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.

English Also available in: French


Revealed preference methods

Revealed preference (RP) methods refer to a range of valuation techniques which all make use of the fact that many (non-market) environmental goods and services are implicitly traded in markets, which allows then for RP methods to uncover these values in a variety of ways, depending on the good in question and the market in which it is implicitly traded. For example, demand for nature recreation can be estimated by looking at the travel costs associated with this activity, with recent developments linking this to geographical information systems to improve accuracy in mapping natural attributes at recreational sites or distances to those sites. Another prominent application are hedonic price techniques which value environmental goods and services as attributes or characteristics of related purchases, notably of residential property, or are used to evaluate the relationship between wages and the occupational risk of death and injury. Finally, averting behaviour and defensive expenditures approaches occur when individuals take costly actions to avoid exposure to a non-market bad. An important development in RP is the ever-growing sophistication of econometric methods brought to bear, reflecting a broader interest in much of applied economics on crucial matters such as causal inference.

English Also available in: French

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