Valuing Our Future: Cost-benefit Analysis and Sustainability

This paper takes a first step in formulating approaches to cost-benefit analysis consistent with sustainable development. It reviews the foundations of the customary approach to cost-benefit analysis, with emphasis on its discounted utilitarian roots, and proposes alternative foundations which are more satisfactory in two respects: they place more weight on the future, and they incorporate in a more central manner the services provided by stocks of environmental assets. In some cases, projects will not be ranked by their present values, but by a new concept of sustainable netbene...t. These alternative foundations imply that the calculation of shadow prices may be quite different from the customary approach, which has implications for the conduct of cost-benefit analysis. In particular, shadow prices may reflect in part contributions in the far future which are not discounted. These alternative foundations also imply a distinct approach to a closely-related topic, the measurement of national income. Moving to these alternate foundations is likely to be to increase greatly the calculated economic return on conserving long-lived environmental assets, making a fundamental difference to the economic analysis of issues such as global warming, habitat fragmentation and ecosystem preservation.