4
Assessing the Effectiveness of Emission Mitigation Techniques and Best Management Practices

What criteria, including capital costs, operating costs, and technical feasibility, are needed to develop and assess the effectiveness of emission mitigation techniques and best management practices? The criteria for evaluating emission mitigation techniques should provide sufficient information to analyze probable societal effects of proposed changes in policy and regulations. The relevant effects are the direct biological and health effects of the emissions themselves and their related economic impacts. It is imperative that a comprehensive holistic approach be adopted. Farms are composed of several interrelated components spread over a significant geographic area. The approach to evaluating mitigation techniques must clearly identify the portion of the system being evaluated and measure changes in all of the material flows (rates and compositions of inputs, air emissions, and liquid and solid effluents) and economic inputs and outputs. The changes in inputs and outputs brought about by adoption of the technique must then be used to model effects elsewhere on the farm and beyond it. Failure to adopt a comprehensive approach risks ignoring increased air emissions elsewhere and having increased adverse environmental effects on land or water resources. A comprehensive evaluation should allow policy analysis that includes quantification and valuation of all the predictable effects on social welfare, including public health, the environment, and the economy. Extensive literature exists on analysis of costs and benefits of policy. Arrow et al. (1996) make the case for benefit-cost analysis. Examples of textbooks on the topic include Layard and Glaister (1994) and Boardman et al. (2001).



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The Scientific Basis for Estimating Air Emissions from Animal Feeding Operations 4 Assessing the Effectiveness of Emission Mitigation Techniques and Best Management Practices What criteria, including capital costs, operating costs, and technical feasibility, are needed to develop and assess the effectiveness of emission mitigation techniques and best management practices? The criteria for evaluating emission mitigation techniques should provide sufficient information to analyze probable societal effects of proposed changes in policy and regulations. The relevant effects are the direct biological and health effects of the emissions themselves and their related economic impacts. It is imperative that a comprehensive holistic approach be adopted. Farms are composed of several interrelated components spread over a significant geographic area. The approach to evaluating mitigation techniques must clearly identify the portion of the system being evaluated and measure changes in all of the material flows (rates and compositions of inputs, air emissions, and liquid and solid effluents) and economic inputs and outputs. The changes in inputs and outputs brought about by adoption of the technique must then be used to model effects elsewhere on the farm and beyond it. Failure to adopt a comprehensive approach risks ignoring increased air emissions elsewhere and having increased adverse environmental effects on land or water resources. A comprehensive evaluation should allow policy analysis that includes quantification and valuation of all the predictable effects on social welfare, including public health, the environment, and the economy. Extensive literature exists on analysis of costs and benefits of policy. Arrow et al. (1996) make the case for benefit-cost analysis. Examples of textbooks on the topic include Layard and Glaister (1994) and Boardman et al. (2001).

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The Scientific Basis for Estimating Air Emissions from Animal Feeding Operations CRITERIA FOR EVALUATING EMISSIONS EFFECTS OF MITIGATION TECHNIQUES Criteria for evaluating mitigation techniques emphasize information needs for policy analysis. These include both “on-farm,” or primary, effects of changes in policy, incentives, and regulations, and “off-farm,” or secondary, effects. The primary effects include changes in the composition and rates of emissions from farms subject to changes in policy. These farms may adopt mitigation techniques, decrease or cease production, begin or expand production, or otherwise modify production practices and management, all of which are likely to affect air emissions. Information needs for policy analysis also include those related to secondary effects, such as increased air emissions from trucks hauling manure greater distances as a result of changes in regulations. Analysis of policy changes should, at a minimum, capture the following factors: effects of changes in land application of manure on groundwater and surface water quality; effects of the risk of occasional events, such as storms, and policy-related changes in emissions due to those events; changes in material flow and composition that can be used to analyze secondary effects. For example, if a proposed change in policy requires impermeable covers on anaerobic treatment containments, then changes in the flow and composition of the supernatant and sludge leaving them must be measured, as well as changes in the rate and composition of direct air emissions from them. Changes in the flow and composition of effluents from the containment can then be used to analyze changes in air emissions and other effects occurring beyond the containment. In this example, such effects might include increased undesirable air emissions from open secondary storage containment, livestock buildings that use recycled containment supernatant for flushing, land on which supernatant and sludge are applied, and increased energy generation required to distribute the supernatant and sludge over a greater area. Estimated changes in the composition and rate of air emissions resulting from a policy change can be evaluated using fate and transport models and their predicted changes in impacts on public health and the environment. This interim report does not address the accuracy or statistical validity of models that transform emissions estimates into predicted impacts on public health and environmental quality.

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The Scientific Basis for Estimating Air Emissions from Animal Feeding Operations CRITERIA FOR EVALUATING ECONOMIC EFFECTS OF MITIGATION TECHNIQUES The last two sections of this report are presented as an overview of the information needed for relevant economic analyses of the effects of changing policies, including regulations and incentives, on mitigating air emissions. Economics is the study of the optimal use of resources to maximize human welfare. A thorough economic analysis of a proposed change in policy requires quantification and valuation of all the public health and environmental effects of the change, as well as its immediate and long-term effects on wealth, income, and employment. This section examines criteria to evaluate immediate and long-term effects on wealth, income, and employment. Emphasis is on identifying financial and economic information to be collected to evaluate mitigation techniques. The environmental and public health effects, including both costs (negative effects) and benefits (positive effects), will be examined in more detail in the final report. Wealth and income as measures of economic welfare (well-being) are usually described in terms of values determined by market transactions. Buyers' willingness to pay is matched with sellers’ willingness to accept payment; this works well in setting market prices for many commonly traded market goods and services. It frequently does not work well in setting comparable values for goods and services that are not traded in ordinary markets, as is often the case for human and environmental health. It is commonly accepted that improvements in both are beneficial and are valued, but estimating this value in terms that can be compared with market-determined values is difficult. Economists call these kinds of benefits and costs "externalities." They are recognized as being real, but their values are determined outside ordinary markets. Various ways of framing these values have been devised so that they (or proxies for them) can be weighed in decisions that also involve market values (National Research Council, 1999). For example, protocols for cost-benefit analyses for evaluating federal projects typically include guidance on handling externalities. This issue will be treated in the committee's final report, in which effects of air emissions on health and ecosystems will be discussed in more detail. Techniques for estimating benefits in the absence of direct market data include hedonic analysis (using changes in values of associated goods to estimate changes in the value of the good in question) and contingent valuation (using controlled consumer surveys to estimate values attributable to actions such as mitigating air emissions). The remainder of this chapter focuses on evaluations based on market-determined prices. Changes in policies and regulations related to air emissions from livestock operations are likely to lead to changes in economic performance of affected farms. They may also result in changes in local, regional, and national economies. A thorough evaluation of the economic effects of these changes

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The Scientific Basis for Estimating Air Emissions from Animal Feeding Operations requires a detailed analysis. Criteria to evaluate air emission mitigation techniques must capture the material flow and economic effects on farms that adopt mitigation techniques. Predicted economic effects on farms adopting mitigation techniques must be sufficient for use in modeling off-farm economic effects as required for policy analysis. Estimates of farm-level economic effects must be fully consistent with estimates of emissions and material flow effects to allow correct analysis of impacts of policy change. Accurate estimates of material flow and economic effects at the farm level can then serve as the basis for modeling the local, regional, and national economic effects of adoption of mitigation techniques. Attention in modeling local and regional economic effects should be given to the following: changes in the demand by livestock farms for goods and services; changes in the supply of manure or manure by-products for farmland application and other uses; changes in demand or supply of goods and services affected by air emissions from livestock farms; and associated direct and indirect effects on income, employment, investment, and tax base throughout the local and regional economies. National economic effects that merit attention include: changes in prices and quantities of livestock produced; changes in imports and exports of livestock products; changes in the national supply and demand for goods and services related to livestock production and air emissions mitigation; the aggregate effect of changes in the regional income, employment, investment, and tax base; and the resulting changes in producer and consumer welfare. The emphasis on measuring “changes” in the above protocol is important. The effects to be measured are those that derive from changes in farm practices, especially in response to changes in policies and regulations affecting air emissions. These changes are the well-known “marginal,” or incremental, changes that are the basis for most economic analyses. Although the emphasis for economic analysis is on marginal changes, effective analysis requires a clear understanding of the basic operations and economics of the farm enterprises being addressed. Thus, criteria for evaluating farm-level economic effects should capture the main economic factors that affect farm operations: costs, revenues, financial status, limited resource feasibility, and exposure to risk of substantial financial loss (liability). Limited

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The Scientific Basis for Estimating Air Emissions from Animal Feeding Operations resource feasibility refers to the ability of the farm to implement new techniques given limited quantities of available labor, land, and management. Each of these factors requires some discussion. (The investment and cost analysis methods described below are consistent with those described in the Environmental Protection Agency [EPA] Air Pollution Control Cost Manual [EPA, 2001b]). Textbooks on farm management provide farm specific methods for calculating investment, cost, revenue and profit, as well as farm enterprise feasibility. Examples include James and Eberle (2000), Kay and Edwards (1999), and Boehlje and Eidman (1984). Farm-level costs include capital costs (those associated with initial investment), operating costs (those that recur annually), and occasional costs (those that occur occasionally in the life of the project, such as sludge removal from a containment every 5 or 10 years). Capital costs include the costs of: purchasing and installing equipment; designing and constructing structures and land modifications; establishing pastures or groundcover that will last more than one year; installing new utility connections; obtaining permits, leases and rentals used in construction; interest accrued on capital committed to construction; and the value of unpaid inputs, such as the owner's labor, management, equipment, and capital. Initial investment may be reduced (or increased) by the net salvage value (net closure or removal cost) of the facility at the end of its useful life. Initial investment may also be reduced by the amount of cost share or other subsidy received. Initial investment is converted to annualized capital costs by amortizing it over the expected or typical useful life of the facility, using an appropriate interest rate. The interest rate should reflect the owner's cost of borrowing money over the amortization period. Criteria for mitigation technique evaluation should ensure that component description, type and capacity, expected life, price, and installation cost are reported. Operating costs include labor and management (hours, wages, and benefits), fuel, electricity, supplies (additives, lubricants, filters, etc.), repairs and maintenance, rentals and leases, royalties, permit fees, fines, custom and professional service costs, insurance and taxes, interest on operating capital, reduction in the value of assets or inventory, the value of unpaid goods and services contributed by the owner or others, and any other expenses incurred in owning and operating the facility. Criteria for mitigation technique evaluation should capture the quantity, quality or type, and price of each input consumed. Operating costs may be reduced by any cost sharing or other subsidy received to offset such costs.

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The Scientific Basis for Estimating Air Emissions from Animal Feeding Operations Occasional costs may include significant equipment overhaul, reseeding of groundcover, sludge removal from containment, and other costs that occur less frequently than annually. Evaluation criteria should capture the expected or typical timing of such costs (e.g. every fifth year), the cost per occurrence (including quantities and prices where appropriate), and any other relevant factors. An important consideration for occasional costs is whether the cost estimates are in current dollars or have been adjusted to allow for inflation. If all costs are in current dollars, then a 'real' discount rate (typically 3 or 4 percent) can be used to deflate a series of occasional costs to their net present value at the time of the initial investment. If occasional costs have been adjusted to include inflation, then a 'nominal' interest rate (e.g. 7 to 9 percent) can be used to deflate the cost series. That net present value can then be amortized over the life of the facility, similarly to initial investment, to produce an annualized occasional cost estimate. Revenues include cash received from the sale of goods or services, an increase in the value of assets and inventory, savings (e.g., reduced costs of fertilizer or electricity) realized elsewhere in the operation, and any other effects that represent an addition to the wealth of the operator. Evaluation criteria should capture the annual value of revenue, including the quantity, quality or type, and net price received from each source of revenue. Where revenue is occasional (e.g., the fertilizer value of land-applied sludge when sludge is removed from containment), the method described in the previous paragraph can be used to discount to net present value and annualize through amortization. Revenue may be increased by subsidies received that were not used to reduce initial investment or operating costs. Evaluation criteria must capture or allow capture of effects on the financial status of the livestock enterprise and the farm. Financial status includes the value of debts compared to the value of assets, the ability to borrow money, cash flow (cash receipts versus cash outflow) and debt service capacity (ability to make scheduled debt payments), and profit (annual value of revenues versus costs). New investments in mitigation techniques can have undesirable effects on financial status because they may require new borrowing for a facility that has little or no resale value (no value as security for debt) and may introduce new costs with little or no revenue. Farmers may choose to close or sell their livestock operation if they are unable to borrow money to install required mitigation techniques, if the new costs would leave them unable to make scheduled debt payments, or if they are no longer able to generate a profit. The entire farm may be forced into bankruptcy if the change in financial status of the livestock operation reduces the financial status of the farm to an infeasible point. Financial status varies widely across farms, as does the relative financial importance of the livestock enterprise, so evaluation criteria for a new mitigation technology should capture its marginal impact on financial status (new capital required, new effects on debt versus assets, new effects on cash flow and debt

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The Scientific Basis for Estimating Air Emissions from Animal Feeding Operations service capacity, new effects on profit). This point underscores the importance of capturing both economic effects and effects on material flows and concentrations, since changes in material flows can also affect the economic viability of other enterprises on the farm. Evaluation criteria should allow capture of effects on farm limited resource feasibility. Marginal changes in the required quantity and type of labor, management, and land should be estimated. Where these resources can be acquired easily in local markets, it may be sufficient to account for them as costs. However, where additional land or specialized labor or management is difficult to obtain, the farm may not be able to adopt the mitigation technique. This is important where livestock operations exist in clusters. The aggregate effect of a new regulation in causing many farms to seek to acquire a scarce resource may be quite different from its effect on a single isolated farm. Evaluation criteria should allow capture of exposure to risk of substantial financial losses (liability). Potential sources of new exposure to risk include those inherent in the mitigation techniques and the policy, such as major fines for occasional failure of the technique. Potential sources of new risk may also include increased threat of livestock or worker illness due to altered material flows on the farm. Criteria to evaluate risk may determine the effects of severe weather (wind, precipitation, floods, temperature), power outages, absence of workers, equipment failure, upsets of biological systems, and any other occasional event that could adversely affect the technique or the operation of the farm. PARTIAL BUDGETING OR SELECTED COST AND RETURNS ESTIMATION The primary method for evaluating the farm-level economic effects of adoption of an emission mitigation technique is selected investment, costs and returns estimation. This involves establishing a description of the mitigation technique and its component parts and activities, and a list of its direct effects on the livestock enterprise. A schematic showing the material flows and concentrations affected, as well as the goods and services required, is useful. A survey of farms using the technique is necessary to statistically determine their material flows, investment, costs, and revenues directly attributable to the mitigation technique. Where the marginal impacts of the technique are difficult to determine, a survey of similar farms not using the technique may be needed to establish a basis for comparison. The term “selected cost and returns estimation” is used to emphasize that the analysis is focused on the mitigation technique rather than on the entire livestock operation or the entire farm. A limitation of this approach is that the researcher may omit items from the “selected” list and thereby

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The Scientific Basis for Estimating Air Emissions from Animal Feeding Operations underestimate or overestimate effects. A benefit of this approach is that it is less costly and less complicated than a whole-farm approach to cost estimation. Where farms have yet to adopt a mitigation technique or where researchers seek to extrapolate from limited survey data, a partial budgeting approach can be used. Instead of relying on survey data for selected cost and returns estimates, the partial budgeting approach models initial investment and costs and returns using quantities and prices from secondary sources. The accuracy of predicted effects is dependent on the accuracy of prices and quantities used in the model, as well as its completeness. (For further exposition of partial budgeting methods, see Chapter 11 of Kay and Edwards, 1999.) Problems in economic estimation based on partial budgeting are exacerbated when researchers must extrapolate. Examples of extrapolation (ranging from least calibrated to somewhat calibrated) include extrapolation from bench or pilot scale to full scale; from single full-scale prototype to multiple-farm implementation; and from farms in one region to multi-region implementation. Researchers and writers are obligated to caution readers about the degree of accuracy underlying extrapolated numbers. Regional differences can be partially accounted for in models by including critical design factors that are known to vary among regions. Similarly, differences in material flows, investments, costs, and revenues among farms of different types and sizes can be approximated by including known critical design parameters and equations. OTHER CONSIDERATIONS IN EVALUATION OF MITIGATION TECHNIQUES Surveys of selected investment, costs, and revenues of mitigation techniques can establish estimates of the range or variability of economic effects across farms. Effects are likely to vary because of farm-specific factors such as topography, soil type and crop production capacity, proximity to neighbors, proximity to environmentally sensitive sites, and so forth. Effects may also vary because of differences in the design or implementation of mitigation techniques. A selected sampling design may be used to establish a range of possible effects, while a larger randomized sampling design may provide estimates of variance in effects. Knowledge of the range or variance of effects for a farm of a given size, type, or region can substantially improve policy analysis. Reporting the livestock capacity at each farm being treated by the mitigation technique surveyed is critical to extrapolating results. In partial budgeting applications, the type and number of livestock are critical inputs. Typical units or inputs for surveys and budgeting include the type of animal, number of head, stage of production, and steady-state live weight in inventory; other input may include the area of the feedlot or livestock building to be

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The Scientific Basis for Estimating Air Emissions from Animal Feeding Operations treated. Estimates of investment, cost, and revenue can then be reported with any of the physical input values as denominator. Comprehensive analysis of prospective policy change requires a systems approach that captures direct and indirect effects. Criteria to evaluate air emission mitigation techniques should produce sufficient information to predict all relevant effects at the individual farm level, as well as at local, regional, and national levels. Beyond the scope of the interim report but to be addressed in the final report is a broader discussion of the economics of policy change with respect to air emissions from livestock operations. Among the issues to be considered are the following: comparative response of farm managers to incentives versus regulations, the potential for value-added products from livestock manure and the associated potential to reduce waste and emissions, a consideration in the policy analysis of market structure including vertical integration, an expanded discussion of benefits estimation, and the analytical implications of global competitiveness.