Discounting Cycling

By Eric Crampton 14/03/2014

The Greens recommend shifting some transport funding from lower value roading projects towards bike lanes near schools. It doesn’t seem like a bad idea, so long as NZTA does proper modelling of effects on traffic flows and doesn’t wind up putting too great of constraints on trunk routes that happen to go by schools.

But I wish they wouldn’t have put up their indicative cost-benefit figures. Here’s the Greens:

New research from the University of Auckland shows the kind of infrastructure the Greens will build for walking and cycling will produce up to $4 billion of benefits over 40 years for a $200 million investment – a 20 to 1 return.19

Ok. First off, 20:1 benefit-cost ratios are immediately eyebrow-raising. If something’s that great, why hasn’t it already been done? My first thought was that somebody’s gone and rolled up forty years of estimated benefits without any time discounting. So, let’s check Footnote 19. It’s this.* And what do we find at page 10?

To make the findings policy relevant, we used the national transport agency’s methods (New Zealand Transport Agency 2010) to calculate indicative benefit-cost ratios in New Zealand dollars (NZD) for each scenario compared with baseline (summed net benefits divided by infrastructure costs). Infrastructure costs were not inflated and, in contrast to the transport agency’s methods, neither did we discount future benefits and harms. [emphasis added]

Where a bunch of the benefits come from estimated future health improvements and mortality reductions, choosing not to discount future benefits at standard discount rates kinda determines their results for them. How can they say that this project is higher value than other NZTA projects when standard NZTA projects discount future benefits at standard discount rates? Again from Macmillan et al paper:

Table 3 illustrates the estimated cumulative costs and benefits to 2051 of the four policy interventions compared with the business-as-usual simulation. All interventions exhibit positive benefit-cost ratios, ranging from 6 to over 20 dollars saved for every dollar spent on bicycling infrastructure. The largest savings come from reductions in all-cause mortality due to physical inactivity.

If the Greens are happy with this kind of no-discounting cost-benefit analysis, I have a proposition for them. For the low low cost of $1,000,000, I will pay them $25,000 per year for the next eighty years. If we roll up the 80-years’ benefits, that’s $2,000,000: a 2:1 benefit-to-cost ratio! Sure, it’s not 20:1, but it’s still pretty good. Two is bigger than one. Right?

It wouldn’t be hard to convince me that this could be a good policy. But hanging it on this kind of analysis sure isn’t convincing.

* Alexandra Macmillan, Jennie Connor, Karen Witten, Robin Kearns, David Rees, and Alistair Woodard. 2014. “The Societal Costs and Benefits of Commuter Bicycling: Simulating the Effects of Specific Policies Using System Dynamics Modeling.” Forthcoming in Environmental Health Perspectives.