CBA

Atkinson et al., 2018

CBA used because = model of rationality (avoiding lexical thinking), clear that a policy should be one of a series of options, accounts for time (discounting), individual preferences count, explicit rather than implicit preferences

recent developments

• finding money values - correspondence problem, use and non-use values

• who gains, who loses - some argue should ‘maximise the cake’ others argue for equity and fairness

• selecting discount rate - tyranny of discounting, contemporary discussion on declining discount rates versus constant discount rate (OECD supports declining),

Limitations

• welfarism assumption - exclusion of justice/fairness

• NUV uncertain - WTP biases

• discounting problems

• must better integrate natural capital and distribution

Randall, 2014

discomfort with welfarist foundation of CBA

• narrow view of human well-being - reduces to what people want and how much do they want it

• sum of everyone’s preferences = treated all preferences as commensurable, ignores distribution, privileges preferences of the wealthy

welfarist assumes preferences and WTP reveals welfare

Arrow et al., 1997

most economists argue economic efficiency (benefits minus costs) should be the fundamental criteria for evaluation → not the only criterion

inherent problem in measuring marginal benefits and costs → emphasises quantification and transparence

concerns about fairness - merit consideration

appropriate use of CBA

• comparison of all favourable and unfavourable effects - monetised and non-monetised

• should be used for all major regulatory decisions where statutes permit

• B and C for proposed policies should be quantified wherever possible

• external review

• good analysis will identify distributional consequences and include sensitivity analysis

Chichilnisky, 1997

CBA dangerous if taken literally on large issues and large timescales - difficult to price these issues

reliability of prices? - usually come from markets but environmental assets have no market price

error in price = radically change results

discounting is not necessary or sufficient for efficiency and intergenerational equity - causes time inconsistency, automatically treats future generations as less important, destroys fairness

global warming alerts to weaknesses of CBA in dealing with global long-term problems

should use sustainable CBA not discounting - long-run component to stop future being discounted to zero, give positive weight to future generations

Ramsey, 1920s

‘discounting is ethically indefensible and arises from a failure of the imagination”

Ray, 1997

CBA is necessary for sensible policy

policies which re and for economic efficiency are often also bad for the environment and vice versa

‘shadow’ price of commodity - should reflect environmental effects

have to integrate distributional concerns into analysis systematically

Lewis and Tietenberg, 2020

cost and benefit = anthropocentric values

optimal = efficient = Pareto optimality → use dynamic efficiency

everything into present value → time is a factor

issues in benefit estimation

• accounting stance - geographic scope

• aggregation - standing

• additionally of benefits

• tangible vs intangible benefits - need to quantify to the best of ability intangible benefits

treatment of risk - identify + quantify (scientific) and decide how much risk is acceptable (Evaluative)

distribution of benefits and costs - economic impact analysis and equity analysis

divergence of social and private discount rates

• cost of capital is higher in risky industries

• risk of private decisions different to risks faced by society

• underlying rates of time preference

assessing magnitude of damage

• identify affected categories

• estimating the physical relationship between the pollutant emissions and damage caused

• estimate response by affect parties in mitigation

• placing a monetary value on unmitigated physical damages

Arrow and Fisher, 1974

if decision is irreversible then more caution is required

Haveman, 1972

CBA is not objective - systematic bias in overestimation of benefits ex ante

• not a stand-alone technique - must be used with other available information

Atkinson et al., 2018 b

environmental valuation in UK - evolution from bespoke primary studies to using shareable values

where has significantly influenced policy - water (EA and private water companies use CBA to meet regulatory requirements and justify derogations from standards), natural capital (shaping UK NEA and 25-Year Environment plan)

rarely the sole driver of decisions

• Thames Tideway Tunnel - driven more by strategic political objectives than CBA

• concern that valuation evidence is more influential when making a positive case for action

• suggest that Brexit will increase demand for domestic environmental valuation

CBA informed policy decisions but not necessarily the primary driver

Turner, 2007

CBA in UK and European environmental policy appraisal (EPA)

still has an important role to play despite limitations - most effective when integrated into multi-criteria assessment

increasingly contested nature of environmental and public policies and outcomes - role will be less prescriptive and findings more contrasted by social justice and ethical imperatives

Potential Pareto Improvement is not reliable for evaluating environmental policies - compensation is not necessarily paid to losers

25 year discounting does not align with environmental change impacts of climate change

key areas of contention - distributional concerns, discounting and future generations, sustainability and ecosystem complexity (ecosystems are non-linear and subject to threshold effects)

Gowdy, 2004

no theoretically justifiable way to make welfare judgements without interpersonal comparisons of utility which is forbidden under the assumptions of neoclassical welfare economics