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• 6. Benefits of Reduced ...

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Hitherto our analysis has provided only cursory treatment of benefits from reductions in non-CO₂ vehicle emissions and the costs to the economy of biofuel blends which we have loosely labelled "resource costs". In this section we provide additional cost benefit analysis which uses these costs and benefits to assess the relative cost effectiveness of various biofuel blend scenarios.

As discussed above, the precise implications of resource costs and hence the net costs of each option cannot be determined in the static model we have employed. However, we can borrow from general equilibrium concepts to assess the relative size of the resource cost in each alternative. In a general equilibrium context relative costs of production and prices of output determine the allocation of resources within the economy. Here we work backwards. We begin with the resource cost, which is known, and then assume that the marginal benefit, or price, of emission reductions is sufficient to induce an efficient allocation of resources which includes production and sale of biofuel blends.

Although the allocation of resources implied by each biofuel blend option would not be chosen by the market, this does not necessarily mean that such an allocation would be inefficient. Here we assume that the market is unable to adequately price the social benefits of a reduction in vehicle emissions and hence in the absence of government intervention resource allocation in the economy is socially sub-optimal with respect to transport fuels.

To evaluate the marginal benefit of various emission reductions (the price at which biofuel production and sale is an efficient allocation of resources) we have worked backwards from the resource costs to calculate an implied price or marginal social benefit of each tonne of non-CO₂ emissions reduced. We begin by calculating the net benefit of biofuel blends (i.e. the cost to consumers less the implied benefit from CO₂ reduction). We then subtract this benefit from the resource costs, to yield a representation of the net cost to the economy of each blend requirement option. We then divide this through by the tonnes of emissions reduced to achieve an implied price per tonne of emission reduced.

In our analysis we have considered emissions of carbon monoxide (CO), non-methane volatile organic compounds (NMVOC), and particulate matter (PM). These emissions have varying effects on health and the environment and so we have chosen to weight each emission by their relative impact on human health.¹⁸ The weights we have used are informed by two Australian studies cited in Duncan and Copeland (2004). These studies provide estimates of health costs per tonne of vehicle emissions. We use these estimates to weight each tonne of reduced emissions by the relative size of health costs per tonne of emission for each type of pollutant. The weights and costs from the Australian studies are shown in Table 10.¹⁹ This approach gives the most weight to particulate emissions. As such, tonnes of PM reduced are priced against a greater share of the resource costs than CO and NMVOC. This is intended to reflect the fact that if PM emissions are more costly than CO or NMVOC emissions, then the price (or marginal benefit) per tonne of PM reduced should reflect this.²⁰

Notes: (1) NZ$, converted from AUS$ at 0.9:1 (AUS$:NZ$)

Source: Duncan and Copeland (2004)

In calculating the implied price per tonne of emissions reduced we are assuming that the marginal social cost of each mandatory blend option will be just sufficient for the resource allocation to be optimal. That is, for the marginal benefit to be equal to the marginal cost. If we sum the value of the benefits of all emissions reduced then add the net present benefit and subtract the resource cost we will invariably arrive at the conclusion that the net cost/benefit of each option is zero. Thus we cannot look to the net benefit of the subsidy to determine if the various policy alternatives are desirable. However, we can look at the implied prices to determine which is the more cost effective means of achieving equivalent reductions in emission. Table 11 provides the results of our analysis.

Source: NZIER

Table 11 shows that for ethanol blends the implied price being paid for CO and NMVOC emission reductions is significantly less than for biodiesel blends.²¹ However, these emissions are considerably less costly in terms of their effects on human health than particulate emissions.

In the case of particulate emissions, biodiesel blends offer the least cost approach to reducing health costs associated with atmospheric pollution. Given the estimated health costs of particulate emissions relative to other emissions this suggests that, other things being equal, biodiesel blend requirements offer the least cost alternative for reducing health costs associated with vehicle emissions.

That is not to say that any of the biofuel blend options provides a cost effective means of reducing health costs from vehicle emissions. Comparing the health cost estimates in Table 10 against the implied prices in Table 11 suggests that none of the biofuel blend requirements provides a cost-effective means of mitigating health costs from vehicle emissions. The price of reducing particulate matter emissions is at best more than twice the cost of these emissions. Moreover, the estimates presented in Table 10 apply only to large Australian cities and so are at best only applicable to Auckland.

As mentioned above, our analysis is not designed to yield an accurate analysis of the desirability of the policy alternatives in question. However, comparing implied prices with estimated health cost benefits is useful for putting our estimates into perspective.