Cost benefit analysis and environmental policy

Abstract

The use of cost benefit analysis (CBA) in British environmental policy has gone through several stages. Early applications of CBA tended to ignore environmental impacts altogether, leave them for a subsidiary 'impact analysis', or provide only a partial monetization of impacts. Currently, CBA is the subject of renewed interest in government departments, in the Environment Agency, and among other agencies providing guidance and advice to government. While the amount of CBA being undertaken has increased, its influence on policy making is open to question. Obstacles remain. Much CBA is expensive and this means that 'benefits transfer' is widely regarded as essential. Currently, however, the validity of much benefits transfer is questionable. Other problems arise from misunderstandings about the nature of economic values and the links to individuals' self interest, and from concerns that CBA results will 'crowd out' flexibility in decision-making, especially the likely context of multiple political objectives over and above economic efficiency. None the less, CBA has begun to have influence in the setting of environmental taxes and alternative decision rules appear to suffer as many, if not more, shortcomings as those faced by CBA.