Climate change and the re-evaluation of cost-benefit analysis

Abstract

The evaluation of climate policy has emerged as an important application of cost-benefit analysis (CBA). But the tool, as it had been most widely used previously, was not suited for this problem. Spatially, the effects of climate change transcend national boundaries and, temporally, they transcend generational time scales. CBA, in its standard form, relies on assumptions that are not fully appropriate in this context. In this essay, I discuss the shortcomings of CBA framed by its historical development and argue that its relatively recent application to climate change has contributed to growth in the literature re-evaluating its normative foundations. In relation to discounting, recent innovations emphasise aspects such as the aggregation of a multiplicity of time preferences and the distinction between inter-and intra-generational time preferences, which lead to discounting approaches that differ from the standard approach with the Ramsey equation. In relation to spatial equity, much of the recent literature argues for the use of equity weights to account for impacts on different income groups. These are significant changes relative to the orthodoxy in the field before the emergence of climate change.

Coastal Migration due to 21st Century Sea‐Level Rise

“…By using CBA, we do not want to suggest that one should use CBA do make decisions on where to protect or retreat. The limitations of applying CBA are well known and have been discussed extensively in climate change literature (Chambwera et al, 2014;Dennig, 2018;Kunreuther et al, 2014;Markanday et al, 2019) In particular, it is near to impossible to unambiguously monetize the many intangible values constituting the costs and benefits of protection and retreat decisions including migration (Barkin, 1967) or ecosystem services (Turner et al, 2007). And even if this would be possible, other decision criteria beyond benefit-cost-ratios or net present values (NPVs), such as environmental justice theory (Ajibade, 2019), could also be applied.…”

Enabling assessment of distributive justice through models for climate change planning: A review of recent advances and a research agenda

“…The aim of the modeling exercise is then to look for alternative policies that maximize this aggregated utility. For two reasons, utilitarianism is highly influential in assessing public policy (Dennig, 2017; Thaler & Hartmann, 2016): it focuses on the aggregate outcome for everybody, and it is based on the premise of fundamental equality in that everybody counts for one and no more than one in the calculations. The utilitarian calculus is blind to people's standing, status, income, race, and so on; it presumes a similar utility function (i.e., value judgments about welfare changes associated with changes in income [or other indicators]) for all individuals.…”

A Philosopher’s Guide to Discounting

“…This is one of the reasons that modern economics tends towards discussion only in terms of increasing returns in financial terms. Since the advent of positive economics, economists have tended to stay away from such assumptions (Dennig 2018). The relevance for this difference in the context of climate economics is that philosophers focus on pure discounting (which naturally apply to pure units) while neglecting the importance of impure rates which apply to, for instance, consumption discounting.…”