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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Distribution and cost-benefit analysis

Conventional CBA for the most part continues to regard (intra-generational) distributional or equity concerns as having little or no place in making its recommendations about policy formulation or investment projects. Identifying this oversight is one thing, responding to it is more controversial especially where this involves weighting costs and benefits according to equity criteria. But this usefully might just involve simply identifying the costs and benefits of individuals and groups on the basis of differences in the characteristic of interest. Perhaps this sounds unambitious but given the starting position (where this seldom happens), more routine cataloguing of this type surely would be useful. Moreover, this could involve not only cataloguing how costs and benefits are distributed across people but also how particular environmental goods and bads (such as air quality, unwanted land uses and so on) are distributed. One catalyst almost certainly could be demand from policy makers. That is, the observation that too much practical CBA neglects distributional concerns may not just be a supply problem (a single-minded focus of cost-benefit practitioners on efficiency), it is also likely to be an issue about demand: perhaps, for example, policy makers perhaps have not required this information in the terms of reference guiding that practical work. Taking this further might involve weighting costs and benefits and scrutinising proposals on the basis of a distributional cost-benefit test. While a long-standing analytical option, there is no easy answer to the equally long-standing question about what value these weights should take. Nevertheless, exploring this question has led to some interesting empirical insights about inequality aversion generally and for specific goods and bads (such as health risks).

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