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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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Political economy of cost-benefit analysis

Questions about why patterns of use and influence are how they are bound up with political economy, necessitating a richer understanding of the policy formulation process. If, in the extreme, all decisions were to be made on the basis of CBA, decision makers would have no flexibility to respond to the various influences that are at work demanding one form of policy rather than another. In short, CBA, or, for that matter, any prescriptive calculus, compromises the flexibility that decision makers need in order to “act politically” or meet other policy objectives. Unsurprisingly, this constrains use or shapes the nature of use in particular ways. Political economy then seeks to explain why the economics of the textbook is rarely embodied in actual decision-making and related to this, policy-formulation processes. But explaining the gap between actual and theoretical design is not to justify the gap. So while it is important to have a far better understanding of the pressures that affect actual decisions, the role of CBA remains one of explaining how a decision should look if the economic approach is adopted.

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