Critique of the above CBA

Some criticisms of the above analysis

The CBA conducted of the Ballen-Brundby District Heatin Plant is a strongly simplified version of what a real cost benefit analysis should look like. The aim of cost benefit analysis is to incorporate the social or communal element into a financial analysis, giving a broader picture of the associated costs and benefits of a given project above and beyond financial arguments.

A large number of factors was ignored in the above CBA, without which it is impossible to accurately present the full implications of a given project.

  • The only externality taken into account is CO2 emissions. Other emissions (some of which increase when using straw as fuel relative to oil) were ignored, which skews the results in favor of the district heating plant.

  • Transport of fuel in this project scenario is hugely relevant. Relative to importing half a million liters of oil each year, the project ensures a drop to 7200 liters of oil each year. Oil is mined and processed a very long distance away from its final use as heating fuel in Ballen and Brundby. As cost-benefit analyses are generally only concerned with the change in the national socioeconomic balance, we can ignore loss of revenue and work for non-national employees. However, the local ferry receives revenue for the truck transport of oil to the island, and the truck driver will probably also be affect the drop in demand.

  • The substitution to locally grown and harvested fuel, which in this scenario is straw leftover from wheat harvests, increases the revenues of local farmers. CBA is notoriously lacking in terms of distribution evaluation. In some scenarios, there are additional benefits to redistributing income from one income group to another.

  • In the scenario in this example, it is assumed that none of the oil furnaces will need to be replaced over the period. This is highly unlikely, as oil furnaces have a given lifetime of 15 years (Danish Energy Agency) and assuming they are not new at the beginning of the project, they will at least become substantially less efficient over the period calculated for.

  • All prices are also assumed to remain constant at the 2004 level. However, specifically oil prices are expected to increase significantly over time, so the method of calculation in this example skews the results towards the oil furnaces.

  • Taxes in this example have been included as a saved cost, but on a national level, they count as a loss of revenue to the Danish government.

Created by tanja.groth. Last Modification: Friday 09 July 2010 17:03:55 CEST by tanja.groth.