7.2.2.1 Analytical Approaches
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
This measures all negative and positive project impacts and resource uses
in the form of monetary costs and benefits. Market prices are used as
the basic valuation, as long as markets can be assumed to reflect “real”
resource scarcities. In other cases the prices are adjusted to reflect
the true resource costs of the action. Such adjusted prices are referred
to as shadow prices (Squire and van der Tak, 1975; Ray, 1984).
Cost-effectiveness analysis
A special case of cost–benefit analysis in which all the costs of
a portfolio of projects are assessed in relation to a policy goal. The
policy goal in this case represents the benefits of the projects and all
the other impacts are measured as positive or negative costs. The policy
goal can, for example, be a specified goal of emissions reductions for
GHGs. The result of the analysis can then be expressed as the costs (US$/t)
of GHG emissions reductions (Sathaye et al., 1993; Markandya et al., 1998).
Multi-attribute analysis
The basic idea of multi-attribute analysis is to define a framework for
integrating different decision parameters and values in a quantitative
analysis without assigning monetary values to all parameters. Examples
of parameters that can be controversial and very difficult to measure
in monetary values are human health impacts, equity, and irreversible
environmental damages (Keeney and Raiffa, 1993).
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7.2.2.2 Cost Analysis and Development, Equity, and Sustainability
Aspects
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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