Cost-Benefit Analysis and the Environment

Further Developments and Policy Use

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This book explores recent developments in environmental cost-benefit analysis (CBA). This is defined as the application of CBA to projects or policies that have the deliberate aim of environmental improvement or are actions that affect, in some way, the natural environment as an indirect consequence. It builds on the previous OECD book by David Pearce et al. (2006), which took as its starting point that a number of developments in CBA, taken together, altered the way in which many economists would argue CBA should be carried out and that this was particularly so in the context of policies and projects with significant environmental impacts.

It is a primary objective of the current book not only to assess more recent advances in CBA theory but also to identify how specific developments illustrate key thematic narratives with implications for practical use of environmental CBA in policy formulation and appraisal of investment projects.

Perhaps the most significant development is the contribution of climate economics in its response to the challenge of appraising policy actions to mitigate (or adapt to) climate change. Work in this area has increased the focus on how to value costs and benefits that occur far into the future, particularly by showing how conventional procedures for establishing the social discount rate become highly problematic in this intergenerational context and what new approaches might be needed. The contribution of climate economics has also entailed thinking further about uncertainty in CBA, especially where uncertain outcomes might be associated with large (and adverse) impacts.

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Contingent valuation method

The contingent valuation (CV) method is a stated preference approach where respondents are asked directly for their willingness to pay (or willingness to accept compensation) for a hypothetical change in the level of provision of a non-market good. CV is applicable to a wide range of situations, including future changes and changes involving non-use values. As this chapter documents, there is now a wealth of experience that can be gleaned from the literature on CV that can guide current thinking about good survey design and robust valuation. This is critical as the central debate remains regarding the method’s validity, manifesting itself in discussions about specific problems and biases. Increasingly some of these problems are being investigated in the light of findings from research on behavioural economics. Other significant developments, notably the rise of on-line surveys, have been important in enabling more extensive applications, and further testing of biases and possible bias reduction mechanisms.

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