Despite challenges, cost-benefit analysis can serve as an effective tool worldwide.
Cost-benefit analysis, while embraced by both political parties over the course of the past three decades, is still feared by many progressives in the United States. But as environmental concerns have spread around the world, this tool is lighting a path in many developing countries toward a new generation of environmental policies to protect public health, climate stability, and natural resources. This new role for cost-benefit analysis challenges the sometimes stale and suffocating way in which discussions over cost-benefit analysis are often framed here at home.
Over the course of the next several decades, an increasing share of global economic productivity will come from the developing world, as massive powerhouses like China, India, and Brazil, and smaller but dynamic economies like South Korea and Chile continue to grow. But, of course, pollution problems follow quickly on the heels of rapid industrialization, as China’s recent extreme air pollution numbers highlight. It is also well known that, to address the problem of climate change, countries like India and China must control their emissions. To help strike an informed balance between environmental protection and other competing priorities, developing nations are starting to turn to cost-benefit analysis.
In my recent book edited with Richard Revesz, The Globalization of Cost-Benefit Analysis in Environmental Policy, contributing authors from countries as diverse as Indonesia, Liberia, and Mexico examine how economic analysis is being deployed to help justify stronger levels of environmental protection. We found that cost-benefit analysis is being used to make the case for environmental protection across the globe on everything from biodiversity loss due to road-building in the Amazon, to the educational benefits of recycling grey water in rural schools in India, and to air quality improvements from low-sulfur gas in Mexico.
This shouldn’t come as a major surprise to those familiar with environmental economics. The first units of environmental protection are often the cheapest, and they also deliver the greatest benefits. Grasping the low hanging fruit is always easy to defend in economic terms. It is only in the more advanced economies, which have worked their way up the cost curve, that protections become harder to justify. But even in the United States, with our relatively more stringent environmental policies, a recent rule by the Obama administration to reduce mercury pollution from power plants will deliver up to $8 in health benefits for every $1 of financial costs. In developing countries, where pollution problems are more severe and less costly solutions are available, the returns will often be even greater.
This does not mean that cost-benefit analysis is uncontroversial, or that it can always be applied easily in the context of developing countries. In the United States, we have substantial resources to devote to analysis; it is not a major challenge to throw dozens of economists, engineers, lawyers, and scientists at difficult regulatory problems. Many developing countries are hard-pressed to find the resources necessary to carry out even basic cost-benefit analysis. And when environmental problems are especially urgent or problematic, the delay associated with analysis can come at a heavy cost.
In addition, methodological challenges arise when analytic tools are applied outside the advanced economies in which they arose. For example, distributional issues are typically not addressed in cost-benefit analysis, with the assumption that the tax-and-transfer system is the most efficient mechanism to achieve society’s egalitarian goals. But some countries lack effective means to address inequality through the tax system, and to avoid causing unnecessary suffering to the world’s least well-off populations extreme poverty it may be necessary for policies or projects to be designed directly with distribution in mind.
Further challenges include how to incorporate factors like foreign investment, employment, and economic growth into cost-benefit analysis. The tradition has, again, been to leave these issues to the side, assuming that macroeconomic policy is the most efficient means to address them. But, in countries with less government capacity, and more exposure to the prevailing global economic winds, a more capacious version of cost-benefit analysis may be necessary.
These challenges have not stopped committed analysts, activists, and public servants from using cost-benefit analysis in many countries around the world. As this global expansion continues, experiences outside the United States can also help inform how we continue to use this important tool here at home.