Environmental sustainability and cost - benefit analysis

Efforts to 'operationalize' a concept of sustainability into appraisal methods for practical decisionmaking have been few and generally unpersuasive. In this paper it is argued that this need not be the case if a set of environmentally compensating, or 'shadow', projects within an overall portfolio are used to ensure a sustainability objective of setting a constraint on the depletion and degradation of the stock of natural capital. This can be achieved through both a 'weak' and a 'strong' sustainability criterion. In both cases the resulting optimum differs from the efficient optimum of the conventional cost-benefit criterion, but the basic cost-benefit model remains intact. 1 Introduction The extent to which cost-benefit analysis (CBA) can adequately account for environmental concerns is the subject of an extensive and controversial literature. Views range from the belief that it is a 'matter of time' before CBA succeeds in valuing the most significant environmental effects, to those that deny a pervasive role for the monetary evaluation of environmental gains and losses (Sagoff, 1988). An additional concern arises with respect to the distribution of gains and losses over time. It is widely thought that conventional procedures for discounting discriminate against future generations by (a) rapidly depleting exhaustible resources, (b) 'shifting the burden' of distant costs (for example, nuclear waste disposal) to future generations, and (c) not sanctioning investments with benefits that are subject to long gestation periods (for instance forestry). In this paper we suggest a way of accommodating these concerns without entering the controversial area of the discount rate but with a full assault on the valuation problem. CBA embodies intuitive rationality in that any course of action is judged acceptable if it confers a net advantage, that is, if 'benefits' outweigh 'costs'. What constitutes a gain or loss depends on the objective function chosen. Most CBA operates with a function based on economic efficiency, that is, any increase in total net benefits is desirable irrespective of the distribution of these benefits or the impact of the action on the noneconomic objectives. But this is only one objective function. It is widely used because economic efficiency is embodied in the very structure of the welfare economics developed over the last century. CBA is essentially the operational version of welfare economics. In principle, however, any other objective function can be chosen, or, more profitably, a set of objectives can be chosen. Common parlance has it that CBA …