of participants in late 1994 found
that 85 percent planned to continue using ICM after cost sharing
ends. Bob and Susan Van Dorn, who milk 220 cows at two sites cut
fertilizer and pesticide costs by more than $50,000 over three
years.
Kevin Erb and Jim Hunt, Water Quality Demonstration Project East
River Integrated Crop Management: A pilot project 1991-1994 Water
Quality Demonstration Project-East River and US Department of
Agriculture Soil Conservation Service, 1150 Bellevue, Green Bay,
WI 54302 (414) 391-4610
COMPARISON OF MAIL AND TELEPHONE SURVEY RESULTS FOR 3 PROGRAMS
Loomis and King find that a traditional mail survey produces
nearly double the willingness to pay as that resulting from a
combined mail booklet with telephone interview format.=20
Correcting for demographic variables, attitudes, and recreation
participation behavior narrows the differences only slightly.
Willingness to Pay for five wildlife programs was measured
through a dichotomous choice Contingent Valuation Survey fielded
in California's San Joaquin Valley. The questionnaire was
pre-tested using telephone interviews and focus groups. In both
mail and telephone-mail surveys respondents received a
multi-color booklet that presented three wildlife programs using
text, pictures and graphics. Participants were asked to
evaluate: (1) a wetlands and wildlife program that increases the
acreage of wetlands and provides dependable water supplies to
existing wetlands with two quality levels--maintenance and
improvement; (2) a wildlife contamintion control program that
reduces exposure of wildlife to contaminated agricultural
drainage water (also with two levels--maintenance and
improvement); and (3) A San Joaquin River and salmon improvement
program.
As expected the telephone survey had a statistically higher
overall response rate, and a higher item response rate.=20
Differences in responses resulted from significant differences in
demographics, in recreation activity participation, and in
knowledge about issues, but not from attitudes toward the
importance of preserving wildlife. The logit equations were
statistically different for responses to questions regarding
three of five equations. Most of the changes resulted from
sample selection effects.
The resulting Willingness to Pay Estimates are presented below
WILLINGNESS TO PAY ESTIMATES MAIL AND TELEPHONE
Program Combined Mail Telephone
Wetlands Maintenance $308.48 $365.88 $206.13
Wetland Improvement $359.35 $503.39 $226.81
Contamination Maintenance $384.23 $684.07 $188.92
Contamination Improvement $407.69 $516.74 $257.07
River & Salmon Improvement $254.50 $251.70 $262.36
John Loomis and Michael King "Comparison of Mail and
Telephone--Mail Contingent Valuation Surveys" Journal of
Environmental Management (1994) 41 pages 309-324
EDUCATION INDUCES SUPPORT FOR ENVIRONMENT
V. Kerry Smith notes that firms appear to recognize differences
in the propensities for collective action exhibited by different
communities. The companies often use this information in their
decisions about siting new (or expanding existing) facilities
which might cause externalities. Hamilton (1993, 1995)
documented these relationships by using differences in the rates
of voter participation as a proxy for the likelihood of pursuing
collective action opposing the location or expansion of an
undesirable activity.
Smith estimates a "probit" statistical model with data from a
special supplement to the National Opinion Research Center's 1993
General Social Survey of 1,606 individuals. The supplement
focuses on knowledge about science related to environmental
issues, as well as participation in voluntary activities. It
also contains information about educational background and
demographic characteristics. Dependent variables in Smith's
study are participation in recycling programs, frequency of
donations to environmental groups, and likelihood of signing
petitions. Activity was positively related to household income
and general science knowledge. Education may therefore change
willingness to pay, and thus prospective benefits found in
studies.
Economics and business majors were the only persons among the
more highly educated individuals who were less likely to
participate in pro-environmental activities. The findings with
respect to economics and business majors are consistent with
those of Robert Frank, et. al. (1993).
V. Kerry Smith "Does Education Induce People To Improve the
Environment" Journal of Public Policy Analysis and Management
Volume 14, Number 4 1995
Robert H. Frank, Thomas Gilovich and Dennis T. Regan (1993) "Does
Studying Economics Inhibit Cooperation?" Journal of Economic
Perspectives 7 (Spring) pages 159-172
James T. Hamilton (1993) "Politics and Social Costs: Estimating
the Impact of Collective Action on Hazardous Waste Facilities,"
Rand Journal of Economics 24 (Spring) pages 101-125
James T. Hamilton (1995) "Testing for Environmental Racism:
Prejudice, Profits, Political Power?" Journal of Policy Analysis
and Management 14 (Winter) pages 107-132
LANDFILL RULES TIGHTENED
The EPA issued a rule on March 1st that is intended to reduce
smog-causing emissions and toxic air pollutants from landfills by
half. The rule requires large landfills that emit volatile
organic compounds in excess of 50 megagrams per year to control
emissions by drilling collection wells into the landfill and
routing the gas to a suitable energy recovery or combustion
device. In the April 1995 issue of EDV&CBN we reported on the
economics of such recovery systems. Large landfills will also be
required to monitor surface methane on a quarterly basis, and to
expand their collection system if the concentration exceeds 50
parts per million. Only landfills which handle everday household
waste, not those handling hazardous materials, are subject to the
rule. Only the largest four percent of existing landfills (280)
and five percent of new ones built in the next five years will be
subject to the rule.
EPA Administrator Carol M. Browner claims that "today's controls
are the smog-fighting equivalent of removing 3.5 million cars
=66rom the road, . . . and with respect to fighting global warming,
todays rule is the equivalent of taking 20 million cars off the
road." The rule will cut emissions of smog-causing volatile
organic compounds and air toxics (such as benzene, vinyl chloride
and chloroform from existing and new landfills by more than
90,000 tons a year.
EPA's regulations will also significantly reduce emissions of
methane, an explosive and potent greenhouse gas by 37 million
metric tons of carbon equivalent (about six million tons of
methane). Landfills are the largest anthropogenic source of
methane emissions in the country, contributing about 40 percent
of all emissions. Methane accounts for approximately 18 percent
of all global warming emissions. It is about 25 times more
powerful than carbon dioxide (the primary greenhouse gas) with
respect to trapping heat in the earth's atmosphere. The controls
can capture enough reusable methane to power 2.3 million homes.
Approximately 7,000 landfills exist in the U.S. In 1990,
Americans produced nearly 196 million tons of municipal waste, or
about 4.3 pounds per person per day (almost a ton of waste per
person per year). Currently 60 percent of all municipal solid
waste is landfilled, 24 percent is recycled and 16 percent
incinerated.
The rule will cost new and existing landfills nationwide about
$778 million in one-time capital costs ($2.2 million a year per
landfill affected) and $93 million a year in annualized costs
($190,000 per landfill affected). Residential customer costs
will increase about 20 to 40 cents per month per household.=20
Energy recovery systems will reduce the cost per household.
Ian Fisher "E.P.A. Rules Require Curbs On Landfills' Gas
Emissions" New York Times, March 3, 1996
Information obtained from the recycle@envirolink.org internet
list March 12, 1996 10:45:55.80 provided by KirkWorks from an=20
EPA press release. Additional information is available through
EPA's electronic bulletin board system, the Technology Transfer
Network (TTN) at (919) 541-5742 under "Recently Signed Rules"
(filename: LANDFILL) or from Martha Smith of EPA's Office of Air
Quality Planning and Standards at (919) 541-2421. The EPA
Landfill Methane Outreach Program can be reached via telephone at
(202) 233-9042
GUIDE FOR REVIEWING ENVIRONMENTAL POLICY STUDIES
A Guide to Reviewing Environmental Policy Studies: A Handbook for
the California Environmental Protection Agency by Steven Moss,
Richard J. McCann and Marvin Feldman provides an excellent and
comprehensive review of environmental economics for the educated
layman. Moss and McCann are with M.Cubed and Feldman is
employed by Resource Decisions.
The handbook was designed to help the staff at the California
Environmental Protection Agency fully understand analytical
reports, the underlying methodology employed, the measurement
techniques used, and key assumptions. It can also be used to
facilitate the development of studies or as a reference tool for
policy analysts.
Steven Moss, Richard J. McCann and Marvin Feldman A Guide to
Reviewing Environmental Policy Studies: A Handbook for the
California Environmental Protection Agency Spring 1994 contact
Malcolm Dole (919)
AIR
EMISSIONS TRADING LABELLED A SUCCESS BY RESOURCES FOR FUTURE
ANALYST
In "Trading Emissions to Clean the Air: Exchanges Few but Savings
Many", which appeared in the Winter 1996 issue of Resources,
Dallas Burtraw argues that the allowance trading program for
sulfur-dioxide (SO2) is both an environmental and an economic
success. According to Butraw the program is reducing annual
emissions of SO2 by nearly 50 percent and is doing so for about
one-half to one-third of the cost that would have been incurred
using the approach taken throughout the first twenty years of
federal air pollution control. However, the volume of allowance
trading is well below original expectations at about 2 to 3
million allowances in 1995
The largest share of benefits come not from trading, but from
"dynamic efficiency"--innovation, competition, and discovery of
new ways to comply with limits. The regulations freed utilities
=66rom regulatory constraints which spelled out exactly how
requirements were to be met and instead gave the utilities
flexibility. This flexibility has led some utilities to replace
high with low sulfur coal whose price has fallen substantially
over the last five years. Others have blended coals.=20
Deregulation of the railroad industry has also led to a sharp
drop in the cost of shipping low sulfur coal.
Before passage of the Clean Air Act of 1990 estimates of marginal
emission abatement costs were as high as $1,500 per ton, which is
the figure stipulated in the act for direct allowance sales by
the EPA. In 1990 the EPA estimated a price of $750, but early
trades came in at only $250 per ton. In early 1995, the price of
allowances traded privately was about $170 per ton and fell to
the low $100s by year end. The marginal price of 1995 allowances
in the EPA auction administered by the Chicago Board of Trade
ranged from $122 in 1993 to $140 per ton in 1994, but fell to
$126 in 1995. State rules, regarding cost recovery, prohibitions
on trades that might undermine local economic activity, and other
issues, as well as the decline in the cost of low sulfur coal,
have inhibited trading. Many analysts have criticized EPA's
annual auction which offers 2.8 percent of allowances, in a
discriminating-price, sealed-bid format, and provides incentives
for bidders and sellers to underbid their reservation prices.
Dallas Burtraw "Trading Emissions to Clean the Air: Exchanges Few
but Savings Many" Resources Winter, 1996 Resources for the
Future, 1616 P Street NW
AUTO EMISSIONS CONTROL THROUGH ZEOLITE
On February 26th Corning Inc. introduced an automobile pollution
control system that could cut emission far in excess of the
strict limits to be in place by the year 2000. Allied Signal Inc
said it expected to have a similar system ready later this year.
Both systems use a gas-trapping substance called zeolite--a
crystal of two minerals, alumina and silica--to trap and hold
hydrocarbon molecules until the catalyst reaches operating
temperature. They reduce cold state emissions, the hydrocarbons
emitted during the first minute or so after an engine is started,
before the catalytic converter becomes hot enough to operate.
Cold start emissions account for 70 to 80 percent of the total
pollutants produced by a converter-equipped car.
Corning's system uses a conventional catalytic converter split in
two. Zeolite based technology is expected to add $50 to $75 to
the cost of converters. Corning said tests on a 1991 Buick with
a 3.8 liter engine achieved hydrocarbon emissions of 0.03 grams a
mile, an 88 percent reduction over the current Federal standard.
Reuters, February 26, 1996
COST EFFECTIVE AIR QUALITY IMPROVEMENT
In "Choosing Among Fuels and Technologies for Cleaning Up the
Air" Hahn provides an integrated framework for assessing the cost
effectiveness of emission control options. The options involve a
combination of vehicle and fuel changes. He studies the cost
effectiveness by combining data on costs and environmental impact
of reformulated gasolines, low emission vehicles (with improved
catalysts and fuel preparation systems), and zero emission
vehicles. The key parameters in determining cost effectiveness
are fuel costs, vehicle costs, and emission factors. The study
demonstrates the importance of an integrated analysis and the
need to consider decentralized regulatory approaches, such as
effluent taxes and marketable permits, when the data are
chaacterized by large uncertainties. Hahn divides costs into
fixed and variable. The potential cost savings from a market
based approach are calculated by constructing a linear program
that minimizes the costs of achieving reductions associated with
the mandate. He performs several sensitivity analyses.
Cost effectiveness measures are based on several previous studies
which are summarized in the table below.
STUDIES OF REFORMULATED GAS COST AND EFFECTIVENESS (1993$)
Study Fuel/ Incremental Pollutant Average
Reformulation cost cost
cents/gallon Effectiveness
$ per ton
US OTA (1989) Reduced RVP 0.5-3.2 VOC 100-900
ARCO (1990) ARCO EC-1 2-15 NMOG=20
CARB(1990a) Reduced 0.4-0.6 VOC 2400-10100
RVP 0.1-1 HC 3,500
Deposit NOX 5,000
Control CO 400
Gushee Federal FRG 4-16 VOC
CARB (1991b) Calif. Phase 2 14-20 VOC,NO 6400-9200
Colucci &=20
Benson (1991) Fed Phase 1 4-7 CO,SO2
ARCO EC-X 16
Calif Phase 2 13-23
Sierra Federal RFG 7.9 ROG,NOX 59000-69000
Research ARCO EC-X 16.7 =20
(1991) Calif Phase 2 15.9-23.1 74000-89000
Texaco (1991) Federal RFG 14.1 HC 218,000+
Pechan & Fed Phase 2 8.6 NMHC, 24600-323000
Walsh (1992) Calif Phase 2 17 NOX 20400-134000
Seisler et al Calif Phase 2 11-30 =20
(1993)
Weaver & Fed Phase 1 3-4.5 50000-168000
Turner Calif Phase 2 11-19 126000-420000
(1993) =20
Austin & Reduced RVP 0.7 1100-1900
Lyons Federal RFG 5.4-7.9 4600-5200
(1994) Calif Phase 2 11-12.3 6100-7200
Please refer to the study for more details about the sources
STUDY OF CLEAN VEHICLE TECHNOLOGIES (1993$)
Study Vehicle Incremental Pollutant Average
cost Cost
$/vehicle effectiveness
$ per ton
CARB TLEV $80 NMOG & NOX $4,400
(1990) LEV $190 NMOG & NOX $4,400
LEV $190 NMOG & NOX $4,400
Pechan & ULEV $190 HC $900-2,300
EEA (1991) LEV/ULEV $190 NOX $1,900-3,200
ZEV $2,900 HCX,NOX $1,500
Pechan & LEV $170-$230 NMOG & NOX $1,300-$12,200
Walsh ULEV $350 NMOG & NOX $2,700-16.900
(1992) ZEV $2,900 NMOG & NOX $5,600
Radian (1992) LEV $415-$645 VOC & NOX $11,000-$23,900
Austin & Tier 1 $144-$273 HC,NOX & CO $12,100
Lyons TLEV $344-$463 HC,NOX & CO $9,800-$26,200
(1994) LEV $775-$1,019 HC,NOX & CO 16,100-$40,600
ULEV $610-$1,475 HC,NOX & CO 24,900-$72,800
ZEV $12,588-$21,034 HC,NOX & CO 10,200-173,600
Please refer to the study for more details about the sources
The analysis suggests that a modest improvement in vehicle
control technology is probably a cost effective strategy for
reducing ozone; but that using a severely reformulated gasoline
or electric vehicle is unlikely to be cost effective. The cost
savings from introducing a market-based approach instead of a
vehicle mandate in the Northeast are estimated to range from $7
billion to $29 billion.
Robert W. Hahn "Choosing Among Fuels and Technologies for
Cleaning Up the Air" Journal of Policy Analysis and Management
Volume 14, Number 4 pages 532-554
ILLEGAL OZONE IMPORTS ESTIMATED TO COST $200 MILLION IN U.S.
DUTIES
Ozone Action estimated that up to 22,000 tons of
chlorofluorocarbons (CFC's) enter the country illegally. Last
year the Federal government estimated that figure at 10,000 tons.
Many of the CFCs are smuggled from Russia and other countries in
the former Soviet Union. A 30-pound cylinder that costs $70 in
Europe is sold in the U.S. for $242. The group estimates that
duties and excise taxes lost could amount to more than $200
million. In September the U.S. Attorney in Miami said two dealers
in the chemicals had pleaded guilty to importing the material
without required permits. They face a maximum penalty of 10
years in jail, and fines of $8.8 million. Scientific studies
that led to the Montreal Protocol's limits on ozone production
all assumed 100 percent compliance with the quotas.
Matthew L. Wald, "Group Sees Ozone Danger In illicit Chemical
Trade" September 17, 1995
LAND
BROWNFIELD TAX LOSSES
Survey respondents reported 20,000 brownfield sites in 39 cities
in a poll of municipal officials conducted for a report entitled
The Impact of Brownfields on U.S. Cities. In 36 of the reporting
areas the sites cover 43,000 acres. The report estimated that
more than $121 million is lost each year in local tax revenues in
the 39 cities. "Using conservative estimates" the report
suggested that municipalities nationwide could be losing billions
of dollars each year in local tax receipts. More information on
the survey and a brownfields action agenda is available from the
U.S. Conference of Mayors at (202) 293-7330.
U.S. Conference of Mayors The Impact of Brownfields on U.S.
Cities, (202) 293-7330
LUST FINE
On December 14th Unocal agreed to pay $530,000 to resolve claims
that the company failed to promptly clean up a leaking
underground storage tank at one of its Phoenix service stations
(Arizona v. Union Oil Co. of California, Ariz SuperCt, Maricopa
County, No. CV-94-05376, 12/14/95). The company will spend
$280,000 to hire personnel responsible for overseeing the
company's storage tank compliance and cleanup efforts. Unocal
disputed its liability but agreed to pay a $250,000 fine to
resolve litigation.
"Settlement With UNOCAL Resolves Claims, Will Expedite UST
Cleanups, Officials Say" Environmental Reporter, Bureau of
National Affairs, Inc. Washington DC, January 26, 1996 page 1799
APPRAISAL OF CONTAMINATED PROPERTY
Chalmers and Jackson assert that "despite recent exhortations to
reemphasize the sales comparison approach and the cost approach
in the valuation of contaminated property, the dominant theme in
the relevant literature has been that the effects of
contamination are best understood and analyzed through the income
capitalization approach." The authors concur with the consensus
view, and present a general framework for analyzing value. The
framework accounts for the cash flow consequences or direct costs
imposed by contamination, and the way in which the risk
implications of contamination affect the cost of capital. The
authors attempt to incorporate the attitudes and behavior of
users, lenders, investors into a mortgage equity model to analyze
value diminution from contamination. The effect of contamination
is thus measured primarily through the cost of capital.
In analyzing the quantification of risk they cite several
previous studies. A survey in 1990 conducted by Patricia and
John Healy, published in The Appraisal Journal found that
almost 50% of the lenders did not believe there was any
diminution in value for previously contaminated property that had
been cleaned up. Only 19% perceived any stigma effect on
previously contaminated property. Of seven specific
environmental issues or conditions, lenders would be most likely
to advance loans to propertiest with underground storage tanks
(61% would lend), and least likely to lend for properties with
unencapsulated asbestos (38% would lend). Forty percent would
grant a loan for a property in the process of being remediated.
Eighty-four percent would lend to previously contaminated
property. Overall 52% of the lenders would advance loans to
properties with one of the environmental problems. The Healy's
also found that 52% of the lenders would adjust loan-to-value
ratios for contaminated properties and 21% would change interest
rates.
In 1991 Mundy & Associates conducted a survey which found that
institutions with formal policies on contaminated property rose
=66rom 41% in 1987 to 88% in 1991; 4% of those surveyed indicated
that the likelihood of making a loan would increase significantly
with an indemnification, while 29% said it would have no effect;
and that a majority of lenders would not advance a loan to a
previously contaminated site that had been "certified clean"
(only 8% would be likely to make a loan, while 46% would be
unlikely to loan, and one-third would deny the loan). The 8%
figure stands in stark contrast to the 52% result in the Healy
study. An updated survey in 1992 found that 25% to 32% of
lenders adjusted loan to value ratios, 14% to 23% changed
loan terms, and 14% to 20% raised interest rates. The 1992 survey
found that 53% of lenders indicated that few to no loans were
denied solely because of concern with contamination.
Chalmers and Jackson also found significant variations in lending
policies by region. Concern for environmental issues was minimal
in central California, but strong in New Jersey due to strict
state environmental laws.
They present four scenarios for evaluating with contaminated
properties ranging from low contamination to high contamination.=20
The table below describes changes in market parameters which can
be used by appraisers to evaluate contaminated properties
SUGGESTED PARAMETERS FOR CONTAMINATED PROPERTIES
Estimated Value Uncontaminated Scenario 1 Scenario 4
Market equity yield .17 .17 .17
Risk premium .00 .03 .15
Adjusted equity yield .17 .20 .32
Loan-to value ratio .7 .7 .00
Capitalization rate 9.90% 11.00% 30.00%
Property Value $1,200,000 $1,080,000 $396,000
Property Value Decline N/A $120,000 $804,000
Diminution Percent N/A 10% 67%
James A. Chalmers and Thomas O. Jackson "Risk Factors in the
Appraisal of Contaminated Property" The Appraisal Journal January
1996 pages 44-58
Patricia R. Healy and John J. Healy Jr. "Lenders' Perspectives on
Environmental Issues" The Appraisal Journal (July 1992): pages
394-398
Mundy & Associates "Lender Concern Increases, Surveys Find: EPA
Rule No Cure-all" Environmental Watch (Summer, 1992) page 2
Victoria Adams and Bill Mundy "Attitudes and Policies of Lending
Institutions toward Environmental Impairment" Environmental Watch
(Winter, 1993) pages 2-4
CLEANUP COST AND NATURAL RESOURCE DAMAGE CONSENT DECREE
Publicker Industries of Old Greenwich Connecticut owned a site in
Philadelphia between 1912 and 1986 which was first utilized as a
liquor and alcohol distillation plant and later as a fuel storage
site. In 1986 Publicker sold the property to Overland Corp.,
which declared bankruptcy and abandoned the site shortly
thereafter. In 1987 the EPA began addressing fire and explosion
threats at the site, and ultimately performed soil cleanup work
and asbestos removal. The EPA removed approximately 2 million
gallons of hazardous materials and contaminants, and hundreds of
miles of process lines, some of which still contained product.=20
The contaminants found in the soil and sediment at the site, and
in slip areas of the adjacent Delaware River included arsenic,
chromium, copper, lead, mercury, zinc and polychlorinated
biphenyls. A complaint was filed under the Comprehensive
Environmental Response, Compensation and Liability Act in 1990
alleging that hazardous substances were disposed at the site
between 1928 and 1987.
A consent decree was filed in federal court on January 11th (U.S.
v. Publicker Industries Inc., DC Epa, No. 90-7984, 1/11/96)
calling for Publicker and its subsidiary to pay a total of $13.4
million plus interest over six years to the U.S. government and
$1 million plus interest over four years to Pennsylvania. The
payments cover reimbursements for cleanup costs and damage to
natural resources.
The site is currently being developed through an EPA brownfields
program under a prospective purchaser agreement between the EPA
and Holt Industries. Holt will operate the property as a marine
terminal. Remaining cleanup involves removing contaminants from
electrical and other utilities and from storm water trenches,
eliminating metal debris and empty drums, and sealing and
abandoning on-site monitoring wells.
"Publicker Industries to Pay $14.4 Million to Resolve Cleanup,
Resource Damage Claims" Environmental Reporter, Bureau of
National Affairs, Inc. Washington DC, January 26, 1996 page 1799
RECYCLING SAVINGS
The Town of Oyster Bay, New York received a Recycling Achievement
Award on January 24th, 1996. In 1994 more than 90% of the town's
86,000 households recycled plastic, glass, metal, mixed paper and
newsprint. It would have cost $1.6 million to haul the
recyclables away as garbage. Instead $2 million was generated
rom the sale of recyclables, resulting in a $3.6 million net
gain
"Realty & Environment Briefs" Long Island Business News February
12, 1996 page 34
EFFECTS OF CERCLA ON DEVELOPMENT
Boyd, Harrington, and Macauley claim"there is a common, but
flawed, perception that development of greenfield sites
necessarily enjoys a cost advantage over brownfield development."
However, commercial or industrial development of greenfield sites
is itself costly, as zoning laws and community opposition can
often impede such development. In addition, theoretically,
prices of brownfield should fall to adjust for the disadvantage
of owning a contaminated site.
Their theoretical model shows that uncertainties arising from
CERCLA (the Comprehensive Environmental Response, Compensation,
and Liability Act) do not necessarily reduce the likelihood of
efficient property transfers and development decisions even when
sellers and buyers are risk averse. However, they show that the
information asymmetries between buyers and sellers and
imperfections in the detection and regulation of liability are
more likely to have a substantial negative effect on property
development.
James Boyd, Winston Harrington, and Molly K. Macauley "The
Effects of Environmental Liability On Industrial Real Estate
Development" The Journal of Real Estate Finance and Economics
Volume 12 Number 1, January 1996 pages 37-58
ENERGY
PRICE OF WIND POWER HAS FALLEN
The Economist reports that the price of wind power has fallen
=66rom about 30 cents per kilowatt hour to about 5 cents/kWh at its
best sites. Shell International Petroleum estimates that
renewables such as wind and sun power could satisfy half the
world's energy demand by the year 2060.
The Economist, October 7, 1995
EXPLAINING HIGH DISCOUNT RATES THROUGH UNCERTAINTY AND OPTION
VALUE
Recent research in investment theory emphasizes the importance of
sunk investment costs (irreversibility), uncertainty in returns,
and flexibility in investment timing. Metcalf and Rosenthal
argue that because traditional rules do not consider these costs,
many advocate investing at a lower rate-of-return than is
optimal. They claim that these factors explain the presence of
high discount rates used by investors in energy-efficient
capital, and note that researchers who measure these discount
rates did not include the option value associated with delaying
investment. The measured discount rate is actually a combination
of a true discount rate plus a mark-up to incorporate the option
value.
The authors cite Hausman's 1979 study which found discount rates
ranging from 20 to 30 percent. Train (1985) reported on studies
which found discount rates for energy efficient refrigerators
ranging from 40 to 100 percent. Others have found discount rates
for thermal integrity (wall and ceiling insulation) ranging from
10 to 30 percent, and for space heaters from 5 to 35 percent.
Between 1972 and 1991 energy efficiency has increased at an
annual rate of 6.2%, while the real price of refrigerators has
fallen 1.6% annually, even before adjusting for quality. Energy
prices were roughly constant, though they varied widely. The
return per dollar invested (electricity price divided by the
quality adjusted refrigerator price) was rising at 5.2% per year
and varied about 11 percent per year. Based on uncertainty
arising from improvements in energy efficiency the expected
present discounted value of the return on an energy conservation
investment in a refrigerator (e.g. the hurdle rate) has to be
roughly 2.5 times as large as it would be if there were no
uncertainty in the price of electricity or refrigerators. Thus,
if the measured discount rate is 11.6 percent the true discount
rate is 5%.
Gilbert E. Metcalf and Donald Rosenthal (1995) "The =91New' View of
Investment Decisions and Public Policy Analysis: An Application
to Green Lights and Cold Refrigerators" Journal of Policy
Analysis and Management Volume 14, Number 4 pages 517-531
Jerry Hausman (1979) "Individual Discount Rates and the Purchase
and Utilization of Energy-Using Durables," Bell Journal of
Economics 10 pages 33-54
Ken Train (1985) "Discount Rates in Consumers' Energy-Related
Decisions: A Review of he Literature" Energy 10 pages 1243-1253.
NURSING HOME CUTS ENERGY COSTS
In January, the Scottsdale Village Square Nursing home installed
an on-site electric cogeneration unit that burns natural gas, can
meet a peak load of 100 kW, and supply one-third of the
facility's total electric needs. Waste heat is used at the home
and an adjacent apartment complex. At the nursing home, waste
heat will provide hot water for cooking, cleaning and laundry.
The electricity cost is one third below what the local electric
company charges, and annual utility bill savings could be as high
as $122,000. Based on an installation cost of $340,000, the
return on investment is about 36% per year, and thus the
installation could pay for itself within three years.
The cogeneration system was installed by The Energy Group (63
North Arizona Place, Chandler, AZ 85225 (602) 814-0150.
"Nursing Home Saves with Cogen System" Energy Conservation News
February 1996 page 3 Editor: Kevin Gainer, BCC Newsletter Group
Norwalk CT 06855 (203) 853-4266
WATER
NON-USE BEACH VALUES NEAR GLEN CANYON DAM
The generation of electricty at the Glen Canyon Dam causes
significant daily fluctuations in river levels below the dam.=20
These fluctuations can decrease the size and number of beaches
and change the habitat of both terrestrial and aquatic species,
including endangered fish species. Dam operations have also
reduced the quality of recreation on the river downstream from
Glen Canyon Dam. However, changes to benefit the downstream
environment and the quality of recreation will cut the value of
power produced.
Nine alternative policies were evaluated in the Glen Canyon Dam
Environmental Impact Statement. Non-use values were measured
through a contingent valuation mail survey for three of the nine
alternatives: 1) the moderate fluctuating flow alternative, 2)
the low fluctuating flow alternative, and 3) the seasonally
adjusted steady flow alternative. Respondents were first asked
if they would vote in favor of a referendum on a proposal to
change dam operations assuming that passage of the proposal would
cost them nothing. Those in favor of the proposal were then
asked how they would vote if passage would cost them a specified
amount of money. Responses to this second question were used to
make inferences about the value, or willingness-to-pay, placed by
respondents upon the proposal being evaluated.
Willingness to pay was measured for a national sample, and a
sample of individuals living in areas obtaining power produced at
Glen Canyon. Best estimates were based on "Definitely Yes"
models, adjusted to reflect values of nonrespondents, and to
reflect the belief that the respondent would actually have to pay
if the proposal passed. Under this approach respondents who said
that they would probably vote for the proposal were assumed to
have voted against it. Assuming that individuals responding
"probably yes" actually support the proposal would increase the
estimates by 370% to 440%. Results were analyzed using a
logistic model which included several variables to estimate the
probability that a respondent would vote in favor of a proposal,
such as education and income. Estimated Willingness To Pay is
presented below:
Water Release Alternative Average Annual Aggregate
Value Per Annual Value
Household (Millions of=20
Dollars)
NATIONAL
Moderate fluctuating flow $13.56 $2,286.4
Low fluctuating flow $20.15 $3,375.2
Seasonally adjusted steady flow $20.55 $3,442.2
LOCAL
Moderate fluctuating flow $22.06 $62.2
Low fluctuating flow $21.45 $60.5
Seasonally adjusted steady flow $28.87 $81.4
Michael P. Welsh, Richard C. Bishop, Marcia L. Phillips, and
Robert M. Baumgartner "GCES Non-Use Value Study: GCES Non-Use
Values Final Study Summary Report" Hagler Bailly Consulting,
University Research Park 455 Science Drive, Madison WI
53711-1058; September 8, 1995
SAVINGS FROM CUTTING POLYMERS IN WASTEWATER
According to a new study by the Water Environment Research
Foundation of Alexandria Virginia, the U.S. could save up to $26
million a year in the cost of municipal wastewater treatment by
controlling the use of polymers, which are synthetic organic
compounds used to dewater solid wastes. The study indicates that
treatment plant operators use up to 20% more polymers than
necessary. Reducing polymers could increase reuse options for
treated sludges known as biosolids.
"Cut polymers and save" Engineering News Record February 12, 1996
page 44
Environmental Damage Valuation
and
Cost Benefit News
Editor & Publisher: Kenneth Acks
Associate Editor: Cindy Grant
Assistant Editor: Anthony Benanti
Environmental Damage Valuation and Cost Benefit News is produced
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Copyright 1996 Kenneth Acks
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