Discounting for Delay and the Value of a Life Year lost to Air Pollution

A key role of the UK government is to address causes of premature fatality. In the UK, air pollution leads to the loss of 340,000 years of life each year and workplace cancers led to the loss of over 140,000 years of life in 2010. Government policies can address the many causes of premature fatality, but these policies need to be evaluated to ensure they make the best use of public money. The question then becomes: what is the value of increasing a person's life expectancy?

To address this question, researchers have introduced the concept of the Value Of a Life Year (VOLY). This VOLY is used in government policy evaluations as a measure of the benefits of policies including air pollution mitigation and workplace safety regulation, and thus it is crucial it is measured accurately.

The VOLY is estimated using surveys of members of the public, in which people state how much they would pay for a given reduction in their risk of dying, or for a given increase in their life expectancy. The benefits being valued occur in the future. Crucially then, a key component of the VOLY is the effect of timing. Put simply, the further in the future something is, the less we tend to care about it. So a reduction in our risk of dying this year might be more valuable than a reduction in our risk of dying in the future, even if the effect on our overall life expectancy is the same. Unless we understand the influence of this 'discounting' for changes in life expectancy, we cannot accurately disentangle it from the true VOLY. This is the problem we aim to solve with our research.

To solve it, our team of experimental economists will use an innovative mixture of experiments and surveys. Participants will play experimental games designed to include simplified models of the air pollution policies, so our team can learn the best ways to describe and measure discounting as it relates to delayed changes in risk. The survey will use the insights from the experiment and elicit individuals' preferences for reductions in their risks at different points in the future. Taken together, the experiments and survey will provide the first major investigation into how people discount their future life expectancy in the context of the VOLY.

Our results will be important for policymakers in two ways. First, unless we can account for the effects of discounting on the VOLY, then policy estimates of the VOLY taken from current surveys might be wrong. If these incorrect estimates are used in the evaluation of policies aimed at improving life expectancy, then the value of the policies will be over- or under-estimated, which means public money is likely to be spent on the wrong policies. Second, when the government is evaluating policies where improvements in life expectancy happen in the future, as is the case for air pollution policies, they have to apply discounting to the value of the benefits. Our research will provide evidence about how governments should discount future gains in life expectancy, to make sure that public preferences are reflected in policymaking.

Our research is also academically cutting-edge. It combines models from economics with insights from psychology to generate new methodological and empirical evidence about how discounting influences preferences for changes in risk, both for money outcomes (in the experiments) and for fatality risks (in the surveys). It also forges a new methodological agenda, which is the incorporation of incentivised experiments into policy-driven research projects.

Overall, our research aims to provide the basis for changing the VOLY used in government policy, challenge existing guidance for discounting fatality risk reductions, and ultimately change how government money is spent, so that the policies implemented are those that improve the wellbeing of society.

What is an additional year of life expectancy worth to society? This question lies at the heart of the evaluation of government policies that reduce risks of premature fatality. The proposed research addresses a core question relating to the evaluation of the monetary value of life expectancy gains: how does the 'value of a life year' (VOLY) change according to its timing?

Our main beneficiaries will be policymakers across UK and EU governments. We will use the context of Air Pollution in our survey, so the immediate beneficiaries will be policymakers in the Department for the Environment, Food and Rural Affairs evaluating policies targeting pollution in the air and water. Yet the methods and insights will be transferable across government departments to any policy context that delivers improvements in life expectancy.

Our project is timely, since a cross-governmental group of departments and agencies is currently focussed on clarifying general issues in the valuation of fatality outcomes. Our research fits very well into this framework, since it addresses the discounting of fatality outcomes; a concept of fundamental importance, yet one that is poorly understood. These departments and agencies include the Department of Health which evaluates life-extending interventions; the Department of Transport which evaluates interventions to prevent road traffic fatalities; and the Treasury, which provides cross-governmental guidance on the valuation of non-market outcomes. The Health and Safety Executive (HSE) evaluates policies using estimates of the Value of Prevented Fatalities (VPF), and is our Project Partner. Beyond UK government, the European Chemicals Agency (ECHA) has also expressed interest and will contribute to the project. The HSE's and ECHA's input will help shape the research questions and design and help identify routes by which the results can influence policy.

We will host a Stakeholders' workshop to bring policymakers and academics together to discuss issues surrounding discounting, the monetary VOLY and related topics. It will combine academic presentations of policy-relevant research with policy-led sessions. This will allow us to showcase the results, increase their visibility in policy circles, strengthen our network with policymakers as well as other existing relationships between academia and policy, and provide opportunities to identify knowledge gaps for future research. We will also disseminate the research to the policymakers identified as the most relevant by presenting in their analytical seminar series and engaging with their relevant committees, to identify remaining barriers to policy change and develop strategies to overcome these. All of our research outputs will be collated on our webpage to maximise the visibility of the findings.

We anticipate our research findings will demonstrate that existing assumptions about discounting underlying the calculation of the VOLY need to be updated - even completely overturned. If so, two specific changes to policy would be called for. First, the VOLY would need to be re-estimated, which could dramatically change the implied monetary value of reducing fatalities attributable to air pollution, as well as a range of other causes of premature fatality. This would change the viability of policies, including those addressing air pollution, and potentially shape government spending. Second, we would call for a fundamental change in discounting advice for public sector policy appraisal of mortality outcomes. For air pollution, guidance currently recommends that costs are subject to discounting at 3.5% per year (declining after the first 30 years), as set out in the Treasury's Green Book. Our research will test whether this practice reflects public preferences. Our research will also provide evidence about the compatibility of the VOLY and VPF approaches to mortality risk evaluation, which is a key concern for the new government initiative.