We saw in Chapter 21 that cost-benefit analysis (CBA) is a technique used to assess whether a project is “worth it” from an efficiency perspective. As the name implies, a critical step in cost-benefit analysis is the estimation of the economic costs and benefits of the proposed action. In this chapter, we continue our discussion of CBA for environmental policy by focusing on two estimation-related topics: benefits transfer, and the empirical characterization of abatement cost functions.

We have noted that the benefits of environmental policy outcomes are usually non-market, meaning the methods presented in Part III of this book are critical inputs for executing at least part of an environmental cost-benefit analysis. In the context of an original study, however, non-market valuation methods require a non-trivial commitment of resources and often the skills of a specialist. This observation often presents policy analysts with a two-fold dilemma. First, in some instances deadlines and institutional constraints make execution of an original valuation study in support of a specific policy analysis infeasible. Second, many decisions – particularly those taken at more localized levels – are too limited in scope to justify expenditure on original research. In these cases, practitioners of CBA need some method of assessing non-market benefits without resorting to an original study. That is, the benefits of the proposed policy need to be measured using previous studies and secondary sources of information. The art and science of doing this is known in environmental economics as “benefits transfer.”

In contrast to benefits, it is often thought that the costs of environmental policy are relatively straightforward to estimate. For example, observation of accounting records on what regulated entities spend to comply with a policy should provide the data needed to tally the cost side of cost-benefit analysis. While this may be a useful first step, our discussion in Chapter 5 demonstrated that abatement cost, when properly viewed as the opportunity cost of reducing emissions, is a broader concept than firms’ compliance costs. Thus far in the book, however, we have said little about how to translate the conceptual aspects of abatement cost functions into empirical strategies for measuring the costs of environmental policies.