What is cost-benefit analysis?
What are the main techniques?
How does discounting work?
When can it be applied?
WHAT IS COST-BENEFIT ANALYSIS?
all that matters is utility
rest of the economy is competitively priced
everything comes in discrete marginal bits
distribution does not matter
on utility and ecosystem services, not
natural capital assets
AN ATTEMPT TO:
assumes assets are simply the NPVs of
the ecosystem services
Correct market prices to take full account of externalities
Put prices on non-market goods and services
Calculate the net present values of projects
Trying to elicit valuations by asking people about their preferences
Looking at the capitalisation of valuations in asset prices
Looking at what people do, and inferring valuations
from their choices
WHAT ARE THE MAIN TECHNIQUES?
WILLINGNESS TO PAY vs. TO ACCEPT
• Stated preferences, questionnaires and strategic
• The physiological problems: framing, lack of
• Risk aversion and inconsistency in results
• Taking the pictures from different angles - do the
answers vary a lot?
• Upper and lower bounds with investment
• The Twyford Down example
HEDONIC PRICING AND CAPITALISATION
• All prices (and taxes and subsidies) are capitalised in asset values
• This includes natural capital
• Trying to isolate the particular externality from all the other background conditions
• Example: Noise and Heathrow airport’s expansion
• Working on North Sea oil rigs vs. similar
land based jobs - values risk against higher
• Value of life studies
• Travel time studies - the HS2 example
• Walking, swimming, bird watching and
nature study - how much time multiplied by
wage rates/cost of time
DISCOUNTING THE FUTURE TO GET NPVs
• The conventional approach
• The social time preference rate
• The social opportunity cost
• The pure utility discounting and impartiality
• Example: the Stern Review and climate change
WHEN CAN CBA BE APPLIED?
• General utilitarian approach: only utility is sacred,
everything else can be sacrificed
• The natural capital approach and the aggregate rules
and the thresholds and safe limits
• Calculating enhancement values above the thresholds
and safe limits
• Projects, not systems
• A useful set of tools in limited circumstances, not a
• Still the basis of the Treasury’s Green Book.
State of Natural Capital
• CBA is the main tool used by economists and the Treasury
• The different techniques give different answers
• Role confined to enhancements in a natural capital asset-based