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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Environmental cost-benefit analysis: Foundations, stages and evolving issues

The rationale for and foundations of environmental CBA are well known but nevertheless provide a logical starting point. In summary, these are that: benefits are defined as increases in human well-being (or “utility”) and costs are defined as reductions in that well-being; for a project or policy to qualify on cost-benefit grounds, its social benefits must exceed its social costs. The geographical boundary for considering these costs and benefits is usually the nation but this can readily be extended to wider limits. Aggregating benefits across different social groups or nations can involve summing willingness to pay or to accept (WTP, WTA) regardless of the circumstances of the beneficiaries or losers (or it can involve giving higher weights to disadvantaged or low-income groups). Aggregating over time involves discounting where discounted future benefits and costs are known as present values. Much of the rest of this volume can be understood as developments to this standard practice with the emphasis on environmental CBA.

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