Quantitative Cost-Benefit Assessments

AspenTech has developed and applied quantitative cost-benefit analysis for engineering systems, including applied thermodynamics. The analysis, provided by Aspen Value Process (AVP), is a collaborative process yielding multi-level, broad commitment for business process changes enabled by software solutions. A key outcome of AVP is the customers validation of the estimated value. The financial information is highly sensitive and consequently there are no published cases available. Here, we present the basic approach and give typical quantitative assessment results. One could either carry out an extrapolation of this analysis to assess the industry-wide benefits (as is done below), or, alternatively, carry out a series of these assessments with specific producers. 

A rough estimation for the process industries based on experiences with AVP would be, state of the art engineering systems can deliver 1-10% of turnover in net, recurring additional benefits. The industry generally validates between 10 and 50% of this claim. A conservative estimation is that 10% is directly attributed to applied thermodynamics. This gives a net, recurrent benefit range of 0.01-0.5% of turnover of the process industries, being 600 M to 30 B for a 6 trillion industry. 

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The final part of this ALARP assessment of the design investigates whether further reduction in risk would be cost-effective. Several potential enhancements were identified, the Severe Accident Mitigation Design Alternatives (SAMDA), but only one of these was taken forward in the generic AP 1000 because the others were not cost-beneficial based on ALARP principles. A quantitative cost-benefit analysis is applied to each of the SAMDA options, to show that its non-inclusion is ALARP for the APIOOO design proposed for the UK. 

Process Hazards Analysis. Analysis of processes for unrecogni2ed or inadequately controUed ha2ards (see Hazard analysis and risk assessment) is required by OSHA (36). The principal methods of analysis, in an approximate ascending order of intensity, are what-if checklist failure modes and effects ha2ard and operabiHty (HAZOP) and fault-tree analysis. Other complementary methods include human error prediction and cost/benefit analysis. The HAZOP method is the most popular as of 1995 because it can be used to identify ha2ards, pinpoint their causes and consequences, and disclose the need for protective systems. Fault-tree analysis is the method to be used if a quantitative evaluation of operational safety is needed to justify the implementation of process improvements. 

A facility risk review (FRR) is intermediate between a qualitative HAZOP and a quantitative risk assessment (QRA) achieved by broad probability and consequence classifications. Although not a risk assessment, an FRR uses PSA to get optimum risk cost-benefit. 

Qualitative findings of ecosystem risk assessments are of low utility for risk management. They cannot be compared with quantitative estimates of other risks this compromises the ability of risk ranking to provide insights to setting priorities. It is particularly difficult to convert them into a format applicable for cost-benefit analysis, which is a key tool that any proponent uses in decision-making on a proposed project. 

This paper will summarize briefly some work my colleagues and I at Decision Focus Incorporated have carried out for EPA to show how decision analysis might be used to assist decision making under TSCA ( 5). I will first briefly review the concepts of quantitative risk assessment and cost-benefit analysis to show how decision analysis fits with these concepts and provides a natural way of extending them. Then I will illustrate the approach using a case study on a specific chemical, perchloroethylene. 

A risk-benefit assessment of a drug can be made looking at the risks of the disease being treated, the chance of improvement by the drug, and the risk from the treatment. A risk-benefit assessment can also be comparative between two or more treatments for the same indication and also examine costs to individuals and the community. It is clear that these assessments should have complete contemporary data for all aspects, and that the data should be organised in such a way as to make qualitative and quantitative comparison easy. 

As these parameters are monitored and changes in risk identified, critical issues can be escalated for more detailed review. Once several risk reduction strategies are identified, the same types of risk evaluation criteria (e.g., risk index, risk matrix, or other quantitative measures) described earlier in this book can be used to assess the relative benefits of each proposed risk mitigation option. Risk reduction can thus be defined as the process of evaluating and identifying options available to reduce risk, that achieve the desired level of risk reduction, and can be justified on a cost-benefit basis. 

The method adopted in many industries is to use a Value of Preventing a Fatality (VPF). The VPF is the amount that an organisation will spend to reduce risk by a single fatality, and is used in cost benefit analysis (CBA) to assess reasonable practicability. The costs and benefits of a potential risk control are evaluated, and if the cost per life saved is less than or roughly equal to the VPF, the risk control is regarded as reasonably practicable and must therefore be implemented. The quantitative approach was formalised by the Health and Safety Executive (HSE) in its 1988 paper (updated in 1992) The Tolerability of Risk from Nuclear Power Stations and its 1989 paper Quantified Risk Assessment its Input to Decision Making Whilst the 1988 paper was developed for the nuclear industry, its principles have been applied widely. 

This chapter deals with flood risk analysis and assessment. The conceptual model source pathway receptor consequence for flood risk analysis is presented and its components are analyzed. The methodology to extract the predicted probability of coastal flooding from risk sources and pathways, as well as the expected damages from risk receptors axe introduced and examined. Reliability analysis of a coastal system is also briefly discussed. Quantitative methods to define acceptable flooding probabilities on the level of the protected area are presented. Tools such as cost-benefit analysis, utihty models, and the life quality index are introduced to define the tolerable risk of flooding. 

Approval of a system is usually based on safety first principle, i.e., a quantitative risk assessment (QRA) and also the cost effectiveness (cost-benefit analysis)... 

Where a major decision regarding cost or safety implication has to be made, it has become increasingly difficult to defend the traditional qualitative process called engineering judgement . Thus, there has been a steady trend towards quantifying risks and/or costs, in particular the techniques of HAZard IDentification (HAZID), Quantitative Risk Assessment (QRA) and Cost-Benefit Analysis (CBA), have come very much to the fore. 

In contrast to the estimates of the costs of REACH, no financial estimates of the health and environmental benefits of REACH were made by the impact assessment the report pointed out that the lack of knowledge about exposure to and the effects of chemicals - a knowledge gap that REACH is intended to fill — makes quantitative assessment of them impossible. But the report does say that the evidence available supports the assessment that the health burden related to chemicals is considerable (CEC, 2003, p25) and that it seems that the impacts of chemicals on the environment are potentially large (CEC, 2003, p26). However, a calculation of the monetary value of possible health benefits was made as an illustration assuming 1 per cent of disease is attributable to chemicals, and that this would be reduced by 10 per cent following the implementation of REACH, 45,000 disability adjusted life years (DALYs) of disease would be avoided every year. This is equivalent to 4500 lives per year, assuming 10 DALYs is equivalent to one mortal-... 

For non-thresholded contaminants some mechanism is required that will allow the benefits in terms of reduced risks and costs associated with control to be taken into account. The costs of control will include enforcement costs as well as costs to producers in reaching ever stricter standards. Ultimately these costs will be borne by consumers in taxes, increased prices or reduced choice. Economic theory dictates that there must be a point where the extra increase in the cost of control is not justified by the corresponding increase in benefit (reduction in risk). This optimal point will differ for each contaminant according to the technology needed to control it, the nature of the hazard, and the relationship between dose and risk. It is in this latter context that quantitative risk assessment (QRA) becomes critical (see section 2.3.4 of this chapter). 

Similarly, there are debates about the value of time—is recreational travel time the same as commuting travel time or the same as business travel time While these debates are interesting, they miss the central question Can public decision making be reduced to a simple dollar value that results from attempts to turn all the products and consequences of road transport into quantitative monetary units and combine them in a single equation As with the continuing debate over our conunon usage of the term accident when we should have used crash, we spend a lot of time on unproductive issues. The real question here is an ethical one—the sanctity of life. There is a major place for the monetary assessment of benefits and costs when choosing between policy options, but it must not be the sole criterion. 

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