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Cost-benefit analysis of domestic energy efficiency

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There are a number of driving forces behind energy efficiency. In recent times, the Kyoto Protocol has been the most prominent in bringing energy efficiency to the fore. In some countries, the domestic sector has been highlighted as an area which has a significant potential for improvement. However, prior to the implementation of large-scale energy-efficiency programmes, it is important to evaluate whether they make economic sense. Heretofore, most economic evaluations of energy-efficiency programmes have concentrated purely on the associated costs of the programmes and the energy savings that result. At best, reductions in environmental benefits are also estimated, but rarely are other benefits calculated, such as increases in the levels of household comfort and improvements in human health. This paper endeavours to provide a template for ex ante economic evaluations of domestic energy-efficiency programmes. A comprehensive cost–benefit analysis of a programme to retrofit various energy-efficiency technologies and heating upgrades to the Irish dwelling stock is taken as a case study. The study demonstrates how energy savings, environmental benefits, and health and comfort improvements may be assessed. In so doing, it provides insights into the methodological difficulties and solutions for assessing the social efficiency of large-scale domestic energy-conservation projects.
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ENVIRONMENTAL STUDIES RESEARCH SERIES
WORKING PAPERS
2000
COST-BENEFIT ANALYSIS OF DOMESTIC ENERGY EFFICIENCY
J. Peter Clinch and John D. Healy
University College Dublin
ESRS 00/02
DEPARTMENT OF ENVIRONMENTAL STUDIES
UNIVERSITY COLLEGE DUBLIN
NATIONAL UNIVERSITY OF IRELAND, DUBLIN
www.environmentaleconomics.net
Cost-Benefit Analysis Of Domestic Energy Efficiency J.P. Clinch and J.D. Healy
ESRS 00/02 University College Dublin
1
COST-BENEFIT ANALYSIS OF DOMESTIC ENERGY EFFICIENCY
J. Peter Clinch and John D. Healy1
ABSTRACT
There are a number of driving forces behind energy efficiency. In recent times, the Kyoto
Protocol has been the most prominent in bringing energy efficiency to the fore. In some
countries, the domestic sector has been highlighted as an area which has a significant potential
for improvement. However, prior to the implementation of large-scale energy-efficiency
programmes, it is important to evaluate whether they make economic sense. Heretofore, most
economic evaluations of energy-efficiency programmes have concentrated purely on the
associated costs of the programmes and the energy savings that result. At best, reductions in
environmental benefits are also estimated, but rarely are other benefits calculated, such as
increases in the levels of household comfort and improvements in human health. This paper
endeavours to provide a template for ex-ante economic evaluations of domestic energy-efficiency
programmes. A comprehensive cost-benefit analysis of a programme to retrofit various energy-
efficiency technologies and heating upgrades to the Irish dwelling stock is taken as a case study.
The study demonstrates how energy savings, environmental benefits, and health and comfort
improvements may be assessed. In so doing, it provides insights into the methodological
difficulties and solutions for assessing the social efficiency of large-scale domestic energy-
conservation projects.
Acknowledgements: The authors are grateful to: Vivienne Brophy, Frank Convery, Ciarán
King, and Owen Lewis for helpful contributions; University College Dublin, Energy Action, and
the Government of Ireland Council for the Humanities and Social Sciences for financial support.
Keywords: cost-benefit analysis; domestic energy efficiency; energy-assessment modelling
Citation: Clinch, J.P. and Healy, J.D. (2000). “Cost-Benefit Analysis of Domestic Energy
Efficiency”, Environmental Studies Research series (ESRS) Working Paper 00/02, Department of
Environmental Studies, University College Dublin.
1Department of Environmental Studies, Richview, Clonskeagh, Dublin 14. Tel: +353-1-269 7988; Fax: +353-1-283
7009; E-mail: Peter.Clinch@ucd.ie / John.Healy@ucd.ie
Cost-Benefit Analysis Of Domestic Energy Efficiency J.P. Clinch and J.D. Healy
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I. Introduction
Behind energy efficiency, there lies an array of so-called ‘driving forces’. In recent times, the
Kyoto Protocol has been the most prominent in bringing energy efficiency to the fore. The
Gothenburg Protocol on the reduction of acidification precursors also provides an incentive for
European countries to improve energy efficiency and thereby reduce environmental emissions. In
some countries, the domestic/residential sector has been highlighted as an area with considerable
potential for improved energy efficiency. Improving energy efficiency in the domestic sector also
has the potential to contribute to the resolution of a number of other social ills, principal of
which are high rates of winter mortality which result from poor thermal standards of housing and
the existence of fuel poverty, i.e. the inability to heat the home to an adequate (safe and
comfortable) temperature, owing to low household income and poor household energy
efficiency.
However, prior to the implementation of energy-conservation measures in the domestic
sector, it is important to assess whether such interventions are socially efficient. There are a
number of studies which have endeavoured to evaluate monetarily the benefits of domestic
energy conservation. The seminal work of Pezzey (1984), along with other notable studies by
Henderson and Shorrock (1989) and van Harmelen and Uyterlinde (1999), show the clear net
benefits of individual retrofitting technologies. At the macro level, Arny et al. (1998), Blasnik
(1998), Brechling and Smith (1994) and Goldman et al. (1988) demonstrate the benefits of
comprehensive retrofitting programmes. However, most studies tend to evaluate energy savings
alone. At best, environmental emissions (usually in the form of CO2) are quantified, but the other
potential benefits of domestic energy-efficiency programmes, such as improvements in health
and comfort, tend to be omitted from any cost-benefit analysis. The chief difficulty, succinctly
identified by Blasnik (1998), is that “although many of these benefits have been demonstrated to
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exist, most have never been fully quantified because of considerable methodological issues in
assessing them”.
The research presented in this paper attempts to advance the literature on the economic
evaluation of domestic energy-efficiency programmes by carrying out a comprehensive evaluation
of a range of costs and benefits using an example. It thereby develops a template for carrying out
ex-ante analyses of large-scale domestic energy-efficiency programmes. In so doing, it provides
insights into the methodological difficulties and solutions for assessing the social efficiency of
such programmes.
II. Case Study
Ireland is an interesting case study of domestic energy-conservation opportunities for a number
of reasons. Firstly, the rate of fuel poverty in Ireland, at 12%, appears to be the highest in
northern Europe (Whyley and Callender, 1997). Secondly, the rate of excess winter mortality in
Ireland, at 15%, is the highest in northern Europe2 and may be the result of poor thermal
efficiency in the dwelling stock (Eng and Mercer, 1998). Finally, Ireland is having extreme
difficulty in meeting its agreed target for stabilisation of greenhouse gas emissions under the
Kyoto Protocol (Clinch and Convery, 1999). This paper describes the ex-ante economic evaluation
of a programme to bring the thermal standards of the Irish housing stock up to the latest (1997)
Irish building regulations over a 10-year period. This involves retrofitting the 1.2 million
dwellings built prior to 1997 with various energy-efficiency technologies and heating upgrades,
further details of which are provided below.
2 See Clinch and Healy (2000a).
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III. Methodology
A computer model was developed to calculate some of the programme’s physical costs and
benefits3. The model takes a similar approach to those attempts to model the energy performance
of the residential sector in the UK (BRE, 1998) and Belgium (Hens et al., 1998). The Energy-
Assessment Model (EAM) was based on the UK’s Standard Assessment Procedure (SAP) but
tailored considerably to meet Irish conditions. The EAM is a ‘bottom-up’ model incorporating
1,824 representative dwelling models, each representing a percentage of the national dwelling
stock. The latest available data relating to the specifications of the dwelling stock (such as floor
area, insulation levels, heating equipment and so forth) was obtained in order to derive
‘representative’ dwelling models. These models are a combination of eight dwelling types, six
categories of insulation and 19 types of heating systems. These were run successively through the
Model’s energy-assessment procedure to yield information on national energy consumption,
costs, internal temperatures, emissions, etc. The energy-saving measures include lagging jackets,
roof insulation, draught-sealing, wall insulation, central heating and ‘low-emissivity’ double-
glazing.
A Cost-Benefit Model (CBM) was fitted to the EAM to facilitate the conversion of the
physical estimates into monetary amounts. A literature review was carried out in order to
ascertain suitable coefficients to enable the calculation of the value of reductions in
environmental emissions. Reductions in morbidity and mortality were evaluated separately and
then included in the CBM with appropriate estimates for the value of statistical life being chosen
via a review of the literature on the subject. The CBM allowed for costs and benefits to be
evaluated at a range of discount rates. There is a huge literature on discounting and space does
not permit an in-depth discussion of appropriate measures; suffice to say that there is no
agreement on which particular number is appropriate. In practice, the discount rate used to
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evaluate public projects is chosen via the political system. The Irish Government recommends a
rate of 5% be used to reflect the opportunity-cost of capital (Department of Finance, 1994). For
the purposes of this research, a range of discount rates varying between 0% and 10% were used
with the Department of Finance’s rate of 5% being considered the key rate for the purposes of
drawing implications for government policy. The CBM facilitated further sensitivity analyses of
each benefit and cost of the Programme.
IV. Costs of the Proposed Energy-Efficiency Programme
The costs of the energy-efficiency programme are comprised of materials and labour costs.
Materials
The following energy-efficiency measures were chosen and priced (net of tax) with the assistance
of quantity surveyors on the basis of cost-effectiveness:
Fitting of Lagging Jacket
Roof Insulation (and Roof Insulation Upgrade)
Draught-Stripping
Cavity-Wall Insulation
Central Heating
Heating Controls Upgrade
Low-Emissivity Double-Glazing
3 This work was undertaken with Ciarán King and is detailed in Clinch et al. (2000).
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Labour
Physical Numbers
An attempt was made to identify an efficient labour mix, i.e. a suitable combination of personnel
from commercial and non-profit organisations. This is of particular importance to the case study
chosen, as rapid growth in the Irish economy has resulted in a similarly rapid fall in the
unemployment rate (to approximately 5%). This has led to skills’ shortages, particularly in the
construction sector, where a property boom has led to a rapid rise (by one-fifth between 1997
and 1999) in employment.
Skills’ shortages in the construction industry might prove to be an impediment to the full
implementation of the energy-efficiency programme. However, a number of organisations in
Ireland specialise in training those who would otherwise be long-term unemployed to undertake
various retrofitting measures. It was considered that the most efficient and cost-effective way of
dealing with the problem of capacity constraints would be to employ this type of personnel on
certain remedial works. This would have the added benefit of minimising costs. Consultation
with architects and quantity surveyors suggested that three of the technologies chosen – draught-
stripping and fitting of lagging jackets and roof insulation (accounting for 12% of total labour
costs) – could be undertaken by staff from non-profit organisations. It was considered essential
that the remaining measures would be undertaken by personnel from commercial companies
with the necessary degree of specialised skill (including plumbers, electricians, plasterers and
carpenters).
An estimate of the number of jobs required for the execution of this programme is a
difficult task and is fraught with difficulties, but an illustrative figure is useful. Using a top-down
approach, it is estimated that approximately 4,900 full-time equivalent jobs (or 49,000 job-years)
involving a range of skills would be required over the ten-year implementation period. The
greatest benefit would arise where a reduction in the number of registered, long-term
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unemployed could be made. The employment requirements were cross-checked with seven
similar studies carried out over the past decade (Table 1). The gross cost per job-year (at over
51,000) is higher than many of the other studies summarised here. This is probably owing to a
number of factors pertaining to the Irish situation, namely Ireland’s heated labour market and
Irish income tax levels but also the use of commercial operatives’ wage rates in this comparison.
-Table 1 about here-
Valuing the Labour Input
If labour markets clear, the shadow price of labour will equal the market wage. Any increase in
employment in one sector of the economy will merely reduce the availability of labour to another
sector. However, in a country with a high unemployment rate, it could be argued that an increase
in the demand for labour in one sector of the economy will not necessarily displace a job in
another sector, i.e. there may be employment additionality, whereby, if the new job is filled by a
person who was previously unemployed, no cost in terms of output forgone is imposed upon
society4. In this case, the shadow price of labour would equal zero. It has been the practice of
Irish Government cost-benefit analyses to assume a shadow price of labour of zero. However,
this is against the international practice of setting the shadow price of labour at most a fraction
below the market wage (e.g. in Canada, the shadow wage is 95% of the market wage, and in the
UK, the shadow wage is set equal to the market wage (Honohan, 1998)).
Honohan argues that it is hard to justify a shadow wage far below the going market wage
in Ireland. He bases his conclusions on the recognition that migration responds so readily to job
creation, such that when the economy is in recession, there is net emigration as people travel
abroad (mostly to the UK) in search of employment. The exodus of thousands of Irish people in
the 1980s demonstrated this quite clearly. The present boom in the economy has resulted in net
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immigration resulting in a rate of growth of the labour force much more rapid than the rate of
decline of unemployment. At present it would seem that it is not justified to use a shadow wage
of less than the market wage for highly skilled workers given that the economy is close to full
employment (5% unemployment rate) and skills’ shortages exist, particularly in the construction
industry. However, for those who are trainees of those non-profit organisations and would
otherwise be long-term unemployed, the cost to society of their employment would be close to
zero. For the purposes of this analysis, it is assumed that the cost equals zero; this reduces total
costs by over 5%.
Sensitivity Analysis for Costs
Three possible scenarios were constructed regarding the time-trend of costs; namely, high-,
medium- and low-cost scenarios. These are used to test the sensitivity of the results to different
outcomes as regards costs. The cost scenarios envisage two competing pressures. Firstly,
increased competitiveness and efficiency in the market, as more companies set up and begin to
specialise in energy-efficiency technologies, should put downward pressure on prices. However,
capacity constraints in the economy would put upward pressure on prices. The predicted
outcome is depicted in the medium-cost scenario (Table 2) where these two forces counteract
one another over the 10-year implementation period. This would result in industry costs
remaining at roughly the same level as currently. The total cost of the energy-efficiency
programme would amount to 1,601m, or 207m per year undiscounted. Depending on
assumptions made, costs could foreseeably increase by about 89m with further tightening of
the labour market, or fall by over 190m, assuming there were increased competitiveness. Net
materials’ costs account for just under half of the total costs of this programme (55%) at 881m
(discounted at 5%). Net labour costs, at approximately 720m account for 45% of the total cost
of the programme.
4 For this to be the case, involuntary leisure time must have no value.
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-Table 2 about here-
V. Energy Benefits
Energy Savings -vs.- Comfort Benefits
The primary difficulty in calculating the reduced expenditure on energy that would result from
the energy-efficiency programme is that there is a trade-off between energy/emissions savings
and comfort/health benefits. Suppose the insulation of a house is improved. All else being equal,
this makes it cheaper to heat the house. The householder has two options: keep the internal
temperature of the house at the same level and benefit from reduced heating bills or allow the
temperature to rise, thereby potentially improving comfort (and health status), but forging some
or all of the potential reduction in the fuel bill. Therefore, improving energy efficiency in housing
will not necessarily result in reductions in energy use (and environmental emissions), even though
consumer welfare will be increased via improved warmth. However, the take-back effects are
usually less than 50% of the expected reductions in energy use5. Skumatz (1996), in her evaluation
of a USA utility energy-conservation programme, estimates that 75% of total programme benefits
are realised in terms of energy cost savings and emissions reductions, while the Energy Saving
Trust (1994) estimates the proportion to be 70% for the UK. Therefore, the remaining 25-30%
of the benefits of residential energy conservation comes in the form of increased warmth.
The evidence regarding the behaviour of households shows that the actual result will
depend to a large extent on the socio-economic status of the household in question. For instance,
Boardman (1991), in her analysis of low-income households in the UK, estimates that 60% of the
benefits of domestic energy conservation go towards improved health status (and comfort levels),
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while only the remaining 40% are realised in terms of energy savings. However, across all income
groups in the UK, 70% of the benefits of energy-efficiency improvements are taken as reduced
energy consumption, while the remaining 30% go towards increased health and comfort
(Boardman, 1994). Thus, it would appear that the ratio of energy savings to comfort benefits
depends on the socio-economic group of the household in question.
Conniffe and Scott (1990) have carried out the most comprehensive work on income
elasticities for fuel in Ireland, i.e. whether the spend on fuel changes more or less than
proportionately to a change in income. Their findings show that, with the exception of oil,
demand for fuel changes less than proportionately to a change in income. Therefore, it seems
reasonable to expect that, ceteris paribus, if improved insulation is installed in a low-income
household, this will reduce the price of heating the house such that the household’s real income
rises, they will be more likely to maintain their expenditure on fuel and will take the benefits as
increased heat. If improved insulation is installed in a high-income household, it seems likely that
the energy spend will be such that the house will already be heated adequately. Therefore, ceteris
paribus, it is reasonable to assume that the household will maintain the temperature of the house
and benefit from reductions in the heating bill. This seems to be backed up by a small Irish study
of 100 houses (Sheldrick, 1998) which suggests that low-income households realise almost all of
the benefits of improving energy efficiency as improved comfort (fuel bills fell by only 2.7%
which suggests that the comfort benefits of the programme were substantial).
The Energy-Assessment Model attempts to mirror this information and assumes that, on
average, the benefits of improving energy efficiency in a house will be taken partly as
comfort/health benefits up to what is considered to be a ‘comfortable’ mean internal
temperature6. As comfortable temperatures are approached, an increasing proportion of the
5 The findings of Scott (1980) are an exception.
6 Defined as an average household temperature of 17.7ºC
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benefits will be realised as energy/emissions savings. All benefits remaining after houses reach
the ‘comfortable’ level of warmth are taken as energy/emissions savings.
The Value of Reductions in Energy Use
A monetary value is placed on physical reductions in household energy consumption in the Cost-
Benefit Model (CBM). A sensitivity analysis was undertaken for alternative scenarios regarding
the possible future movements of energy prices. These are difficult to predict as there are a
number of offsetting effects. Possible deflationary pressures include the development of more
energy efficient machinery and technology, improved availability (and therefore reduced prices)
of non-fossil-fuel energy sources and systems, and the impending deregulation of the energy
sector in Ireland. Possible inflationary pressures include rapid economic growth and the
consequent increased demand for energy, political pressure to introduce carbon taxes and/or
tradeable permits in the light of the Kyoto agreement7, the exercising of market power in oil
production, and/or any scarcity in fossil fuels. To explore the sensitivity of the benefits of energy
savings to price movements, three possibilities were explored: an annual energy real price increase
of 1%, an annual energy real price decrease of 1%, and no change in energy prices. The last
assumption is based on a scenario where a combination of downward pressure on prices offsets
any upward pressures. While it is difficult to foresee the exact impact of each effect, a 0% price
change in Irish energy prices (i.e. ‘static prices’) was taken as an operating assumption.
Under the predicted scenario, energy savings amount to 2.7 billion over the 30-year
programme (Table 3), easily outweighing programme costs. This result represents a benefit-cost
ratio, in terms of energy benefits alone, of 1.7, at a 5% discount rate. It is interesting to note that
7 Note that, if the price of energy is inflated by a carbon tax/emissions-trading system set to reflect the external costs
of energy use, it would be important to avoid summing these external costs with the energy savings using this price,
as this would count the negative externalities twice.
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the benefits may be 425m more or less depending upon price inflation of +/- 1%. Also, it is
notable that energy benefits are particularly sensitive to the discount rate chosen, and at discount
rates above 11%, the costs outweigh the energy benefits. Graphically, the discounted energy
benefits cut the discounted costs at year 10, the end of the implementation period, as can be seen
in Fig. 1. In physical units, some 208.85 terawatt hours (tWh) of energy will be saved over the 30-
year life of the project which equals 6.96 tWh annually. This can be expressed as 17.57m tonnes
of oil-equivalent (TOE) over 30 years or 595,000 TOE per annum. The physical benefits begin to
diminish, although at a much less acute rate, after year 20. This is due mainly to the natural
wearing out of energy-efficiency technologies, some of which (e.g. controls upgrade and central
heating) have a life-span of only 20 years.
-Table 3 about here-
-Figure 1 about here-
VI. Environmental Benefits
The Energy-Assessment Model was used to estimate the physical reductions in emissions of CO2,
SO2, NOx and PM10 (in physical units) as a result of implementing various retrofitting measures.
Monetary values were placed on these using a benefits-transfer approach. 19 was chosen as a
mid-range value to reflect the benefit of reducing emissions of carbon by one tonne (from
Fankhauser, 1995) which translates to a value for reducing a tonne of CO2 emissions of 5.19.
Upper and lower bound estimates of 32.49 and 1.59 per tonne were taken from Cline (1992).
With regard to the damage estimates for SO2 and NOx, we favoured the estimates of
Pearce et al. (1998) and used their mean lower bound damage estimates for SO2 and NOx
emissions of 74 and 85 per tonne respectively. For the purposes of sensitivity analyses, upper
and lower bound SO2 damage estimates of 110 per tonne and 36 per tonne respectively were
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used, with equivalent figures of 125 per tonne and 44 per tonne respectively for NOx.
Connolly (1999) estimates total damage from Total Suspended Particles (TSP) to be in the region
of 2,813 per tonne for Ireland. We adjust this figure to calculate PM10 damage, which has been
identified as the most malignant category of particulate matter, using the ExternE project team’s
suggested conversion factor of PM10 = 0.55 PM / TSP (European Commission, 1995); this gives
a damage per tonne of PM10 estimate of 1,547.
Total emissions’ reduction benefits amount to 394 million over the lifetime of the
project at a 5% discount rate, which represents approximately 8% of the total benefits of the
project. Benefits from CO2 and PM10 reduction rank as the greatest monetarily, at 189 million
(4% of total benefits) and 184 million (3.9%) respectively. SO2 savings account for 15 million
(0.3%), while NOx reductions amount to almost 8 million (0.2%). Using lower bound estimates,
emissions benefits fall to 253 million. With upper bound estimates, emissions’ savings equal
1,397 million. A time-series of emissions’ reduction benefits are presented in Figure 2.
-Figure 2 about here-
VII. Mortality Benefits
Each year, the number of deaths during the winter season in Ireland is far greater than during any
other season. This surplus mortality can be denoted ‘excess winter mortality’. Cold exposure is
cited as the major cause for this seasonality and indoor cold exposure (through the inability to
heat the home to an adequate, i.e. safe and comfortable, temperature) is believed to be a
significant cause for concern in this regard. A cross-country comparison was used to quantify the
proportion of excess winter deaths in Ireland associated with poor thermal housing standards. A
number of countries were evaluated for control status. The aim was to utilise the mortality
statistics of another country with eminent housing standards and internal levels of comfort. In
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addition, in order to isolate this housing effect, the country also had to fit, as closely as possible,
the population specifics of the Irish. Thus, data were collected from a number of countries on
demography, climate, smoking prevalence, diet, obesity and fitness levels and levels of air
pollution, all risk factors for cardiovascular disease (CVD) and respiratory disease (RD) (Clinch
and Healy, 2000b).
The Norwegian population was chosen as the control group for two reasons. Firstly, the
thermal standards of Norwegian housing are among the highest in Europe. Secondly,
demography and lifestyle risk factors for CVD and RD are remarkably similar for both countries.
The proportion of this excess winter mortality attributable to poor thermal housing standards
(henceforth denoted as ‘insiders’) was estimated to be 50% for cardiovascular disease (381
deaths) and 57% for respiratory disease (271 deaths). Further details of this procedure can be
found in Clinch and Healy (1999).
Valuing Mortality Benefits
Placing monetary values on mortality benefits is, perhaps, the most controversial area of
economics. There are a number of approaches for carrying out this task, but, in line with the
approaches of recent studies8, the value of statistical life (VSL) was used to value the reduction in
risk of death that would result from the improvement in the thermal standards of housing as a
result of the energy-efficiency Programme. VSL may be defined as the sum of individuals’ own
valuations of reductions in risks to their own lives. Obtaining a VSL involves aggregating up
from a willingness-to-pay figure for risk reduction (Pearce, 1998). A substantial review of the
literature and discussion of alternative techniques can be found in Clinch and Healy (2000c) but,
in summary, it was decided to employ a VSL estimate of 3.03m for the under-65 age group and
8 See, for example, European Commission (1995), Pearce et al. (1998)and Connolly (1999).
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2.18m for those over 65 years of age (since there is some evidence that values of risk aversion
are lower for the over-65 age group) as recommended by Pearce et al. (1998).
Amongst other criticisms of VSL estimates is that most come from accident contexts
where the mean age of the person killed is very much lower than in the context of, for instance,
this study where the beneficiaries are largely elderly. For this reason, there has been an effort to
estimate the value of the period of life gained by reducing the risk, i.e. an age-adjusted VSL. This
figure is produced by annualising the VSL figure according to the mean age of the original sample
of individuals for whom the figure was calculated. This gives the Value of a Life Year (VoLY)
which can then be aggregated up from the age of the individuals for whom the value of risk
reduction is being calculated. However, there are problems with Age-Adjusted VSL as, due to the
calculation method, they are monotonically declining with age, whereas the literature (albeit
relatively sparse) that examines the relationship between willingness to pay for risk reduction and
age tends to produce inverse-‘U’ shapes. Thus, willingness to pay increases with age up to a point
before decreasing with old age at the upper tail of the inverse-‘U’ shape (Johannesson et al., 1997).
For this reason, we accept the view of Pearce (1999) that, until there is more substantial work on
actual valuation of life years rather than arbitrary inferences about it from VSL studies, it is best
to use the standard VSL approach. This gives a total mortality benefit of the energy-efficiency
Programme of 1,494m undiscounted (Table 4). Mortality benefits using the age-adjusted VSL
are shown for illustrative purposes and it is clear that the use of this approach would substantially
reduce the benefit estimate. More discussion of the calculation of mortality benefits can be found
in Clinch and Healy (2000c).
-Table 4 about here-
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VIII. Morbidity Benefits
The incidence of infections and sickness increases dramatically during the winter months in
Ireland. As with excess winter mortality, epidemiologists have demonstrated that it is the
increased exposure to cold and damp which causes the vast majority of this seasonal variation in
morbidity9. The problem with cold, damp houses is that high relative humidity (70% or more)
leads to condensation and moulds on cold surfaces; these are especially detrimental to human
health.
There are two elements to consider when valuing reduced morbidity from improvements
in the energy efficiency of housing. The objective is to assess the avoided cost to the individual
who would have been ill had their house been colder and to assess the avoided cost to wider
society from that person avoiding illness. If we can assess both these costs, we can then derive
society’s willingness to pay for reducing such morbidity. The avoided cost to wider society
includes costs of hospitalisation and drugs that would have been borne by the state. This is
evaluated using a Cost-of-Illness approach. Other costs avoided by wider society include the loss
of productivity from those who are ill being unable to work. The avoided cost to the individual is
more difficult to calculate but one approach is to estimate individuals’ willingness to pay to avoid
‘Restricted-Activity Days’.
Hospitalisation and Drugs’ Costs
Overall, cardiovascular disease in Ireland exhibits a winter surplus of about 4% which
corresponds to an inpatient surplus of 371 cases. The mean annual excess inpatient cost for
cardiovascular disease was calculated to be 2.8m of which 1.4m was considered to be
associated with poor thermal housing standards based on the ‘insider ratios’ as calculated for
Cost-Benefit Analysis Of Domestic Energy Efficiency J.P. Clinch and J.D. Healy
ESRS 00/02 University College Dublin
17
mortality. Respiratory disease (RD) exhibits a stronger physical correlation and a stronger cost
correlation with the winter season. Using the public acute hospital data, it can be shown that
there are approximately 4,000 excess winter inpatients treated for this disease (corresponding to a
winter surplus of 14.5%). The excess winter inpatient cost for RD works out to be over 9.1m
annually to which 5.2m (57%) may be attributed to poor thermal housing standards. Observed
winter drugs’ expenditure for CVD/RD was calculated for the four-month period, December to
March. Excess winter drugs’ costs for CVD and RD amount to 1.1m annually representing a
winter surplus of 5%. 0.6 million of this excess may be associated with thermally inefficient
housing.
Restricted-Activity Days
An energy efficient home leads to an increase in the health status of its inhabitants. This implies
that less time will be spent absent from work on sick-leave. Thus, a potential benefit of
improvements in the thermal standards of housing may be decreases in lost productivity.
However, the vast majority (87%) of those experiencing ill-health due to cold homes are elderly
and, therefore, do not actively participate in the labour market. Therefore, reductions in lost
productivity are not a substantial benefit in this study. However, there are a number of attendant
impacts (along with lost productivity) which may be valued. These include the irritation and
debilitation caused by illness and reduced activity. A Benefits-Transfer approach may be used to
estimate the benefit to the individual of avoiding a Restricted-Activity Day (RAD). A study by
Navrud (1997) estimated people’s willingness to pay to avoid a RAD. On the basis of this study,
Pearce et al. (1998) estimate the adjusted unit (marginal) cost of a RAD to be 41. Based on the
figures above, total RADs from CVD and RD associated with poor thermal housing standards
amount to over 17,000 in physical terms. Applying Navrud’s estimate to these figures gives an
9 See Pocock (1972), Collins (1986), Boardman (1991) and Henwood (1997).
Cost-Benefit Analysis Of Domestic Energy Efficiency J.P. Clinch and J.D. Healy
ESRS 00/02 University College Dublin
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estimated annual benefit of avoiding reduced activity by improving the thermal standards of Irish
housing of approximately 0.7m.
The value of the morbidity benefits of the energy-efficiency programme amounts to
58m excluding RADs and 65m including RADs at a 5% discount rate (Table 5). Thus, the
benefit of avoiding RADs is shown to be very small relative to the costs to the State.
-Table 5 about here -
IX. Comfort
Valuing comfort is, perhaps, the most difficult part of a cost-benefit analysis of a domestic
energy-efficiency programme, primarily because of its inherent subjectivity and also because there
has been so little empirical work undertaken in the area. Comfort encompasses more than simply
increased levels of warmth in the home. There are many attendant effects which are very hard to
capture monetarily. Henwood (1997) concludes that evidence demonstrating the positive impact
of improved housing on reported psychological distress is now well established. Symptoms
include anxiety, depression, headaches and fatigue in adults, and irritability, temper tantrums,
bedwetting and headaches in children.
A temperature of 18ºC appears to be the benchmark level of warmth for living rooms
(Collins, 1986, Mant and Muir Gray, 1986 and Raw and Hamilton, 1995) and 16ºC for all other
areas. The Energy-Assessment Model used in this study followed these guidelines. When the
Irish dwelling stock (post-retrofitting of the energy-efficiency measures) is run through the
Model, a mean household temperature of 17.7ºC is predicted. This implies that the living room
will have a temperature higher than 17.7ºC, while the bathroom may have a lower temperature.
This mean temperature is considered a safe and comfortable level of warmth, in accordance with
the medical literature.
Cost-Benefit Analysis Of Domestic Energy Efficiency J.P. Clinch and J.D. Healy
ESRS 00/02 University College Dublin
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Increases in comfort levels are valued in this study by using the proportion of energy
savings forgone (i.e. the proportion of maximum, potential energy savings not realised) as a proxy
for the value that people place on increased levels of comfort. Thus, it is assumed that the value
of the comfort obtained must at least be equal to the value of the energy savings forgone.
Therefore, the figures will be lower bound because they do not necessarily reflect individuals’
maximum willingness to pay for increased comfort. In addition, the approach is less than ideal as
it assumes perfect knowledge whereby people are assumed to understand the trade-off that they
are making. Nevertheless, it was considered useful as an indication of the possible value of
comfort. Most of the comfort benefits are likely to accrue to those with lower incomes and in
poorer socio-economic groups who are experiencing fuel poverty and so, prior to the energy-
efficiency programme, were unable to heat their houses to comfortable temperatures.
The Energy-Assessment Model assumes that, for example, if actual energy savings are
60% of potential energy savings, this means that the first 40% is forgone because initial increased
levels of comfort (warmth) are valued higher than energy cost savings. It is predicted that, at the
first year of the project, 52% of energy benefits are not realised and are, in fact, taken as increased
warmth in the home, i.e. comfort benefits. This figure diminishes as the housing stock achieves a
high level of comfort over time and the benefits are then taken as reductions in fuel bills
(especially by higher income households). In addition, the EAM assumes that there is an
increasing demand for comfort over time as living standards rise, even if no retrofitting
programme were to occur. Comfort benefits amount to some 461m, discounted at 5%.
X. Overall Results
Table 6 illustrates the overall results of the cost-benefit analysis of the domestic energy-efficiency
programme at various discount rates. The figures represent the predicted scenario in the case of
each cost and benefit, i.e. the ‘middle bound’ estimates. It is important to note that the morbidity
Cost-Benefit Analysis Of Domestic Energy Efficiency J.P. Clinch and J.D. Healy
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benefits estimates are conservative, since RADs are not included, as this might lead to double-
counting with comfort benefits, i.e. it is likely that people’s willingness to pay to increase comfort
will overlap with their willingness to pay to avoid restricted-activity days. Taking the Irish
Government’s test discount rate of 5%, total programme costs amount to 1,601m, of which
materials’ costs account for 881m and labour makes up the remainder 720m. Total benefits
amount to some 4,723m. This implies that the overall benefit-cost ratio is a resolute 3.0. Energy
cost savings alone, at 2,712m, would allow the programme to pass the cost-benefit test (a
benefit-cost ratio of 1.7). Energy benefits represent the majority (57%) of all programme benefits.
These are followed by health benefits (mortality and morbidity) which account for 1,158m of
the total benefits (25%). Comfort benefits rank next, at 461m (10%). Finally, emissions
reductions of 396m (8%) account for the remaining benefits. Overall, the net benefit to society
amounts to some 3,124m at a 5% discount rate. The payback period is estimated to be seven
years at the test discount rate of 5% (Figure 3). The internal rate of return (IRR) of 33% is
remarkably high.
-Table 6 about here-
-Fig. 3 about here-
Comparison of Results with Other Studies
Table 7 illustrates the total programme costs, benefits (in terms of energy cost savings alone),
programme lives, cost-benefit ratios and payback periods of a number of similar studies which
have been surveyed for this study. As some studies reported undiscounted benefits and costs, and
others used discount rates other than 5%, it was decided to present the undiscounted results of
all studies (including this one). This obviously implies that the monetary values of the costs and
benefits increase, and this affects the benefit-cost ratio. For instance, a benefit-cost ratio of 1.7 is
Cost-Benefit Analysis Of Domestic Energy Efficiency J.P. Clinch and J.D. Healy
ESRS 00/02 University College Dublin
21
reported for this programme (energy benefits alone) at a 5% discount rate. However, at a 0%
discount rate, the ratio almost doubles to 3.2 (although the payback period remains unaffected).
Despite this, the Table gives an illustration of the relative magnitude of the results of this
programme. The investment required for this programme lies in the mid-range of total costs
reported. The benefit-cost ratio lies towards the upper-tail of the ratios reported in the studies
surveyed. The payback period lies in the middle of the range of estimates presented in the Table.
The studies are chosen to reflect the wide literature dealing with evaluation of energy-efficiency
programmes in the residential sector.
-Table 7 about here-
XI. Conclusion
The research summarised in this paper has attempted to build on existing research on the
economic evaluation of energy-efficiency projects by presenting a template for undertaking
comprehensive cost-benefit analyses of domestic energy-conservation programmes. The case
study chosen was a programme to retrofit the Irish housing stock with energy-conservation
measures such that it would be brought up to the standards of the latest building regulations. The
programme was subjected to cost-benefit analysis, the components of which include costs,
energy savings, emissions’ reduction benefits, health benefits and comfort benefits. These costs
and benefits were evaluated via an energy-assessment model of the housing stock and an
associated cost-benefit model.
While an attempt has been made to evaluate all the costs and benefits, there are a number
of weaknesses in the analysis. Firstly, assumptions must be made about household behaviour (e.g.
how will individuals react once energy-efficiency measures have been installed in their houses, i.e.
it is necessary to predict the combination of comfort and savings on energy bills that will be
Cost-Benefit Analysis Of Domestic Energy Efficiency J.P. Clinch and J.D. Healy
ESRS 00/02 University College Dublin
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chosen). Future energy prices cannot be predicted with certainty, nor can future developments in
available technology. Health benefits are particularly difficult to calculate. Not only is it necessary
to estimate the physical number of deaths and illnesses that result from inadequately heated
houses, it is also necessary to choose appropriate coefficients for reduced risk of death and
disease. Finally, the estimation of comfort benefits is less than ideal as it is based upon an
estimate of the extent to which households will forgo savings on energy spend in exchange for
comfort. A lower bound estimate is obtained which relies upon an assumption of perfect
knowledge on the part of the householder.
The above difficulties demonstrate that a perfect methodology for evaluating large-scale
energy-efficiency programmes is not yet available. In addition, a positive evaluation is far from
sufficient to ensure that such a programme is implemented for various reasons as shown by
Clinch and Healy (2000d). Nevertheless, the results of this study are convincing enough to show
(as have other studies) the clear net benefits to society of an effective household energy-efficiency
programme. However, the extent to which research in the area of economic evaluation of energy-
efficiency programmes is beneficial depends upon whether the programmes themselves can be
effectively implemented.
Cost-Benefit Analysis Of Domestic Energy Efficiency J.P. Clinch and J.D. Healy
ESRS 00/02 University College Dublin
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Cost-Benefit Analysis Of Domestic Energy Efficiency J.P. Clinch and J.D. Healy
ESRS 00/02 University College Dublin
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Table 1. Employment Estimates from Energy-Conservation Studies
STUDY Gross Cost
(1997 m)
Job-Years Gross Cost/Job-Year
(1997)
ACE/ERL123617 500,000 47234
ACE/ERL157900 1,223,000 47342
ERR294469 2,500,000 37787
Fraunhofer322246 594,000 37450
Louisiana4335 12,600 26603
Boardman525141 970,000 25917
EST & Unison/ACE623 394 57138
MEAN 31962 828,571 39924
This study 3035 49,000 51627
Notes: 1Environmental Resources Ltd. (1983). 2Hodgkinson (1986). 3Fraunhofer Institute (1985).
4Laitner (1991). 5Boardman (1991). 6Association for the Conservation of Energy (1997).
Table 2. Total Costs of the Domestic Energy-Efficiency Programme (m)
Discount
Rate (%)
Low-Cost
Scenario
Medium-Cost
Scenario
High-Cost
Scenario
0 -1,817 -2,065 -2,180
3 -1,554 -1,766 -1,865
5 -1,409 -1,602 -1,691
8 -1,227 -1,395 -1,473
10 -1,126 -1,279 -1,351
Cost-Benefit Analysis Of Domestic Energy Efficiency J.P. Clinch and J.D. Healy
ESRS 00/02 University College Dublin
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Table 3. Energy Savings from the Domestic Energy-Efficiency Programme (m)
Discount Rate
(%)
Static Energy
Prices
1% Energy Price
Inflation
1% Energy Price
Deflation
0 6520.92 7713.00 5328.84
3 3774.47 4405.14 3143.81
5 2711.68 3136.99 2286.35
8 1730.20 1976.36 1484.02
10 1319.35 1495.19 1143.51
Table 4. Mortality Benefits of the Domestic Energy-Efficiency Programme
Age CVD
Deaths
Avoided
RD
Deaths
Avoided
Total
Deaths
Avoided
Total Savings using
Standard VSL
(undiscounted m)
Total Savings using
Age-Adjusted VSL
(undiscounted m)
>65 325 245 570 1,243 649
<65 56 26 82 251 251
Total 381 271 652 1,494 900
Table 5. Morbidity Benefits of the Domestic Energy-Efficiency Programme (m)
Discount Rate
(%)
Morbidity Benefits
excluding RADs
Morbidity Benefits
including RADs
0 110 122
37583
55865
84247
10 34 38
Cost-Benefit Analysis Of Domestic Energy Efficiency J.P. Clinch and J.D. Healy
ESRS 00/02 University College Dublin
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Table 6. Costs, Benefits and Net Social Benefits under ‘Predicted’ Scenario (m)
Discount
Rate (%)
Costs Energy CO2SO2NOxPM10 Mortality Morbidity Comfort Net
Social
Benefit
0 -2066 6521 452 36 17 438 1494 110 728 773
3 -1766 3775 263 20 10 255 1238 75 549 4417
5 -1601 2712 189 15 8 184 1100 58 461 3124
8 -1395 1731 121 9 5 118 929 42 361 1920
10 -1280 1319 93 8 4 91 835 34 309 1412
Cost-Benefit Analysis Of Domestic Energy Efficiency J.P. Clinch and J.D. Healy
ESRS 00/02 University College Dublin
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Table 7. Cross-Study Comparison with Key Results from
Various Energy-Conservation Studies (Undiscounted1)
Study Total Cost
(m)
Energy
Savings
(m p.a.)
Programme
Years
Energy
Saving-
Cost Ratio
Payback
Period
CBA of Residential Energy
Conservation in Ireland
2,066 218 30 3.2 7 years
Jobs & Energy Conservation
(USA)2
23,617 3,352 10 1.4 <10 years
Too Cold For Comfort394,469 4,571 30 1.5 -
Employment Effects of
Energy Conservation
Investments in EC Countries4
22,246 3,047 38 5.2 4-5 years
Energy Investment for a
Stronger Louisiana
Economy(USA)5
330 48 20 years 2.9 <5 years
Impact Evaluation of Ohio’s
Weatherization Assistance
Program (USA)6
28 3 Depends on
measures
(mean =12
years)
0.9 -
Economic & Greenhouse
Gas Emission Impacts of
Electric Energy Efficiency
Investments (USA)7
1,625 317 13 years 2.6 -
Major Energy Savings,
Environmental and
Employment Benefits by
Double-Glazing (EU)8
12,697 13,000 10 years 1.0 10 years
Notes: 1The figures are undiscounted and are converted into 1998 price levels. 2 Environmental Resources Ltd. (1983). 3
Hodgkinson (1986). 4 Fraunhofer Institute (1985). 5 Laitner (1991). 6 Blasnik (1998). 7 Arny et al. (1998). 8 Thermie
(1995).
Cost-Benefit Analysis Of Domestic Energy Efficiency J.P. Clinch and J.D. Healy
ESRS 00/02 University College Dublin
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Figure 1. Costs & Energy Benefits of the Domestic Energy-Efficiency Programme (m)
0
50
100
150
200
250
1 3 5 7 9 1113151719212325272931
Years
Costs
Energy Benefits
Figure 2. Discounted Environmental Benefits (m)
0
2
4
6
8
10
12
14
1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31
Years
discounted
value of CO2
reduction
discounted
value of SO2
reduction
discounted
value of NOx
reduction
discounted
value of PM-10
reduction
Cost-Benefit Analysis Of Domestic Energy Efficiency J.P. Clinch and J.D. Healy
ESRS 00/02 University College Dublin
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Figure 3. Net Social Benefit (m) & the Payback Period at a 5% Discount Rate
-500
0
500
1000
1500
2000
2500
3000
3500
1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31
Years
Cost-Benefit Analysis Of Domestic Energy Efficiency J.P. Clinch and J.D. Healy
ESRS 00/02 University College Dublin
35
Environmental Studies Research Series (ESRS)
Working Papers
ESRS Working Papers contain reports on research in progress at the Department of
Environmental Studies, University College Dublin. A list of recent working papers follows:
No. Author(s) Title
99/01 Clinch, JP Pulp Fiction: Assessing the Social Efficiency of Temperate-Zone
Commercial Forestry Programmes
99/02 Clinch, JP and Healy, JD Housing Standards and Excess Winter Mortality in Ireland
99/03 Clinch, JP Why Should We Value the Environment and How Can We Do It?
99/04 Clinch, JP and Healy, JD The Benefits of Residential Energy Conservation in Ireland in the
Light of the Luxembourg Agreement
99/05 Clinch, JP and Healy, JD Domestic Energy Efficiency: Correcting Market Failure in Ireland
99/06 Clinch, JP Environmental Policy in the EU
99/07 Clinch, JP Towards a More Integrated Approach to Environmental and Health
and Safety Policy
99/08 Clinch, JP and Healy, JD Alleviating Fuel Poverty in Ireland: A Program for the 21st Century
99/09 Clinch, JP and Murphy, A Modelling Winners and Losers in Contingent Valuation of Public
Goods: Appropriate Welfare Measures
99/10 O'Leary et al.Afforestation in Ireland – Regional Differences in Attitude
99/11 Convery, FJ Large-Scale Out-Of-Town Shopping Development in the Republic
of Ireland – Issues and Choices
00/01 Clinch, JP and Healy, JD Evaluating the Health Benefits of Improving Domestic Energy
Efficiency
00/02 Clinch, JP and Healy, JD Cost-Benefit Analysis of Domestic Energy Efficiency
00/03 Convery, FJ and Roberts, S Farming, Climate and Environment in Ireland
00/04 Clinch et al. Modelling Improvements in Domestic Energy Efficiency
00/05 Clinch, JP and Healy, JD The Potential Health Benefits of Improving Household Energy
Efficiency
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... While many studies have assessed thermal comfort improvements as a result of retrofit projects, the quantification of comfort is often challenging due to the inherent subjectivity of its nature [23]. Therefore, a combination of quantitative temperature and RH data from data loggers and qualitative data from occupant surveys have been used in this study. ...
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... Apart from these (rather general) analyses, and despite objections by critics of cost-benefit analyses involving environmental parameters [24], several energy efficiency programmes in the housing sector have been examined through a cost-benefit-analysis lens, e.g., [25][26][27][28][29][30]. More holistic projects and evaluations did not only look at energy saving on the financial benefit side but expanded it to environmental benefits and health and comfort improvements [31,32], or they emphasised the positive effects on energy literacy, and, at the same time, the quality of life of the participants and their communities [33]. ...
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... A number of authors have analyzed the role of PHS on RES price mechanisms and economic aspects of electricity markets [7,[10][11][12][13][14][15][16][17][18][19], while others have studied the technical aspects of implementation and energy contribution of PHS systems [8,[20][21][22][23][24][25][26]. In addition, many authors have developed CBA on the subject of RES [27][28][29][30][31][32][33][34][35][36][37][38][39][40][41][42]. ...
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This award-winning study examines the costs and benefits of an aggressive program of global action to limit greenhouse warming. An initial chapter summarizes the scientific issues from the standpoint of an economist. The analysis places heavy emphasis on effects over a long run of 200 to 300 years, with much greater warming damages than those associated with the conventional benchmark. * Estimates are presented for economic damages, ranging from agricultural losses and sea level rise to loss of forests, water scarcity, electricity requirements for air conditioning, and several other major effects. The study concludes with a cost- benefit estimate for international action and a discussion of policy measures to mobilize the global response. * Selected by Choice for its 1993 "Outstanding Academic Books" list and winner of the Harold and Margaret Sprout prize for the best book on international environmental affairs, awarded by the International Studies Association.
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