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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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Health valuation

The valuation of health risks is a long standing area of both research and policy application. Even so, increasing evidence of the global burden of disease and especially the role of environmental pollution as a determinant of this burden has added a further urgency to this work. Considerable strides have been made in recent years in terms of clarifying both the meaning and size of the value of statistical life (VSL). One of the main issues has been how to “transfer” VSLs taken from e.g. from country-to-country or where life expectancy of those people who are the object of policy and investment project proposals differs. Needless to say, this still requires that applications are done with care and judgement. In some areas, the literature offers firmer guidance here than in others. Notably, age may or may not be relevant in valuing immediate risks – the literature is arguably ambiguous with regards to the empirical relationship. That said, in terms of practical guidelines, the empirical record has been important in translating findings in base or reference levels for health values for use of policy or project appraisal.

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