Press release from the chairperson of the committee: Report on cost-benefit analysis

An expert committee charged with reviewing the cost-benefit guidelines in Norway is today submitting its report to the Minister of Finance, Sigbjørn Johnsen. The Committee was appointed on 18 February 2011, and has been chaired by Kåre P. Hagen, Professor Emeritus, Norwegian School of Economics. The Committee has comprised experts within the field of economics.

- It is with great pleasure we submit our report on economic analysis, which has been a year and a half in the making, to the Minister of Finance, says the Chairperson of the Committee, Kåre P. Hagen, Professor Emeritus, Norwegian School of Economics.

- I have reviewed, together with a committee of highly qualified experts, aspects of the current framework in line with the terms of reference stipulated by the Government, says the Chairperson of the Committee.

- I am pleased that the Committee is unanimous in its recommendations. Economic analysis may provide an improved basis for prioritising the limited resources of society. An economics update should stimulate more and better use of economic analysis in making such prioritisation decisions, says Professor Hagen.

The recommendations of the Committee

The Committee endorses the fundamental economic analysis principles outlined in the NOU 1997: 27 Green Paper; Cost-Benefit Analysis. The Committee is making close to 50 recommendations. The following recommendations, which deviate from earlier practice, merit special mention:

1. It is recommended, on a general basis, that the utility of time and the value of a statistical life (VSL) be subject to real price adjustment, corresponding to the real growth in GDP per capita. Thus far, it has not been common practice to subject the utility of time and the value of a statistical life to real price adjustment.
   
   
2. It is recommended that the real risk-adjusted, pre-tax discount rate for normal public sector investments, like for example transportation investments, remain fixed at 4 percent for the first 40 years. Thereafter, the recommendation is to apply a discount rate of 3 percent to effects over the subsequent 35 years, from 40 to 75 years into the future. After 75 years, the discount rate should be 2 percent. Thus far, a rate of 4.5 percent has been applied to transportation projects, 4 percent to ordinary projects and, in practice, between 2 and 4.5 percent to major projects in excess of NOK 750 million that fall within the scope of the public quality assurance scheme, with no rate reduction for the distant future.
   
   
3. It is recommended that the usual analysis period for road projects be increased from 25 to 40 years. Any residual value after 40 years should be based on future utility, and not on estimated accounting values based on costs as per the investment date.
   
   
4. Supplementary analysis of potential wider impacts of transportation projects is encouraged, together with better follow-up with regard to the actual implications of any investments made. However, the Committee cautions against so-called double counting of potential utility. As a main rule, price changes in the property market as the result of transportation investments will, for example, represent only a redistribution of the original direct utility of such investment. Consequently, including both effects in the analysis will amount to double counting.
   
   
5. The Committee also proposes that greenhouse gas emissions be priced equally for purposes of all analysis. If Norwegian targets are related to the contribution to global emissions caused by Norway, the carbon price trajectory should be based on the future quota prices of the EU. Eventually, the trajectory should approach, over time, a trajectory in line with the UN target of limiting global warming to two degrees centigrade. If the targets concern domestic emission reductions, the carbon price trajectory should be based thereon. In addition, we propose that one may, for certain projects, perform sensitivity calculations assuming a two-degree trajectory for all years.
   
   
6. It is proposed that the economic value of a statistical life (VSL) be fixed at NOK 30 million at 2012 prices for all sectors. Supplementary analysis of investments specifically targeting the safety of children may apply a level equivalent to twice the VSL of the general population. Previously, a VSL figure has only been assigned within the transportation sector, which figure has been approximately NOK 30 million.

 

The Committee members were:

Kåre P. Hagen, Professor Emeritus, Norwegian School of Economics, Chairperson
Stein Berntsen, Executive Vice President, Dovre Group
Brita Bye, Researcher, Statistics Norway
Lars Hultkrantz, Professor, Örebro University
Karine Nyborg, Professor, University of Oslo
Karl Rolf Pedersen, Associate Professor, Norwegian School of Economics
Maria Sandsmark, Researcher, Molde University College
Gro Holst Volden, Researcher, Norwegian University of Science and Technology/SINTEF
Geir Åvitsland, Director General, Ministry of Finance (from 1 July 2011)

Any questions relating to the Report may be directed to:

Kåre P. Hagen, Professor Emeritus, Chairperson of the Committee, telephone 55 95 92 70
Frode Karlsen, Deputy Director General, Head of the Secretariat, telephone 22 24 43 64