New explainer video series to inform mitigation decisions

A new video series that draws on Bushfire and Natural Hazards CRC research is helping to guide emergency managers and policy makers with mitigation funding decisions.

Taught by Dr Veronique Florec from the University of Western Australia and produced by the Bushfire and Natural Hazards CRC, the video series draws on research from the Economics of natural hazards project to explain the core economic concepts and models that are relevant to the mitigation of natural hazards. The videos complement the training course that is currently being conducted, and both will upskill and build capacity within the emergency management sector so that natural hazard managers and practitioners feel more confident to both commission and use economic information to aid their decision making.

Starting with the simplest concepts and progressing through different economic principles across the ten lessons, the video series covers the types of economics analyses available, their data requirements, how to evaluate mitigation options, estimating costs, benefits and value for money of mitigation, how to integrate intangible values and how to deal with uncertainty.

Economic analysis is a key tool that can support decision making, notes Dr Florec.

“An economic analysis won’t tell you exactly what you should do, but it does provide guidance and makes the trade-offs clearer,” Dr Florec explained.

Video one – types of economic analyses

The video series begins with an overview of the different types of economic analyses and their purpose in the context of natural hazards. The economic analysis chosen for a mitigation option depends on the type of question that needs answering. The five most common economic analyses are:

1. benefit-cost analyses: compares the costs of implementing different mitigation options, as well as the benefits that each option generates, in order to assess which option provides the best value for money
2. cost-effectiveness analyses: estimates the amount of a good or service produced for each dollar spent – in the case of natural hazards, it estimates the outcomes achieved from the implementation of mitigation activities for each dollar spent
3. economic optimisation modelling: looks for the ‘optimal’ outcome or solution given a set of constraints on allocating resources, knowing the limits of those resources, and the environment being operated in
4. cost of impact assessments: estimates the losses in dollars caused by a natural hazard by assessing the direct and indirect impacts of the event, including the costs of response
5. investment decision support tools: tests a variety of decisions to view their effects under different circumstances, with the possibility of changing parameters to see how they interact with each other.

Video two – the basics of benefit-cost analyses

A benefit-cost analysis of natural hazard mitigation options helps economists assess the costs of implementing a mitigation option against the benefits it generates. This video begins by defining the counterfactual, or baseline, of what the options are being compared to. The extent of benefits generated by any mitigation option depends on what has been selected as the counterfactual. For example, if assessing options to see whether they are worth doing at all, the counterfactual would be to do nothing. This would help to define the worth of allocating resources to the options being tested.

Video three – using economics to estimate losses from natural hazards

Assessing a wide range of hazard impacts is important to capture the full picture of losses: economic, social and environmental. To estimate losses caused by natural hazards, economists need to know three things:

• what has been impacted – things in the landscape that have been affected by the hazard either directly or indirectly
• the degree of damage to the things damaged – is it complete or partial damage?
• the value of the things that have been impacted so that the value that was lost can be estimated.

Video four – Scale of analysis

Choosing the scale of analysis is another important step during natural hazard economic analyses, as the scale chosen will determine, to a large extent, the costs and benefits of mitigation options. The scale will therefore influence the decisions made about mitigation and how to prioritise the allocation of resources. Depending on the questions that need answering, the scale would be at a local, regional, state or national level.

Video five – money transfers

Some economic analyses of natural hazards include the economic benefits resulting from the hazard events, such as insurance payments, payments by government, recovery and restoration programs, aid funds, donations and economic activity generated in the affected area. Several guidelines on disaster loss assessment suggest integrating these benefits in economic analyses of disaster impacts because they may partly offset the losses suffered. However, integrating these inflows of money is only useful when the impact to communities in the area affected by the hazard needs to be evaluated to make policy decisions. Generally, when conducting economic analyses of mitigation options to make decisions about resource allocation, inflows of money into the case study area are not included as biases may be created.

Video six – estimating Average Annual Damage

Dr Florec delves into more complex concepts and calculations to explain how Average Annual Damage is calculated. Average Annual Damage is an indicative figure that tells economists what damage to expect from a natural hazard. For any hazard event of a given size, an Annual Exceedance Probability reveals the chance of an event of that size or greater occurring in any given year. These probabilities are used to calculate the Average Annual Damage through either integration, trapezoidal sums or the simple multiplication method.

Video seven – estimating benefits of mitigation options

The calculations discussion continues to explain how to calculate the benefits of mitigation options. Once the Annual Average Damage, counterfactual (base case) and implementation of all mitigation options is completed, economists can generate the estimation of benefits from each option. The benefits are calculated as the difference between losses for the counterfactual scenario and the losses of the option being looked at. In other words, benefits correspond to the reduction in damages achieved by a mitigation option compared to the counterfactual. This is why it is so important to be clear about what the counterfactual is, as the level of benefits will always depend on it.

Video eight – comparing costs and benefits of mitigation options

To be able to produce a summary measure of the net benefits of a mitigation option, all values need to be converted to values at a common point in time, which is usually the present. In a benefit-cost analysis, economists look at the annual amounts of costs, the annual amounts of benefits and how they spread over time, and then calculate the total benefits and total costs at the present time. The timeframe for an analysis should be the length of time that maximises the estimated economic efficiency of each mitigation option project, after which a replacement should be considered. A timeframe could also be chosen at some point in the future when meaningful estimates of the effects of mitigation are no longer possible. To bring all the values for the costs and benefits to the present, the rate at which the values change during the timeframe needs to be decided. This is called the discount rate.

Video nine – calculating and interpreting benefit-cost analysis results

In a benefit-cost analysis, there are three main criteria that can be used to compare the benefits and costs of different mitigation options:

1. net present values: the present value of benefits minus the present value of costs to find the net present benefits
2. benefit-cost ratios: the present value of benefits divided by the present value of costs
3. internal rate of return: the discount rate at which the net present value becomes zero; the rate is compared with the cost of financing the mitigation option.

Video ten – risk and uncertainty

Risk and uncertainty need to be accounted for when making decisions about resource allocation for mitigation options, so it is important to know the difference between the two. Risk refers to situations where economists know the potential outcomes of an event and their likelihood of occurrence. Uncertainty refers to a situation where economists don’t know the potential outcomes of an event or their likelihood of occurrence, and so cannot reliably estimate these.

Full economic analyses help predict the impacts of future events and make consequential strategic decisions on how to improve the allocation of resources, and make decisions about mitigation or land use planning. This video series is a resource that introduces key economic principles and helps end-users appreciate the importance of, and challenges associated with, conducting economic analyses of natural hazard mitigation. View the full playlist of videos here.