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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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Value transfer

Value transfers are the bedrock of practical policy analysis in that only infrequently are policy analysts afforded the luxury of designing and implementing original studies. Thus, in such instances, analysts must fall back on the information that can be gleaned from past studies in order to estimate monetary values for some current policy or project proposal. Whether this is a defensible short-cut is the object of value transfer tests, which provide important guidance about situations in which value transfer can be carried out confidently and when practitioners should proceed with more caution. The general lesson is that there are possibly significant trade-offs between simplicity and accuracy of the resulting transfer. Thus, a competent application of transfer methods demands informed judgement and expertise and sometimes, according to more demanding commentators, as advanced technical skills as those required for original research. This is something of a paradox then for surely the point of transfer exercises is to make routine valuation more straightforward and widely used. Another development which may help in this respect is valuation databases (such as EVRI) and “look-up tables” (lists of average values and ranges for various categories of environmental goods and services). These are important facilitators of valuation uptake in policy formulation, although in turn these do require good guidance on practice and use.

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