Group 2—Risk and resource allocation for the environment

Chair: Professor Tom Kompas

Australia has limited resources to address its ever-increasing risk to the environment from, for example, exotic pests and diseases, climate change and the effects of growing population pressure and natural resource use, so it is critical that these resources be used efficiently. Traditional cost–benefit analysis (CBA) is often used to allocate budgets to rank alternative projects by their benefit–cost ratios (BCRs), and to select projects in declining order of BCRs until the budget is exhausted. This approach considers, for each candidate project, the benefit it would provide (per dollar spent on it) if the project received a specific level of funding. The benefits that each project would provide at different levels of funding are typically not considered. Indeed, most applications of CBA in Australia have focused on the evaluation of individual environmental projects, rather than using information to determine how to allocate an overall budget across many possible projects. These single-project evaluations usually ignore issues of uncertainty and risk and people’s attitude to risk and uncertainty. It is becoming increasingly clear that applying this approach to allocating a budget for the environment may result in a misallocation of resources because the benefits of an environmental project per dollar spent on it can be highly sensitive to its scale, how we perceive risk and who bears those risks. What matters is not the benefit–cost ratio but the extra benefits relative to the extra costs of an investment in the environment; what matters, in other words, is the rate of return on the investment. Budget allocations across alternative projects are especially impacted by this consideration.

The issue is further complicated by two facts. First, the values associated with an environment outcome, or the benefits that an investment in the environment would generate, are difficult to quantify. Advanced techniques and contingent valuation and choice modelling only partly address this problem. Second, the risk to the environment itself, from things like exotic pests and diseases and climate change, are also often difficult to quantify. The use of ‘expert elicitation’ in cases where data is scant is helpful, but this too invokes some concern.

In this subgroup, our main task will be to investigate the issue of how to optimally allocate a given budget at the proper scale for an environmental investment and across a series of environmental projects—highlighting the limits to CBA. We will also briefly examine the use and problems associated with choice modelling approaches to ‘value’ the environment, on the one hand, and the practice of obtaining information on measures of risk through the use of expert elicitation on the other.

Questions to get you thinking

  1. Is an environmental project with a positive ratio of potential benefits to costs always worth funding?
  2. Is it best to allocate budgets across different environmental projects simply by their BCRs (i.e. starting with the highest BCR and working down the list)?
  3. How would one optimally allocate a budget across different environmental projects? What is the list of priorities?
  4. What if the budget is severely constrained, does that change the allocation?
  5. If there are risks associated with an action, or inaction, who bears those risks?
  6. How important is equity in terms of costs, benefits and risks with respect to environmental decisions?
  7. How do you value the environment when there’s no data?
  8. Can experts tell us what the risk to the environment is from a given threat or outcome, even when there is no supporting data?

We encourage every participant to bring a particular problem of environmental decision-making that includes significant amounts of risk and uncertainty (in terms of either benefit or cost). These will be used to provide context to the discussion.

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