Summary

In this chapter we explain why one needs to evaluate environmental costs and benefits. Cost–benefit analysis (CBA) is necessary for many choices relating to public policy, especially in the field of environmental protection, to avoid costly mistakes. Even when other, non-monetary criteria must also be taken into account, a CBA should be carried out whenever appropriate. Without a monetary evaluation of damage costs one can only do a cost-effectiveness analysis, as illustrated in Section 1.3. In Section 1.4 we explain how to determine the optimal level of pollution abatement, as a simple example of the use of a CBA. Impact pathway analysis (IPA), the methodology for quantifying damage costs or environmental benefits, is sketched in Section 1.5. The internalization of external costs is addressed in Section 1.6.

Why quantify environmental benefits?

The answer emerges through asking another question: “how else can we decide how much to spend to protect the environment?” The simple demand for “zero pollution” sometimes made by well-meaning but naïve environmentalists is totally unrealistic: our economy would be paralyzed because the technologies for perfectly clean production do not exist.

In the past, most decisions about environmental policy were made without quantifying the benefits. During the 1960s and 1970s increasing pollution and growing prosperity led to increased demand for cleaner air, and at the same time there was sufficient technological progress in the development of equipment such as flue gas desulfurization to allow cleanup without prohibitive costs. The demand for cleanup became overwhelming and environmental regulations were imposed with no cost– benefit analysis.