Significance of Cost-Benefit Analysis for Environmental Projects - Essay Example

Significance of Cost-Benefit Analysis for Environmental Projects Abstract This essay is about the significance of cost-benefit analysis (CBA) for environmental projects. The essay reviews the findings of various studies that are related to the subject and presents a brief analysis of the different ways in which CBA is important for environmental projects. Based on the findings, it is established that studies show that policymakers rely on CBA as a tool to aid their decision-making processes to achieve sustainable development and enhance people’s wellbeing. Introduction This essay examines the significance of cost-benefit analysis (CBA) for environmental projects. The essay answers the following question: to what extent is CBA important for environmental projects? To address this question, the essay examines the main reason why governments and other institutions involved in developing and implementing environmental policies need to assess the economic merits of their policies. The essay then refers to findings in published academic literature to assess the importance of CBA as a tool that facilitates rational decision-making by government agencies. A brief review of related literature One of the questions that researchers have been concerned with for a considerably long period relates to the main purpose of performing a cost-benefit analysis on environmental projects. There appears to be a consensus among researchers that the main reason why governments and other stakeholders of environmental projects perform CBA on the projects is to determine the economic rationale for implementing the projects in the first place (Feuillette et al. 2016, p. 81). Economic rationale is simply defined as the merits and demerits of implementing a project (Feuillette et al. 2016, p. 83). It is argued that stakeholders of environmental projects are motivated to select and implement projects that they believe will be beneficial in the long run (Feuillette et al. 2016, p. 84). Furthermore, Kuosmanen and Kortelainen (2006, p. 6) observe that environmental cost-benefit analysis is a necessary step of assessing the social and economic implications of the environmental projects that governments launch. Similarly, Harnley and Barbier (2009, p. 2) state that performing CBA helps governments to assess the impact of every dollar that they spend on environmental projects to ensure that they make the most appropriate decisions. Therefore, the main purpose of performing CBA on environmental projects is to assess the socio-economic merits and demerits of the projects. By assessing the social and economic consequences of environmental projects, governments and other stakeholders can make economically sound decisions regarding which projects should be implemented at any given time. Apart from serving the important role of helping decision makers make rational decisions about environmental projects, CBA is regarded as a necessary process that helps to assess and manage environmental risk (Harnley & Barbier 2009, p. 3). The relationship between CBA and environmental risk is a complex one. In the first place, the environment is regarded as an important asset for humanity because of the role that the environment plays in fostering social and economic activities (Dixon 2012, p. 6). The environment is an important supplier of raw materials that are used in industrial and other economic-related processes (Dixon 2012, p. 7). Also, the environment is a significant source of essential resources that sustain human life and activities (Feuillette et al. 2016, p. 84). Moreover, the environment is the sole supplier of many resources and facilities that are used for recreational purposes (Organisation for Economic Cooperation and Development (OECD) 2016, p. 15). Thus, the importance of the environment lies in the fact that it is a key source of resources that are used for social, economic and recreational purposes. According to the OECD (2006, p. 17), the importance of the environment as the sole source of important resources and the threats that the environment faces are the two reasons why there is a need to ensure sustainable use of environmental resources. It is further observed that the environment faces threats from multiple sources, one of them being overexploitation by human beings because of intense economic activity (OECD 2016, p. 18). Also, the natural resources that the human population is dependent on face the possibility of getting exhausted because of the intensity with which they get exploited (OECD 2012, p. 18). Based on the foregoing discussion, decision makers on environmental policies seek to incorporate the concept of environmental sustainability in the policies that they develop and implement. Kuosmanen and Kortelainen (2006, p. 8) provides a clear and more direct link between environmental sustainability and CBA. It is argued that sustainability means that human beings need to use natural resources in ways that do not undermine the ability of future generations to use the resources (Kuosmanen & Kortelainen 2006, p. 9). To achieve this objective, policymakers attempt to address the various concerns of stakeholders in the policies that they develop. Interestingly, CBA provides an effective tool that policymakers can use to identify, assess and evaluate the impacts of environmental policies on societies and other stakeholders (Feuillette et al. 2016, p. 84). Thus, policymakers rely on CBA to make decisions that meet the needs of various stakeholders on the one hand and ensure that the resources of the environment are used in a sustainable manner on the other. Dixon (2012, p. 8) examines the relationship between the use of CBA for projects whose externalities can be easily measured and those whose externalities cannot be easily measured. It is observed that the basis of measuring the impact of environmental projects is on the change in the production of goods and services that the project causes (OECD 2006, p. 18). In other words, it is easy to measure the economic impact of an environmental project by analysing the changes in the prices of goods and services that the project causes. However, certain environmental projects provide peculiar scenarios that make it difficult for economists to measure their economic impact by analysing changes in the prices of goods and services (OECD 2006, p. 17). Thus, for some projects which produce complex externalities, it is difficult to assess their social and economic impacts by using conventional cost-benefit approaches such as change in productivity, market approaches and contingent valuation. Discussion, critical evaluation and personal recommendations Based on the discussion above, several issues related to the significance of CBA for environmental projects can be pointed out. The first one regards the importance of CBA in helping decision-makers develop policies that help the wellbeing of humanity. According to the OECD (2006, p. 18), the costs and benefits of any project are linked to corresponding increases or declines in the levels of wellbeing of humanity. What this implies is that the costs of a project signify a decline in the overall level of wellbeing because of the project. The benefits of a project relate to the various ways in which the project will help increase the overall wellbeing of the people in the society. It is only when the overall benefits of a project to the population exceed the potential costs that the project can be said to be socially and economically sound (OECD 2006, p. 16). Thus, CBA is important for environmental projects because it helps policy developers to choose projects that benefit humanity. Another critical importance of CBA for environmental projects lies in the overall costs that are associated with environmental projects and the need to make decisions that are economically sound. In practice, governments rely on donors to finance many environmental projects (Kuosmanen & Kortelainen 2006, p. 11). Because of the costs associated with environmental projects and the involvement of public and donor funds, decision-makers are obliged to choose projects whose implementation guarantees an attractive return on investment (ROI) (Dixon 2012, p. 13). Thus, CBA is used to help assess the possible ROIs of competing projects and select only those projects that are regarded most viable and whose implementation guarantees value for money. Conclusion From the findings presented in many studies about the subject of CBA analysis for environment-related project decision-making, there is a consensus that CBA is an invaluable part of environmental projects. Many researchers believe that CBA is essential for helping to achieve environmental sustainability. Given that the environment is an important source of resources which are essential for human economic, recreational and other activities, it follows that sustainable use of the environment is necessary. Thus, policymakers rely on CBA to make the right decisions about environmental projects. References Dixon, JA 2012, ‘Economic cost-benefit analysis (CBA) of project environmental impacts and mitigation measures: Implementation guidelines,’ Inter-American Development Bank, Technical Note, no. 428, viewed 9 July 2017, . Feuillette, S, Levrel, H, Boeuf, B, Blanquart, S, Gorin, O, Monaco, G, Penisson, B & Robichon, S 2016, ‘The use of cost–benefit analysis in environmental policies: some issues raised by the Water Framework Directive implementation in France,’ Environmental Science & Policy, no. 57, pp. 79–85, viewed 9 July 2017, . Harnley, N & Barbier, EB 2009, Pricing nature: cost-benefit analysis and environmental policy, Edward Elgar Publishing, London. Kuosmanen, T & Kortelainen, M 2006, ‘Valuing environmental factors in cost-benefit analysis using data development analysis,’ Nota Di Lavoro Paper Series, no. 96, viewed 9 July 2017, . Organization for Economic Cooperation and Development (OECD) 2006, Cost-benefit analysis and the environment: recent developments, OECD, Paris. Read More