Cost-benefit and cost-effectiveness analysis in the context of CAP evaluation

Cost-benefit analysis and cost-effectiveness analysis are methods used to evaluate the efficiency of policy interventions and programmes such as the CAP. Evaluating policy efficiency is of utmost importance, as it allows for assessing how well a programme or intervention produces the desired outcomes and achieves its objectives with minimal resources.

Cost-benefit analysis (CBA) is an economic evaluation method used to determine whether the benefits of a programme or intervention outweigh its costs. CBA adds up the total costs of a programme or intervention and compares it against its total benefits. The technique assumes that a monetary value can be placed on all the costs and benefits of a programme, including tangible and intangible returns to stakeholders immediately impacted and to other stakeholders that could also be affected. Comparing the total costs of a programme/intervention/project (e.g. interventions implemented under CAP Strategic Plans (CSPs)) with its benefits enables the calculation of the net cost or benefit. The best CBAs take a broad view, including indirect and long-term effects, reflecting the interests of all stakeholders who will be affected by the programme.

Cost-effectiveness analysis (CEA) is also an economic evaluation method that compares the costs of different policies or interventions to assess how much they cost to achieve the same outcome. CEA is used to determine the most cost-effective approach to achieving certain policy outcomes. It involves comparing the costs of different interventions with their outcomes or impacts, usually measured as costs per unit of outcome. Therefore, the goal is to identify the most efficient intervention that achieves the desired outcome with minimum resources. CEA is closely related to CBA, but instead of monetised benefits, it uses other measures to quantify outcomes such as job creation, production increases, abated emissions, etc.

Both CBA and CEA can be used to assess the ‘value for money’ generated by expenditure programmes. However, CEA is less applicable to policies or interventions with more than one main objective or to the estimation of indirect benefits. In the case of interventions with multiple quantified impacts, whether quantitative and measured in different units or qualitative, multi-criteria decision analysis (MCDA) can also be used to evaluate efficiency (See Tool #62 of the Better Regulation Toolbox).

When to use these techniques in the context of a CAP Strategic Plan assessment

CBA can be used in CAP Strategic Plan evaluations to assess the economic efficiency of proposed interventions, ensuring that resources are used effectively to achieve policy objectives. CBA is often carried out at the start of a programme or project when different options are being appraised and compared (e.g. impact assessment, ex ante evaluation), as a method for choosing the best approach. It can also be used to evaluate the ex post impact of a programme or policy measure in quantifiable and monetised terms.

CBA can be used to evaluate the economic and environmental impact of specific CAP interventions or schemes. It can help estimate the monetary value of benefits, such as improved farm incomes or enhanced environmental outcomes. When used to evaluate alternative strategies aimed at the same objective, such as choosing between different approaches to promoting sustainable practices, CBA provides a structured way to compare the costs and benefits of each strategy. For example, different interventions, such as drainage systems, retention ponds, or buffer strips, can be compared for their effects on reducing irrigation water use. The costs for farmers might include the upfront capital and operating expenses for running such interventions. These costs can be assessed against the monetary value of water saved for irrigation (i.e. benefit).

CEA can be used in CSP evaluations to compare the costs of different interventions against their outcomes, allowing policymakers to identify the most efficient measures for achieving specific objectives, such as reducing greenhouse gas emissions or improving a particular agricultural outcome. For instance, CEA can be used to compare the cost per tonne of CO₂ reduction across different interventions, which is crucial for selecting the most efficient intervention(s) to achieve a given objective, such as emissions reduction. Tools like the CAPRI model can be used to model impacts, comparing the cost of CAP interventions with their effects on production, income and the environment. Outside comparisons, CEA can also be used to evaluate the efficiency of individual CAP interventions, such as a new incentive for farmers to use digital tools to reduce fertiliser use.

CEA is particularly useful when a monetary value cannot be easily assigned to all benefits, such as environmental benefits, making it a suitable tool for evaluating CAP interventions that aim to deliver tangible, albeit non-monetary results. For instance, two eco-schemes, such as reduced tillage and cover cropping, with the intended effect of improving soil quality, can be compared in terms of their costs to achieve certain soil fertility parameters.

Preconditions

Cost-benefit analysis

1. Define the policy scope – Clearly outline the policy objectives, timeline and expected outcomes.
2. Identify costs and benefits: List all direct and indirect costs and benefits associated with the policy, including tangible and intangible factors and immediate and longer-term effects.
3. Assign monetary values – Quantify the costs and benefits by assigning a monetary value to each identified item. For instance, in CAP evaluation, a market-based approach can be used to quantify costs and benefits (e.g. market prices or derived demand functions), or a cost-based approach can be used to estimate the value of goods not traded in markets (e.g. environmental benefits such as reducing water pollution or improving soil quality).
4. Discount future values – Adjust future costs and benefits to their present-day value by applying a discount rate to account for the time value of money. Costs and benefits that occur in the future carry less weight in a cost-benefit analysis. To account for this, it is necessary to ‘discount’ or reduce the value of future costs or benefits to place them on a par with costs and benefits incurred at present.
5. Calculate the net present value (NPV) – The NPV is obtained by subtracting the total present value of costs from the total present value of benefits. A positive difference indicates that the benefits outweigh the costs, hence the policy is economically efficient.
6. Calculate the benefit-cost ratio (BCR) – Divide the total present value of benefits by the total present value of costs; a ratio greater than 1 indicates that the analysed policy programme is viable.
7. Perform a sensitivity analysis – Examine how changes in key assumptions may affect the results (i.e. assess risk and uncertainty) and consider the limitations of the approach, e.g. monetisation of intangible benefits (so-called non-market goods).
8. Make a recommendation – Based on the NPV and BCR, determine whether the policy is economically efficient and whether it should be adopted or continued, accounting for limitations and/or uncertainties.

Cost-effectiveness analysis

1. Identify alternatives – CEA compares at least two policy options or interventions to achieve a specific objective (e.g. strategic objectives in Member States’ 2023-2027 CSPs).
2. Quantify costs – The costs associated with each alternative are identified and measured. In CAP evaluation, costs can be considered from the perspectives of the EU (e.g. financial allocations across different interventions), Member States, farmers and/or consumers.
3. Measure outcomes – Outcomes include indicators related to physical aspects, such as economic, health, social and environmental. The effectiveness of each option is measured in physical units (e.g. tonnes of CO₂ reduction).
4. Calculate cost-effectiveness ratios – The ratios indicate the cost per unit of outcome. An incremental cost-effectiveness ratio can also be calculated by dividing the difference in cost by the difference in outcome between two alternatives.
5. Compare options – The intervention with the lowest cost per unit of outcome is considered the most cost-effective. For example, in CAP evaluation, the cost of reducing emissions can be compared across different CAP interventions to identify the most cost-effective option.
6. Assess efficiency – Comparing costs with achieved outcomes can help determine whether a policy programme is using its resources effectively and identify areas for potential improvement in policy design and implementation.

Both CBA and CEA are useful tools for decision-making as they can inform policy design and the most efficient resource allocation option(s) by providing evidence-based quantitative information: