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Canadian Cost-Benefit Analysis Guide: Regulatory Proposals (view source)

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ρ is the economic discount rate; and
 
ρ is the economic discount rate; and
   −
n is the duration of the policy impact periods.</blockquote>This approach allows us to express and compare net benefits that occur in different policy impact time periods on a consistent basis. Annualization simply spreads the net benefits smoothly through time. An example is given below.<references />
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n is the duration of the policy impact periods.</blockquote>This approach allows us to express and compare net benefits that occur in different policy impact time periods on a consistent basis. Annualization simply spreads the net benefits smoothly through time. An example is given below.
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<blockquote style="background-color: lightgrey; border: solid thin grey;">
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'''Annualization of Net Benefits'''
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Suppose there are two mutually exclusive projects. Project A generates a present value of net benefits of $1,500 million over a five-year period. Project B generates a present value of net benefits of $1,700 million over a seven-year period. With the simple net present value criteria, Project B would be recommended. However, we have problems with a longer time horizon than that of Project A.
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* We can calculate the annualized value of the net benefits as follows:
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For Project A, the annualized value of the benefits is:
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 +
<abbr>AV<sub>A</sub></abbr> <abbr>=</abbr> [1,500 <abbr>·</abbr> 0.08] <abbr>/</abbr> [1 <abbr>-</abbr> (1 <abbr>+</abbr> 0.08)<sup><abbr>-</abbr>5</sup>] <abbr>=</abbr> $375.7 million
 +
 
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For Project B, the annualized value of the benefits is:
 +
 
 +
<abbr>AV<sub>B</sub></abbr> <abbr>=</abbr> [1,750 <abbr>·</abbr> 0.08] <abbr>/</abbr> [1 <abbr>-</abbr> (1 <abbr>+</abbr> 0.08)<sup><abbr>-</abbr>7</sup>] <abbr>=</abbr> $336.1 million
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* Conclusion: The higher present value of the net benefits for Project B than for Project A is due to a longer time horizon. When the value of net benefits is normalized with respect to time period, it is shown that Project A is in fact preferred.</blockquote>
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== STEP 5: Preparing an Accounting Statement ==
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After completing the analysis, it is expected that the results will be summarized in an accounting statement. Analysts are advised to adopt the format that is best suited for a specific policy, while remaining faithful to the intent of the accounting statement, as illustrated below. The purpose is to highlight key components of the benefits and costs associated with the policy and the total net outcome of the analysis.
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=== Cost-benefit analysis for each option (accounting statement section A) ===
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Table 1 provides the incremental benefits and costs of the policy as compared to the baseline scenario. For each option, two sets of analytical results can be shown. Part I presents the results of benefits and costs based on single (deterministic) values for all of the variables affecting the policy outcome, where no risk or uncertainty is assumed for the values. Part II presents Monte Carlo simulation results by dealing with uncertainty and risk surrounding the future value each of the key input variables contributes to the policy outcome.
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In the deterministic case, one should present not only annual estimates of benefits and costs but also the present value or annualized value of the net benefits over the policy impact period. This is shown in Part IA of Table 1.
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Annual estimates of the undiscounted streams of benefits and costs should be presented over the impacted period. The impacted period could vary from one policy to another and a time interval could also be used if more relevant. If the original estimates are expressed in nominal dollars, they should be deflated to become real prices or prices expressed in terms of the price level of a specific year using the GDP deflator. If the GDP deflator is not readily available, the consumer price index should be used.
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For the monetized category, the total benefits and costs should be discounted to the present value using a real discount rate of 8 per cent. The net incremental benefits (i.e. the benefits less the costs) should be provided in order to obtain the net present value of the policy. The net present value should also be converted to an annualized value for alternative presentation of the results. Although the results are the same as the net present value criterion, it is another way of presenting the results.
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The expected benefits and costs can be grouped into the following three categories: monetized; physically quantified but not monetized; and qualitative or intangible, that is neither monetized nor quantifiable. As some of the benefits generated from regulatory policies are difficult to quantify, attempts should be made using alternative methods of quantification illustrated in this guide. However, for the items where the benefits or costs cannot be quantified, some can be physically quantified but not monetized, in which case they should be listed in physical units. Those intangible or qualitative items that are likely to have significant impacts on decision making should be listed and their importance briefly stated. Only those benefits and costs that are monetized can be aggregated to arrive at the net benefits.
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When the main benefits generated by the policy are too difficult to monetize, one should present the cost-effectiveness ratios for each of the alternative options. Wherever possible, cost-utility analysis should be used, as it provides additional information and moves the analysis a step closer to a complete cost-benefit analysis.
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In this situation, the analysis does not place a monetary value on the benefits. To get the overall result of the option, one should discount the physical quantities of the benefits produced with the same discount rate. In other words, both the monetary value of the costs and the units of effectiveness should be discounted to the present value using a real discount rate of 8 per cent. After the cost-effectiveness ratios are computed for each of the alternative options, one can rank the alternatives and take a decision. This is illustrated in Part IB of Table 1.
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Projections of the future benefits and costs so far have been discussed in terms of deterministic values. In practice, it is highly unlikely that the values of all key benefit and cost items will be known with certainty in the future. The reasons for risk and uncertainty can be a lack of information, competitive forces, advances in scientific knowledge, or technological progress. One should build a set of data around the identified input risk variables (e.g. variables 1, 2, 3, as shown in Part II of Table 1) based on the historical data or judgment of experts in the fields to generate a range of possible values and different probability distributions. Using Monte Carlo simulations, one should present the expected net benefits with probabilities given for higher and lower ranges of the values for the outcome. The presentation of the results of the analysis in this way will be more meaningful for decision makers.
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=== 5.2 Stakeholder analysis for each option (accounting statement section B) ===
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In addition to the cost-benefit analysis, one should also present the distribution of the impacts of the policy on various stakeholders and the environment. However, the impacts depend upon the types of regulation that may have impacts on different kinds of stakeholders. If the impacts are on different types of business, it may be presented in terms of net financial profits by specific sector. Sectors can be grouped according to the North American Industrial Classification System. If policies have significant impacts on consumers, the effects should be shown as an incremental burden on individuals and households that may be presented in terms of income groups. In the case of governments, the effects on the budgets of the federal, provincial, and other governments should be shown separately. The effects should also be shown by region or by gender, if there are significant differences in impacts. In the end, the net impact on each of the stakeholders for the nation as a whole should be presented and double counting must be avoided.
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The stakeholder impacts by category shown in Table 2 are presented for illustrative purposes. Details of the template could depend upon the specific issues and respective areas of departmental responsibilities.
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==== Table 1 ====
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Accounting Statement Section A: Cost-Benefit Analysis for Each Option
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===== Part I: Deterministic Case =====
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{| class="wikitable"
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|+
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!Category
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!Year 1
 +
!Year 2
 +
!Year 3
 +
!…
 +
!Total npv
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!Annualized value
 +
|-
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!A. Cost-Benefit Analysis
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|
 +
|
 +
|
 +
|
 +
|
 +
|
 +
|-
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!Monetized
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|
 +
|
 +
|
 +
|
 +
|
 +
|
 +
|-
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!Benefits
 +
|
 +
|
 +
|
 +
|
 +
|
 +
|
 +
|-
 +
!Costs
 +
|
 +
|
 +
|
 +
|
 +
|
 +
|
 +
|-
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!Net Benefits
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|
 +
|
 +
|
 +
|
 +
|
 +
|
 +
|-
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!Quantified but Unmonetized
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|
 +
|
 +
|
 +
|
 +
|
 +
|
 +
|-
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!Benefits
 +
|
 +
|
 +
|
 +
|
 +
|
 +
|
 +
|-
 +
!Costs
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|
 +
|
 +
|
 +
|
 +
|
 +
|
 +
|-
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!Unquantified
 +
|
 +
|
 +
|
 +
|
 +
|
 +
|
 +
|-
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!Benefits Described
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|
 +
|
 +
|
 +
|
 +
|n/a
 +
|n/a
 +
|-
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!Costs Described
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|
 +
|
 +
|
 +
|
 +
|n/a
 +
|n/a
 +
|-
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!B. Cost-Effectiveness Analysis
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|
 +
|
 +
|
 +
|
 +
|
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|n/a
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|-
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!Benefits (quantified but unmonetized)
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|
 +
|
 +
|
 +
|
 +
|
 +
|n/a
 +
|-
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!Costs (monetized)
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|
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|
 +
|
 +
|
 +
|
 +
|n/a
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|-
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!Cost-Effectiveness Ratio
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|
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|
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|
 +
|
 +
|
 +
|n/a
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|}
 +
 
 +
===== PART II: Dealing With Risk/Uncertainty =====
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{| class="wikitable"
 +
|+
 +
!Category
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!Values of risk variable (range)
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!Type of probability distribution
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|-
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!Key Parameters:
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|
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|
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|-
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!Risk Variable 1:
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|
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|
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|-
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!Risk Variable 2:
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|
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|
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|-
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!Monte Carlo Simulation Results
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! colspan="2" |Statistic Values of the Project Outcome
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|-
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|
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| colspan="2" |Expected Value:
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|-
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|
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| colspan="2" |Range of the Outcome:
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|-
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|
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| colspan="2" |Variance:
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|}
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==== Table 2 ====
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Accounting Statement Section B: Stakeholder Analysis for Each Option
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{| class="wikitable"
 +
|+
 +
!Category
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!Year 1
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!Year 2
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!Year 3
 +
!…
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!Total npv
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!Annualized
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|-
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!Impacts on Business
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|
 +
|
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|
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|
 +
|
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|
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|-
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!Small Firms
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|
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|
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|
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|
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|
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|
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|-
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!Medium-Sized Firms
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|
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|
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|
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|
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|
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|
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|-
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!Large Firms
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|
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|
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|
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|
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|
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|
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|-
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!Impacts on Consumers and Households
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|
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|
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|
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|
 +
|
 +
|
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|-
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!Impacts on Governments
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|
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|
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|
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|
 +
|
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|
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|-
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!Federal
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|
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|
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|
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|
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|
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|
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|-
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!Others
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|
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|
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|
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|
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|
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|
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|-
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!Impacts on the Environment
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|
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|
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|
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|
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|
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|
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|-
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!Impacts by Region
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|
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|
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|
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|
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|
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|
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|-
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!Atlantic
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|
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|
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|
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|
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|
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|-
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!Quebec
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|
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|
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|
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|
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|
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|
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|-
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!Ontario
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|
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|
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|
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|
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|
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|
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|-
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!Prairies
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|
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|
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|
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|
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|
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|
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|-
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!British Columbia
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|
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|
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|
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|
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|
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|
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|}
 +
 
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== References ==
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* Agnar, Sandmo and Jacques Dreze, "Discount Rates for Public Investment in Closed and Open Economics." In: ''Economica'', November 1971.
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* Arrow, Kenneth, Robert Solow, Paul R. Portney, Edward E. Leamer, Roy Radner, and Howard Schuman, "Report of the Natural Oceanic and Atmospheric Administration: A Panel on Contingent Valuation." In: ''Federal Register'', 58, No. 10, January 15, 1993.
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* Australia, Office of Regulation Review, ''A Guide to Regulation'', second edition, December 1998.
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* Brean, Donald; David Burgess, Ronald Hirshhorn, and Joseph Schulman, ''Treatment of'' ''Private and Public Charges for Capital in a "Full-Cost Accounting" of Transportation: Final Report'', March 2005.
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* Burgess, David F., "The Social Discount Rate for Canada: Theory and Evidence." In: ''Canadian Public Policy'', Summer 1981.
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* Burgess, David F., "Removing Some Dissonance from the Social Discount Rate Debate," unpublished paper, Department of Economics, University of Western Ontario, London, Canada, June 2006.
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* Canada, ''Smart Regulation Report on Actions and Plans'', Fall 2005 Update.
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* ''Canada Gazette'', ''The'', Part II, Vol. 133, No. 13 (June 23, 1999), ''Canadian Environmental Protection Act, Sulphur in Gasoline Regulations''.
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* ''Canada Gazette, The'', Part II, Vol. 139, No. 13 (June 29, 2005), ''Tobacco Act'', ''Cigarette Ignition Propensity Regulations''.
 +
* Canada, Privy Council Office, ''Assessing, Selecting and Implementing Instruments for Government Action'', 2005.
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* Canada, Privy Council Office, ''Framework for Regulatory Review'', September 2005.
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* Canada, Privy Council Office, ''Framework for the Triage of Regulatory Submissions'', May 2006.
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* Canada, Privy Council Office, ''Government Directive on Regulating'', document created for discussion and Consultation purposes only, February 2006.
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* Canada, Privy Council Office, ''Government of Canada Regulatory Policy'', November 1999.
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* Canada, Treasury Board of Canada Secretariat'', Benefit-Cost Analysis Guide,'' Ministry of Supply and Services, 1976.
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* Canada, Treasury Board of Canada Secretariat, ''Cabinet Directive on Streamlining Regulation'', April 2007.
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* Carson, Richard T., "Contingent Valuation: A User's Guide." In: ''Environmental Science & Technology'', Vol. 34, No. 8, 2000.
 +
* Chestnut, L. G., D. Mills, and R. D. Rowe, ''Air Quality Valuation Model Version 3.0 (AQVM 3.0), Report 2: Methodology'', Colorado: Stratus Consulting, 1999.
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* Cropper, Maureen L. and Wallace E. Oates, "Environmental Economics: A Survey." In: ''Journal of Economic Literature'', Vol. XXX, No. 2, June 1992.
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* Duhamel, M., "On the Social Welfare Objectives of Canada's Antitrust Statute." In: ''[http://ideas.repec.org/s/cpp/issued.html Canadian Public Policy]'', [https://www.utpjournals.press/loi/cpp/ University of Toronto Press], 29(3), pp. 301-317, September 2003.
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* Duhamel, M., "The Optimality of Arbitrary Partial Equilibrium Welfare Analysis." In: ''Journal of Public Economic Theory'', 2005 (forthcoming).
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* Environment Canada, ''Benefit-Cost Analysis of a Proposed Regulatory Instrument for 2-Butoxyethanol''. Report prepared by HLB Decision Economics Inc., in association with Douglas Environmental Solutions and Michael Holiday & Associates, April 2005.
 +
* European Commission, ''Impact Assessment Guidelines'', June 15, 2005.
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* Garber, Alan M. and Charles Phelps, "Economic Foundations of Cost-effectiveness Analysis", ''Journal of Health Economics'', 16, 1997.
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* Goulder, L. H. and R. C. Williams III, "The Substantial Bias from Ignoring General Equilibrium Effects in Estimating Excess Burden, and a Practical Solution," ''Journal of Political Economy'', 2003.
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* Canada, Treasury Board of Canada Secretariat'', Cost-Benefit Analysis Guide for Regulatory Programs'', August 1995.
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* Canada, Treasury Board of Canada Secretariat'', Benefit-Cost Analysis Guide,'' Ministry of Supply and Services, 1998.
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* Harberger, Arnold C. and Glenn P. Jenkins, ''Manual on Cost Benefit Analysis for Investment Decisions'', Queen's University, Kingston, Canada, 2002.
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* Harberger, Arnold C., "On Measuring the Social Opportunity Cost of Public Funds." In: Arnold C. Harberger, ed., ''Project Evaluation-Collected Papers'', Chicago: University of Chicago Press, 1972.
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* Harberger, Arnold C., "The Social Opportunity Cost of Labor: Problems of Concept and Measurement as Seen from a Canadian Perspective", Report for the ''Canadian Immigration and Employment Commission, Task Force on Labor Market Development'', Ottawa, 1980.
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* Harberger, Arnold C., "Three Basic Postulates for Applied Welfare Economics." In: ''Journal of Economic Literature'', Vol. IX, No. 3, September 1971.
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* United Kingdom, HM Treasury, ''Managing Risks to the Public: Appraisal Guidance'', June 2005.
 +
* Industrial Economics, Incorporated, "Economic evaluation of Health Canada's Regulatory Proposal for Reducing Fire Risk from Cigarettes." Paper prepared for the Economic Analysis and Evaluation Division, Healthy Environments and Consumer Safety Branch, Health Canada, March 2004.
 +
* Industry Canada and the Centre for the Study of International Economic Relations, University of Western Ontario, ''The Shadow Price of Foreign Exchange in the'' ''Canadian Economy'', 1995.
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* Jenkins, Glenn P., "Measurement of Rates of Return and Taxation from Private Capital in Canada." In: ''Benefit-Costs Analysis'', W.A. Niskanen et al., editors, Aldine, 1972.
 +
* Jenkins, Glenn P., "The Public-Sector Discount Rate for Canada: Some Further Observations." In: ''Canadian Public Policy'', Summer 1981.
 +
* Jenkins, Glenn and Chun-Yan Kuo, "The Economic Opportunity Cost of Capital for Canada-An Empirical Update, "QED Working Paper Number 1133, Department of Economics, Queen's University, Kingston, Canada, 2007. Available at http://www.queensjdiexec.org/publications/qed_dp_201.pdf. (PDF Version 115 kb)
 +
* Health and Environment Impact Assessment Panel, Joint Industry and Government Study: Sulphur in Gasoline and Diesel Fuels, ''Health and Environment Impact Assessment Panel Report'', June 25, 1997.
 +
* Mishan, E. J., ''Cost-benefit Analysis'', London: George Allen & Unwin Ltd., 1971.
 +
* Organisation for Economic Co-operation and Development, ''Cost-Benefit Analysis and the Environment: Recent Developments'', 2005.
 +
* Organisation for Economic Co-operation and Development, ''Regulatory Impact Analysis (RIA) Inventory'', April 2004.
 +
* Phillips, Ceri and Guy Thompson, "What is a QALY?." In: ''Hayward Medical'' ''Communications'', Vol.1, no.6, 2003.
 +
* United States Office of Management and Budget, ''Proposed Risk Assessment Bulletin'', 2006.
 +
* Ross, T. and R. Winter, "The Efficiency Defense in Merger Law: Economic Foundations and Recent Canadian Developments." In: ''Antitrust Law Journal'', December 2004.
 +
* Sjaastad, Larry A. and Daniel L. Wisecarver, "The Social Cost of Public Finance."In: ''The Journal of Political Economy'', Vol. 85, No. 3, June 1977.
 +
* Slesnick, D., "Empirical Approaches to the Measurement of Welfare." In: ''Journal of Economic Literature,'' Vol. 36, No. 4, pp. 2108-2165, 1999.
 +
* Starzenski, Nahuel Arruda, ''The Social Discount Rate in Canada: A Comprehensive Update'', M.A. thesis submitted to Queen's University, November 2004.
 +
* Tobacco Act, Cigarette Ignition Propensity Regulations, ''Canada Gazette'', Vol. 139, No. 13, (June 29, 2005).
 +
* Townley, Peter G. C., ''Principles of Cost-Benefit Analysis in a Canadian Context'', Scarborough: Prentice Hall Canada Inc., 1998.
 +
* United States, Environmental Protection Agency, ''Guidelines for Preparing Economic Analyses'', September 2000.
 +
* United States, Office of Management and Budget, ''Circular A-4'', September 17, 2003.
 +
* Vaughan William J., Arthur H. Darling, and Diego J. Rodriguez, ''Uncertainty in the Economic Appraisal of Water Quality Improvement Investments: The Case for Project Risk Analysis'', Inter-American Development Bank, July 2000.
 +
* Viscusi, W. Kip, "The Value of Risks to Life and Health." In: ''Journal of Economic Literature'', Vol. XXXI, No. 4, December 1993.
 +
 
 +
<references />
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