Cost Benefit Analysis
From SEA.unu.edu/wiki
CBA aims to translate all impacts into monetary values. The aim is to help decision-makers by "translating" environmental and social costs into a single unit of measure -- money -- that they already use to make decisions. In theory this allows all impacts to be put on the same footing.
CBA techniques include:
- Dose-response approach: determines the links between pollution (dose) and its impacts (response), and values the final impact at a market or shadow price (e.g. cost of crop/forest damage from air pollution).
- Replacement cost approach: ascertains the environmental damage done and then estimates the cost of restoring the environment to its original state.
- Avertive expenditures: measures expenditures undertaken by households which are designed to offset some environmental risk (e.g. noise abatement)
- Travel cost method: a detailed sample survey of travellers to a site determines how they value the (mainly recreational) characteristics of the site and the time spent travelling to the site (e.g. visiting a nature area)
- Hedonic price methods (house prices approach): applies to environmental attributes which are likely to be capitalised into the price of housing an/or land. Involves assembling cross-sectional data on house prices, together with data on factors likely to influence these prices, and analysing these using multiple regression techniques.
- Hedonic price methods (wage risk premia): uses multiple regression to relate wages/salaries to the factors (e.g. morbidity and mortality risks) which influence them
- Contingent valuation: involves asking people for their willingness to pay and/or accept compensation for changes in environmental resources.
- Contingent ranking: individuals are asked to rank several alternatives rather than express a willingness to pay.
Example:
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Click here for another example: see joint OECD/ECMT conference, Guehnemann presentation, pages 7 and 17-18.
Advantages:
- Allows all impacts to be considered on the same footing: "integrates" impact appraisal
- Makes transparent the value of things that have not traditionally be considered in economic analysis
- Is generally accepted by economists and decision-makers
Disadvantages:
- Many CBA techniques are very indirect -- house values in a given neighbourhood may have little to do with air pollution levels -- and the techniques used can greatly affect the results.
- It is unclear over what time period costs and benefits should be compared: the impact on jobs may last for 20 years, on climate change for hundreds of years
- There is no agreement on what discount rates to use, i.e. whether future impacts should be given the same weight as impacts now. Traditional CBA discounts future impacts by an annual discount rate to arrive at a net present value (NPV). However this contradicts the intra-generational principle of sustainable development. The discount rate which is applied can have a large impact on the NPV.
- CBA does not consider equity, for instance who wins and who loses. For instance it does not distinguish whether the noise increases are borne by people with already high noise levels or not.
- Arguably CBA is not an appropriate approach to decision-making about public goods. Jacobs (1994) argues that CBA presuppose a particular political theory centred around private individual choice in markets - and that this is the wrong theory because:
"public goods are not like private goods . . . Environmental features affect other people, they raise ethical questions which are of necessity public in character, and they often form part of the common good. To understand and consider these aspects of the question, respondents need to engage in argument, not valuation. 'Valuation' implies that what people are doing is weighing the 'worth' (to them) of the policy option, against its cost. But this is not how the theory of citizenship and the public good asks people to think. It asks them to reflect and judge whether the option is the right one for society to choose. This is essentially a public not a private activity - the activity of a 'forum' not a 'market', where debate can be engaged in, arguments put".
Further reading:
More information on CBA can be accessed here.
- UK Department of the Environment (1991) Policy Appraisal and the Environment, HMSO, London.
- David Pearce et al. (1992) Blueprint for a Green Economy, Earthscan, London.
- other Blueprint books by Earthscan.
- Weiss, J. (1998) Cost-benefit analysis and assessing privatisation projects in transitional economies", Impact Assessment and Project Appraisal 16(4), pp. 289-294.
