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Cost assessment is an input into one or more of the rules for decision making, which are discussed in more detail in Chapter 10 of this report. Economic approaches to decision making include cost–benefit analysis, and cost-effectiveness analysis, and these approaches can be supplemented with multi-attribute analysis that facilitates an integrated assessment of economic impacts and other quantitative and non-quantitative information. These approaches are briefly described in Box 7.1.
It should be recognized that some types of impacts can be measured in both monetary terms and physical terms. This applies, for example, to changes in air pollution as a result of the reductions in GHGs.
There is a major difference between the economic approaches and multi-attribute analysis in how the various dimensions of the assessment are summarized. The economic approaches seek to provide aggregates to single measures based on an economic welfare evaluation, while multi-attribute analysis does not provide an aggregation of the different dimensions of the analysis.
| Box 7.1. Decision-making Approaches
Cost–benefit analysis Cost-effectiveness analysis Multi-attribute analysis |
The underlying objective behind any cost assessment is to measure the change in human welfare generated as the result of a reallocation or change in use of resources. This implies the existence of a function in which welfare or “utility” depends on various factors such as the amounts of goods and services that the individual can access, different aspects of the individual’s physical and spiritual environment, and his or her rights and liberties. Constructing a “utility function”, representing social welfare, that is an aggregate measure of all such impacts for all individuals involves a number of complexities and controversial equity issues that have been intensively studied by economists (see, for example, Blackorby and Donaldson, 1988). However, the sum of the individual WTPs and WTAs can be taken as a measure of the social welfare, which finesses these difficulties to a considerable extent. There remain, however, issues that cannot be fully addressed in this WTP–WTA framework, most important of which are equity and sustainability.
The above analysis of welfare focuses on the narrowly economic dimension. Even within this framework there are complexities that make a full assessment difficult. In addition, however, issues of DES need to be taken into account.1
A key question in broadening the analysis of costs to cover these dimensions is whether they can be measured in the same units as the costs (i.e., in money). The authors take the view that the methods to “convert” some of these other dimensions into monetary terms are useful and should be pursued. These are discussed further in Section 7.2.3. At the same time, there is some controversy about the measurement of equity, of environmental impacts and sustainability in monetary terms, as, for example, in the discussion on social cost-benefit analysis in Ray (1984).2 This is because of disagreement about what values should be attached to physical and social changes that are of interest. Furthermore, it is generally accepted that not all these impacts can be put in monetary terms.3 Hence it is important, indeed imperative, that the cost methodology be supplemented by a broader assessment of the impacts with physical values reported wherever possible. These questions are discussed further in Sections 7.3 and 7.4.
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