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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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Current use of cost-benefit analysis

It is important to take stock of the extent to developments in environmental CBA have found their way into actual assessment. This chapter looks at this from the perspective of a number of OECD countries across policy sectors such as energy, transport and environmental policy, via questionnaire responses. What this finds is that there are large variations in the extent to which CBA is being carried out, and the extent to which various environmental impacts are being taken into account in these analyses, across economic sectors and across analytical contexts. For example, energy sector investments and policy proposals are relatively well covered in CBAs, but there is far narrower coverage of non-climate environmental impacts in those assessments. Cataloguing such use is important. Of course, it does not of itself provide answers to inevitable questions about why CBA is used in one context but not another. Nor did the responses provide a clear picture of the influence of CBAs on the final decisions. It must also be recognised that use and influence are moving targets in the sense that both are probably evolving reasonably rapidly given developments in environmental CBA.

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