AMP Toolbox

The BCA tool kit
A benefit-cost analysis can be used either ex ante or ex post. That is, it can be undertaken in ex ante mode during Step 2: Assembling a basic policy or Step 3: Making the policy robust. It can also be undertaken in ex post mode in Step 5: Evaluation and policy adjustments.

The BCA tool kit is used to quantify and compare the costs and benefits of proposed measures and projects to address natural hazards. By quantifying all the impacts of a project or policy in monetary terms, the BCA Tool Kit provides a decision-making framework which obeys the rule: select the project/policy which promises the highest net benefits for society. Distributional issues, such as for example which social groups enjoy the benefits and which carry the cost of a project, no matter how important they might be, are outside the scope of a BCA.

The BCA tool kit is a user-friendly tool requiring specific data from the decision maker in order to implement the assessment and quantification of the impacts of hazard mitigation assistance projects. This tool focuses on a variety of major natural hazards such as floods, hurricane wind, earthquake, tornado and wildfire. Moreover, the overall procedure for the implementation of the CBA can be characterised as simple. Finally, this tool kit gives the capability for the utilisation of available seismic and meteorological data. The technical support of this tool regarding operational issues is sufficient. The tool requires specific data for the assessment so that the policy options can be examined. Link.

Before conducting a BCA, the following issues should be considered:
  • Define clearly the scenario with and without the project
  • Be conservative in the range of estimated costs and benefits you use for discounting
  • Choose an appropriate time horizon
  • Choose an appropriate discount rate
  • Be explicit about what can and what cannot be monetised
  • Discuss uncertainties through sensitivity analysis of the main parameters
  • Report the results in non-technical terms and always insist on their relativity in relation to assumptions made.

The BCA has emerged from the need to evaluate the necessity and effectiveness of big water engineering projects planned and executed under the authority of the US Corps of Engineering in the 1920s. In the beginning, it lack a concise theoretical basis; it was an administrative process of counting costs and benefits without too much reliance on economic theory or concepts. That changed in the 1960s when the application of the BCA was intimately linked to the economics of welfare based on the Hicksian concepts of willingness to pay/accept. Since then, the BCA has been refined and extended to practically all major areas of public concern (i.e. health, infrastructure, transport, environment, education, etc.).

The CBA can be linked to spatially explicit, DIS-based decision support models in order to visualise the results and their spatial components. It can also be linked to distributional weighting schemes in order to take distributional issues under consideration. In addition, gaps and uncertainties referring to data can be handled with probabilistic simulation approaches, e.g. Monte Carlo techniques.

Medium - high. In general, the level of usage depends on the problem at hand: market problems are much easier to submit to a CBA that non-market ones. In the marine domain, the information required in each of the different cost/benefit categories can be very demanding.

Moderate - high. The costs of data collecting and categorising will vary greatly depending on the level of detail that is sought.

Moderate - high. The tool requires a good knowledge of economic theory as well as knowledge of similar empirical applications. It also requires a deep understanding of the issue of discounting future prices since the use of a specific discount rate is a very controversial topic and heavily influences the outcome of a BCA.

Background requirements
Moderate - high. The results can be controversial, which makes previous experience a strong requirement.

Low - moderate. It is a technical exercise in which no stakeholder participation is required once the scenarios have been decided. The data determination within each cost/benefit categories as well as the links among them is likely to be performed by the relevant experts group with some inputs from key stakeholders and end-users (e.g. to identify existing or potential conflicts among different users or ecosystem components).

Time range
Medium-high. Time is required to build consensus with stakeholders on: 1) the relevant cost/benefit categories involved, 2) the relevant population groups affected, 3 )the appropriate discount rate to be used and 4) the source and quality of the data necessary to complete the analysis. Once data are collected, the calculations are performed rather quickly.

Source of information