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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Executive summary

Imagine a choice between energy project options which involve investing in a coal-fired power plant or a renewable energy investment, such as in wind turbines. In choosing between these options (or deciding not to invest in either), one analytical tool that decision-makers and practitioners might reach for is cost-benefit analysis (CBA). This might start by understanding what these options provide in terms of benefits (defined as increases in human well-being) and costs (defined as reductions in human well-being). Although this may sound simple enough, some way must be found to aggregate environmental and social benefits and costs across different people (within a given geographical boundary) and finding some means of monetising these, accounting for different points in time. For one of these projects to qualify on cost-benefit grounds, its social benefits must exceed its social costs.


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