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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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Sustainability and natural capital

The notion of “sustainable development” has permeated significant parts of policy discourse about the environment. This reflects a number of (related) concerns including the development path that the broader economy is on and specifically the way in which (changes in) natural wealth affects this path. It is important that CBA speaks to those concerns especially as policy and investment projects have the potential to shift a development path (perhaps because of non-marginal actions or the cumulative effect of smaller decisions). There are a few implications of this but one of the most prominent (as well as far-reaching) is to circumscribe CBA by having it live within sustainability constraints, perhaps based on ecological criteria. This places greater emphasis on a single appraisal within the context of a portfolio of policies or projects. That is, the constraint is that this portfolio, on balance, maintains the ecological status quo with practical applications of this approach including biodiversity offsetting. This raises important issues. On the one hand, there is a benefit to avoiding untoward and irreversible damage to (possibly) critical resources. On the other hand, there are opportunity costs to applying the shadow projects approach that need still to be considered.

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