COST-BENEFIT ANALYSIS: A TOOL IN DECISION-MAKING FOR SOUND ENVIRONMENT CONSERVATION IN UGANDA ?

 

By

F.C. OWEYEGHA- AFUNADUULA

Website: http://www.afuna.org or http://www.afuna.o-f.com

Email:afunaduula2000@yahoo.co.uk or afunaduula@afuna.org

Tel: +256 78 555 222 or +256 71 845461

 

 

Introduction

 

Many decisions in environmental policy concern non-priceable goods and services such as air quality and water quality. Therefore, there is a problem of measuring costs and benefits under such circumstances.

Environmental planning and management is about devising strategies and policies in and for environment. It may be sound or unsound strategies and policies. The former are assumed to be for and the latter to be against sustainability.

Environmental planning and management for sustainability has recently assumed centre stage in public decision and policy-making.

Many public activities that are not concerned with environmental management have important environmental consequences. They include such human activities as reservoir irrigation schemes, hydroelectric power stations and dams, and production activities (Ahmed and Sammy, 1985). These need to be evaluated and their environmental impacts must be accounted for in public decision or decision-making in order to achieve sound management of the environment.

National policy for the environment, therefore, should be geared towards ensuring that decision-making or public policy blueprints are, in the end, those which can be effective in ameliorating environmental impacts of human activities while, at the same time, aiming at achieving the sustainability of the environment, now and in future.

Present decisions affect future generations. The problem is that it is difficult to know what the preferences of future generations will be. There is no way to measure the costs and benefits pertaining to future generations. Decisions covering the future have to be based on the preferences of the present generation only. The unknown future is a limitation to all decision-making.

Environmental impact assessment (EIA) is a tool that has been innovated to aid environmental decision-making and policy formulation. However, without Cost-Benefit Analysis (CBA), which must immediately follow the environmental impact assessment of human activities, EIA is useless.

CBA has become, not only a fundamental process in the formulation of environmental policy, but is also an important application in evaluation of public projects.

The objective of any CBA is to allocate resources in such a way as to maximize human welfare.

Its limitation, however, is that it cannot establish costs and benefits of future generations.

This paper examines in detail the role and application of CBA in decision-making for sound environmental management. It is suggested that CBA education be part of a curriculum of instruction, not only for environmental economics, but also environmental education, environmental science, environmental planning, environmental management and conservation biology, even if the unknown future is a limitation to all decision making in general and CBA-guided decision-making in particular.

 

The development process

 

The concept of development has changed its meaning over the years. In this era of environmentalism, there is general agreement that the process of development should be geared towards multiple goals including:

Satisfying basic human needs, such as health and education;

Social and popular participation and control of production processes by the local people for self-reliance, local responsibility and local sovereignty; and

Ecological soundness of projects whereby there is harmony between environment and development.

There is also general agreement that the yardstick for measuring the development process should be whether the inequalities in rural societies and between rural and urban sectors are decreasing; whether participation of the poor, particularly the poorest of the poor, in the development process, is increasing; and whether the ecological soundness of the development process is increasing.

In line with this environmental and ecological thinking, it has been suggested that an ecological framework of dealing with development issues both in the rural and urban areas, is needed.

The objectives of such an ecological framework have often been stated as:

Considering trends of evolution of environments;

Focusing attention of planners and decision-makers on the major changes accompanying human use of the ecosystems and/or environments, and broadening their awareness about the complex web of management problems resulting from these uses;

Providing insights to scientists about the new ecological approaches to problem-oriented research on complex land use problems;

Analysing management options for sustained use of available resources; and

Stressing the need for scientific understanding of environmental problems and both multidisciplinary and interdisciplinary approaches and integrated planning for their rational management.

The overall objective is long term environmentally-oriented development programmes and/or projects

 

Constraint of Data and Expertise Scarcity

 

Unfortunately, paucity of data and expertise for, in and about the environment continues to bedevil many countries, particularly the poorest, in all efforts to address issues of environmental quality. In Uganda , for example, there is a critical shortage of trained experts to do the work of predicting changes in environmental quality, which would result from a programme or project. Although Makerere University has since 1987 been training Ugandans in Environmental science, there has been an overemphasis of biological and natural science aspects. Multidisciplinary and interdisciplinary teaching and research have been virtually absent so that the products of the course have been inadequate in confronting multidimensional environmental problems that do not respect disciplinary boundaries. It is only recently that courses that aim to overcome this weakness in University education in, about and for the environment have been launched. For example, the Department of Political Science and Public Administration in the Faculty of Social Sciences and the Department of Social Work and Social Administration (SWSA) in the same Faculty now run Masters Programmes in Environmental Management and Environmental Planning and Management respectively. The latter course is particularly interdisciplinary. It is hoped that within a few years the country will be armed with the kind of environmental cadres that will be able to provide the necessary data and expertise to deal with the complex web of environmental problems challenging Ugandans towards the 21st Century and beyond. With relevant data and expertise, it will be possible also to come up with national policies for the environment, that will be achievable, specific, flexible and responsive to the social and cultural norms of the local people instead of simply translocating policies from elsewhere and trying to adopt and adapt them to environmental situations to which they were not meant to apply.

 

Environmental Management - A Resource Allocation Problem

 

Environmental management or the management or the natural environment is part of the general problem of allocating the economy's resources between competing ends. The competing ends may be war and human settlements; scenic value and tourism or forestry and agriculture.

Environmental policy, therefore, should provide a set of operational objectives and measures in environmental management by which the overall efficiency objective can be met; that is the removal of inefficiencies in allocation of environmental goods and services (Ahamed and Sammy, 1985)

The efficient provision of goods and services is the one important aspect of environmental policy. Many goods and services rendered by the environment are public goods - such as water quality and air quality. Everyone consumes the same level of quality. Moreover one cannot be excluded from it if one refuses to pay for it. The public good is supplied in the same quantity to everyone. Therefore, one cannot unilaterally adjust own consumption. Common property resources include the atmosphere, the sea, publicly managed areas, etc. Just like other public goods, they too pose problems in resource allocation.

The allocation of resources depends on the decisions taken. Once decisions are taken, it becomes necessary to identify the allocative inefficiencies and to think through the potential remedies or policy options. This implies that policy actions are rarely costless. Therefore, it is extremely important that the gains or benefits of less inefficiency are weighed against the costs of the policy measures taken or proposed. It is in situations like these that Cost Benefit Analysis (CBA) is necessary.

In fact, CBA is a very fundamental tool to the formulation of environmental policy, evaluation of policy and evaluation of public projects and/or development programmes.

At all times, therefore, public authorities should aim at the efficient allocation of resources, (goods and services), particularly the efficient use of natural resources. In order to assist in this regard, the concept of ‘Pareto Efficiency' (PE) has been innovated as a criterion even if there are very substantial inefficiencies in the economy. PE helps in the identification of desirable projects or policy actions.

Allocation of resources in the economy is efficient in the sense that it is not possible to increase the welfare of any citizen without increasing the welfare of someone else. This is what Pareto Efficiency is all about and this is Pareto Efficiency or Pareto Criterion (PC).

The standard Pareto Criterion states: ‘If at least someone gains and nobody loses from a change , then the change is considered beneficial.' The reverse is not true.

What is normally done is that the decision-maker is presented with a list of welfare impacts for all affected individuals or groups of individuals. The decision-maker weighs the individual welfare impacts against each other to arrive at a decision.

If the decision-makers preferences concerning the welfare distribution are known, then we could obtain weights for individuals from it and use these to obtain a weighted sum of welfare impacts. If the net welfare impact was a gain, the change would be considered beneficial. This is consistent with the PC if the preference ordering satisfies the condition ‘If an individuals welfare increases, while all others' is kept constant, then this is preferred to that where anyone's welfare remains constant.'

Public authorities also have a direct impact on the use of the natural environment through their many decisions in matters not directly concerned with the policy-making for allocative efficiency, such as Hydroelectric power stations, dams, exploitation of minerals and creation of national parks.

 

CBA, Project Design and Environmental Decision-Making

 

So far CBA has been mentioned in passing. CBA as applied to environmental considerations can be useful in two policy areas: i) appraising projects or policies for environmental protection or preservation; ii) appraisal and design of projects whose primary objectives are not environmental but which nevertheless may have significant environmental repercussions.

As far as environmental protection in concerned, CBA and its derivatives - Risk Benefit Analysis (RBA) and Cost Effective Analysis (CEA) - can be used but with caution. In framing environmental legislation or policy, results of past CBA case studies can provide critical addition information when setting environmental standards or to indicate those areas where scarce resources available for environmental protection may be directed. Also, when appraising specific environmental protection projects, CBA can always provide a useful framework for the consideration of the issues involved and may often help resolve decision-making difficulties by significantly reducing the dimensions of the problem.

At all times, the task facing the decision-maker is to design or choose between projects whose primary objective is not environmental protection and/or improvement, but which could have potentially important environmental repercussions. CBA is an important tool in this.

In the past, projects have been designed with scant or no regard for their environmental implications. However, there is now growing awareness that failure to provide safeguards for the environment can lead to striking adverse social, ecological and even political consequences. This has prompted governments in many parts of the world to submit development project proposals to some form of environmental review. The CBA technique is used to justify projects, using the language of economics to design and formulate project outlines in an attempt to design projects rationally.

The thinking is that if the environmental effects of a project can be incorporated into the whole procedure of CBA at the very beginning, then the result is likely to be a project in which both economic and environmental objectives are in closer harmony, and the overall benefits are maximised (Ahmed and Sammy, 1985).

There may be no major objections to a project on environmental additional expenditure, along with certain changes in project design, significant environmental gains could be made.

An awareness of the environmental problems at hand and a willingness to include them in the CBA process, enables the decision-maker, with the technical expertise of an analyst, to identify a project design that is socially superior. This would tend to increase the overall benefits of the projects socially and environmentally.

Whether the effects will depend entirely on the nature of the project. What CBA does is to concentrate on the effects of different policy options on human welfare. This is why any EIA can only be useful if it includes a CBA. CBA will also quantify estimates of the effects of the environmental indicators on receptors such as humans, animals, vegetation, buildings etc. that may affect human welfare.

Figure 60 shows the linkages between human activities upon or in the environment, their effects and economic valuation.

 

Figure 60. Linkages Between Human Activities, Effects and Economic Evaluation

 

Before specification and quantification of environmental effects is done EIA should have addressed the following questions in its first stages for each policy or action option:

What activities will be involved in the development of the proposed project?

What are the major phases of the project?

What will be the impacts of those activities on all the significant environmental parameters?

What are the dynamics of the significant environmental impacts?

What degree of uncertainty is attached to the predicted impacts?

In every stage where these questions are raised, the impact analyst estimates the impacts of the changes in the environmental indicators upon the receptors of interest.

Hufschmidt and Dixon (1983), in their paper ‘quantifying the consequences of human activities on natural systems', have stressed that only after the physical effects of human activities are quantified can the CBA valuation techniques be applied.

Figure 61 shows the relationship between formulating environmental quality management measures and valuating economic costs of the measures of management (see also Hufschmidt and Dixton, 1983, quoted in Ahmed and Sammy, 1985).

 

 

 

Figure 61

 

The CBA Process in Practice

 

In his paper ‘Environmental Decision-making: an introduction to its theory, its problems and uses in practice', Aeron Thomas (1983 quoted in Ahmed and Sammy, 1985) has stated that generally it is possible to identify numerous alternatives or courses of action. However, the difficulty is to limit the set of decision alternatives to keep the decision problems manageable and yet formulate them so that most relevant options are actually covered (Aeron Thomas, 1983).

In CBA, formulation of the decision alternatives is an important phase and may become intertwined with the evaluation process itself (Aeron Thomas, 1983). The core of a decision problem is that all feasible alternatives cannot be adopted. Some must be rejected not because they are inapplicable but because the resources are limited.

Figure 62 shows the usual progression in the CBA process. Seven steps are involved but the first two and the last one are not really part of the CBA (evaluation) process.

 

 

Figure 62. The CBA Process In Practice

 

Defining Objectives

 

Here, the initial clarification of objectives that are to be given emphasis in the CBA process is made. The step is important because it is a great aid in the formulation of and choice between options.

 

Consideration of Options

 

With defined objectives, this step follows, whereby a range of technically managerially and politically feasible options are chosen so that they can be compared with the no-action or limited action alternative can be made. It is during this stage that a comparison of a range of alternatives is done. It is very important that this is done so that well-defined alternatives are spelt out.

 

Specification of Effects (Costs and Benefits)

 

This step marks the beginnings of the actual CBA process. With well-defined alternative options, the effects of each option (either benefits of costs) must be systematically specified.

The procedure is usually to classify the diverse effects into two categories: Non-Environmental Effects (NEE) and Environmental Effects (EE)

 

Non-Environmental Effects: How Specification Proceeds

 

These are easy to predict because they are relatively straight forward, although they require enormous effort to do so.

Resource requirements for each option are estimated from technical specifications, for example in terms of land, labour, capital equipment, etc. This is done for each year of project duration.

For purpose of evaluation, however, these categories will have to be disaggregated (i.e., separated). How much disaggregation is done will depend on a number of factors (variables), including size of the project and the number of options being simultaneously considered at the stage of the analysis.

From the same technical specifications, the analyst will be able to predict within certain bounds, the probable level of the non-environmental outputs for any given level of inputs.

 

Environmental Effects: How Specification Proceeds

 

Specification of environmental effects is problematic but essential. Whether the effects are costs or benefits depends on the nature of the project being evaluated. The effects are revealed or charted by EIA. However, it is important to know that although EIA is a necessary prerequisite to the CBA, not all methods of performing EIA are suitable for use in CBA.

CBA concentrates on the effects of different policy options and on human welfare. This, therefore, implies that an EIA that examines only what happens to environmental indicators may be of very limited value in CBA. IT is necessary that a quantitative estimate of the effects of the environmental effects on scenery receptors, such as humans, animals, wildlife, vegetation, buildings, industry, agriculture, etc., which may affect human welfare, is made.

There are often problems in arriving at a fully satisfactory quantification of all the effects on receptors, even if all the effects in the environmental quality indicators were known with certainty. However, with care and ingenuity, some form of quantification could be possible. This will be of substantive use to the cost-benefit analyst and decision-maker.

For a project whose primary objective is non-environmental, valuation procedures for standard inputs and outputs of the project are straightforward: Market prices are used. This is also the case with a project whose inputs (and perhaps secondary outputs) are environmentally oriented. Where, however, inputs and outputs are thought to reflect true resource scarcity, valuation procedures use what are called ‘shadow' or ‘accounting' prices.

Valuation of environmental impacts, like the specification of environmental effects, is problematic. An environmental protection measure, for example, may be a project in its own right or it may be part of a larger project with other objectives altogether. If the impact is environmental degradation, the valuation uses the same methods as for protection valuation.

Benefits arising out of protection would be of two kinds:

those affecting marketed goods; and

those affecting non-marketed goods.

Where benefits affect marketed goods, protection measures that prevent environmental damage are seen as conferring benefits corresponding to production. The usual method of placing a monetary value on the benefits of avoided damage in the sphere is simply to estimate the increase in the market value of production. However, shadow prices would be more appropriate if a product is exported or an import substitute or foreign exchange is valued more highly than the official exchange rate indicates. Mean while the debate continues as to what should be used: market or shadow prices?

Where benefits affect unmarketed goods, such benefits accrue from avoided damage. They are associated with improved environmental amenities such as unspoiled views, clean air, clean water, etc. These amenities are generally not bought or sold, but are free to those who want to use them. Therefore, no market prices for them do exist. However, in order to facilitate calculations and comparison with other costs and benefits of the activity or project, some monetary value or shadow price has to be attached.

Whether the best solution is for the analyst to estimate a value to be placed on environmental amenities or for the decision-maker to use his discretion to put an implicit value upon them will depend on:

the nature of the decision;

the availability of relatively reliable data.

If an analyst is to assign a value, then the best way is to work with framework of CBA to estimate people's willingness to pay for amenities. However, discovering the valuation an individual attaches to avoided damage in terms of willingness to pay is a difficult matter. People can give wrong values and/or overstate their preferences if the cost is to be met by public funds.

 

Evaluating the costs and Benefits

 

Any calculation of environmental costs and benefits is conditional upon what we know about the environmental consequences. As noted earlier, what we know about these consequences comes from EIA.

For a public project, the calculation of costs and benefits must start with a list of the claims on the natural environment that the project entails, given a list of claims on the environment, the next step is to determine the environmental effects of these claims (i.e., EIA). It is then that determination of the types of costs and benefits associated with them (i.e., CBA) starts.

The CBA will be as thorough as the EIA allows it to be. CBA will only be applicable and must be assigned to assessable environmental effects. What it does is to provide additional relevant information concerning the types of costs and benefits associated with estimated environmental effects and their relative importance if a monetary estimate of them is feasible.

Given the environmental effects, the starting point of the CBA is to identify types of costs and benefits involved and estimate them in physical terms (i.e., effects on environmental health, effects on materials and effects on natural resources).

Nevertheless, even if we have a fairly good picture of the environmental effects associated with a project, it can be difficult to identify the various types of costs and benefits associated with them.

It can also be difficult to obtain quantitative physical estimates of those costs one can identify (e.g., health effects) because of limited knowledge. Therefore, CBA can only be confined to a subset of all the relevant environmental subset. It is not possible to get a full monetary measure of all environmental impacts identified.

Aeron Thomas (1983) has given the measures commonly used to determine the overall desirability of a project in terms of costs and benefits. These are: i) Net Present Value (NPV); ii) Benefit/Cost Ration (B/C Ration); and iii)Economic Rate of Return (ERR).

If we consider a 3 year project, Benefits in Year 0 = B 0 ; Costs in Year 0 = C 0 ; Benefits in Year 1 = B 1 ; Costs in Year 1 = C 1 ; Benefits in Year 2 = B 2 ; Costs in Year 2 = C 2 .

Then,

 

Where r = Social rate of return.

 

 

More Neatly,

or for a project of n years,

 

 

 

 

 

This is the rate at which NPV of the project is 0.

For various theoretical reasons, NPV is the more reliable guide to project selection.

Even if it is not possible to get full monetary measures of costs and benefits of a project, partial monetary estimates are possible and may still be useful. It may be possible to arrive at a lower bound of the environmental costs involved in a project. This may be sufficient. If the lower bound is high enough to outweigh the benefits, it is clear that the project should be rejected and we do not have to bother about the unmeasured part of the costs.

It will only be in exceptional cases that use of CBA, aided by other methodological tools and analytical devices, will be unable to marshal data in a manner useful for decision-making.

Mulugata (1982) introduced an equation called ‘Mulugata equation', as a guide to monetary CBA. The equation is given below:

 

Where,

Ai= Operating expenses

Aj=Additional national economic expenditure through environmental degradation or cost of rehabilitation of the environment.

Ei=Gain from the project

Ej=National economic benefit due to the rehabilitation of the environment

Therefore any project should always be evaluated not only to reveal social benefits and costs, but also monetary benefits and costs. CBA equations can be used for this.

 

Comparing Costs and Benefits and Discounting

 

This step involves having a set of physical flow-tables that delineate inputs, outputs and environmental impacts of each project option for each year of operation of the project. It also involves having a set of values for each input, output and environmental impact in terms of consumer willingness to copy or of the opportunity costs for each year of project. The two sets of information can then be easily combined. The result is an indication of whether the particular project option results in a net social benefit or net social cost for each year of its duration. However, what is needed is an estimate of the overall value of the project to society. Therefore, it should be possible to compare the costs and benefits that occur in different years during the lifespan of the project.

The challenge and goal of analysing benefits and cots of a project is to weigh future welfare of society from current welfare. The method used to do this is called DISCOUNTING.

If society is thought likely to consume more in future, than an extra unit of consumption will probably be valued less than it is currently. Consequently weights of declining magnitude are attached to both costs and benefits that will occur further and further in the future. This is discounting. The choice of the rate at which future costs and benefits are discounted is of critical importance. The higher the rate of discounting, the less are future costs and benefits valued. However, the social rate of discount is a value judgement and must be elicited from the past choices of decision-makers.

Using the discount rate, the cost-benefit analyst can calculate the project's net present value (NPV), its benefit/cost ratio (B/C) or its economic rate of return (ERR). all these can provide satisfactory measures of a project's economic desirability when the costs and benefits of the project can be satisfactorily calculated.

CBA calculations may not be possible for all costs and benefits. However, this does not negate the value of using CBA in consideration of problems containing an environmental element.

The more significant those costs and benefits which cannot be evaluated, the larger the value judgement required of the decision-maker. However, in these circumstances an explicit or implicit value judgement by decision-makers will be unavoidable. This should not make CBA be dismissed as useless.

Even in extreme circumstances where none of the benefits of an environmental protection project can be calculated, the CBA approach can still be used. However, such analysis is called ‘Cost Effective Analysis (CEA) instead. The use of CEA emphasises the minimum resources that will have to be sacrificed to gain the given level of environmental protection and/or improvement.

Depending on the number of options under consideration, once the costs and benefits have been compared, the next course of action will be either to discard those that look less promising and then refine the analysis or to move on to the decision. Consultation with the decision-maker is absolutely important.

Before the topic of discounting is left, it is perhaps necessary to say something about how the discount rate is chosen.

Economists prefer discounting future costs and benefits. However, there are particular problems in justifying environmental protection projects the costs of which tend to be in the present, whereas the benefits tend to be in the sometimes distant future.

Ecologists. however. argue that a lower rate of discount should be used for environmental benefits. At first glance, the approach may seem appealing because it is uncomfortable to think of the environment being destroyed because of the dictates of theoretical bias.

The problem is not one that should be solved by using different discount rates for different costs and benefits. the problem often lies in the failure to put a high enough value on environmental benefits in the future. It has been suggested that a sensitivity analysis (SA) can be used to test this assertion.

If those who make a welfare gain could completely compensate those who make welfare losses, by some income transfer and still make a welfare gain after the compensation deductions, then the PC would be satisfied if indeed compensation is carried out.

 

Elimination of Less Desirable Options

 

This step eliminates the options that are less desirable. It depends on (i) the nature of the project; ii) How will the objectives of the project are defined; and iii) the number of technically feasible alternatives for each component of the project.

If the objective of a project is very well defined and the available technology limits the options to one or two alternatives other than of ‘no action', then the analysis takes off at a relatively sophisticated level. The decision may be reached fairly quickly.

When dealing with projects whose objectives are rather broader and perhaps less amenable to precise definition, or which contain a number of components that are independent, in a technical sense, of the rest of the project, then a detailed examination of each potential option will be impossible.

Increasing the level of sophistication in the analysis can gradually reduce the number of options. As the level of research and detail increases, the main option will emerge. In these circumstances, the CBA process can be thought of as a closed loop from which a final decision will eventually emerge after frequent consultations with the decision-maker.

 

Deciding

 

With consultation with the decision-maker, the CBA expert will by this step have isolated and evaluated the option(s) that is/are likely to come closest to attaining the stated objective of the project while making a socially efficient use of the environmental and non-environmental resources.

However, there will still remain areas that CBA is not equipped to deal with implicitly for either ethical or technical reasons. In fact the full range of benefits of an environmental protection project may not be captured by the CBA.

If the benefits that can be captured by the CBA do not by themselves justify the project, then it must be the value judgement of the decision-maker that will settle the issue. Where income distribution considerations will be the ones to determine whether to go ahead with a project or not, using labour intensive technology, this must be an ethical judgement. What analysts try to do in this case is to ensure that the ultimate choice is consistent with past choices where similar value judgements were implicitly made.

It must be stated that CBA, useful as it is, in some circumstances fails to come to a concrete conclusion. This is not a discredit to CBA. CBA is not to be taken as a problem-proof technique that is 100% effective. Its role is simply to act as an aid to decision-making; not as a substitute for the decision-maker.

 

Problems in Applying CBA

 

There are many problems in applying CBA. Many of the problems arise, in part, from CBA's attempts to deal explicitly with complicated ethical or technical difficulties. These are not even addressed by other techniques. The problems cause complications, but in a sense are one of CBA's advantages in that the issues involved would otherwise be completely by-passed.

 

The problems are many and diverse and include the following:

 

Inadequate data

 

CBA can only be as good as the data on which it is based; that is, as good as the EIA of the project. Application of CBA will at last give a coherent framework for the analysis of these elements of the project that are quantifiable. It will also give the decision-maker a good idea of what the environmental damage is to be weighted against.

 

Valuation Problems

 

Many reasons exist why, in some circumstances, estimation of the valuation of individuals put in certain environmental costs and benefits is either impossible or dubious:

There may be a way of establishing such things as the ‘value of life'. Moreover, it is also difficult for people to value particular dangers to health or amenity before damages are present;

The use of ‘revealed preferences' measures presents tricky practical problems. The question is whether such measures are of any value in societies where many of the relevant values are not reflected in the market. For example, housing market is absent in rural areas in Africa .

Most crucial, many environmental impacts appear or build up only in the longrun. Moreover, future willingness to pay is exceedingly difficult to measure. Yet future valuations are necessary, still, for today's project appraisals.

‘Willingness to pay' in monetary terms varies with a person's level of income.

Even if an environmental hazard is a danger to life itself, a very poor person might indicate a low subjective willingness to pay to avoid it.

Individual pacing or valuation of environmental damages depends on having complete and proper information about effects. This is not always the case.

With such an array of problems the CBA expert will have to specify prominently the assumptions that he is making in his evaluation.

For the benefit of the decision-maker, the CBA expert should perform a ‘sensitivity analysis' on the key variables to highlight the effect of changing his assumptions on the overall viability of the project component under consideration.

 

Avoiding Double Counting

 

There is always the problem of double counting. All CBA's, in order to be useful, must avoid double counting. This is a particularly important consideration with respect to environmental analysis since many values are so often used in the valuation of costs and benefits.

For example, increased agricultural conditions will be reflected in increased production and increased land prices. However, only one of these increases in value should be used as a measure of benefits (since increase in the productivity of land will be reflected in higher land values). Using both values would be repetitive.

 

CBA, Risk, Uncertainty and Environmental Policy

 

Risk and uncertainty feature prominently in the evaluation of environmental decisions. They are, therefore, very important in public policy. In fact, there are few areas in public policy where risk and uncertainty are more significant than in environmental policy.

Where an EIA is thorough, it will be possible for a judgement to be made about the relevant probabilities of the different possible outcomes of an environmental policy instrument. If estimates of the costs and benefits associated with the outcomes can be made with a reasonable degree of reliability, then the problem of uncertainty can be resolved by recourse to the various decision-making tools developed for use in such circumstances. For example, on the basis of such information, it is possible to calculate the ‘expected net present value (ENPV).

Standard literature on CBA indicates that in most instances governmental treatment of risky projects should be based simply on eNPV, with the presence of risk having no impact on the decision. The rationale for this approach is given by Arrow and Lind (1970). They showed when individual behaviour clearly indicates an aversion against risk.

The rationale for the eNPV approach is based on the idea that cost of risk disappears if the risks are shared among enough individuals (e.g., as is common with public projects. However, Fisher (1973) argued that because of the public nature of the goods provided by the environment, the risks cannot be shared in the way that is possible in many projects and that governmental decisions should, like private decisions, display an aversion against risk.

Unfortunately, in many circumstances it will simply be impossible to calculate the probabilities (due to inadequate information) or evaluate the associated costs and benefits with any degree of reliability.

Where probabilities cannot be specified, decision theory is full of unresolved technical problems. There is actually no fully satisfactory way of dealing with them. As a way out, the so called ‘Minimax Risk Principle' (MRP) has been proposed to deal with the problem.

MRP directs the decision-maker to determine the maximal risks associated with each course of action and to choose that which has the lowest maximum risk.

When valuation of associated costs and benefits cannot be made with sufficient reliability, and this is true for long-term projects, decision-making is even more difficult. However, there is general agreement that in such circumstances, attempts to assign monetary values to the different outcomes should not be carried too far.

 

Conclusions

 

Many decisions in environmental policy concern non-priceable goods and services. Individuals' preferences are the fundamental criterion in judging different states of the economy.

Costs and benefits associated with the various decision alternatives cannot be measured until we have specified what these costs are.

CBA as applied to environmental considerations can be useful in two public policy areas:

Appraising projects or policies for environmental protection or preservation; and

appraising and designing projects whose primary objectives are not environmental, but nevertheless may have significant environmental repercussions.

CBA will be as thorough as the EIA allows it to be, but it has to be confined to assessable environmental effects. However, CBA, in some circumstances, fails to come to a concrete conclusion. This is not a discredit. CBA still remains an aid to decision-making and not a substitute for the decision-maker.

Present decisions affect future generations. However, it remains difficult to know what the preferences of future generations will be. A CBA pertaining to future generations is impossible. Decisions covering the future have to be based on the preferences of the present generation only. Therefore, the unknown future is a limitation to all decision-making, and of CBA for environmental decision-making. All the same, future generations should not be ignored in social decision-making, whatever the problems of CBA.