Environmental Benefit Cost and Cost Effectiveness Analyses

Integrated assessment models are intended to help decision makers understand the implications of taking different courses of action, but when there are many outcomes of concern, the problem of how to make trade-offs remains. Benefit-cost analysis is a common method for making trade-offs across outcomes and thus linking modeling to the decision-support systems (see Chapter 17). Benefit-cost analysis defines each outcome as either a benefit or a cost, assigns a value to each of the projected outcomes, weights them by the degree of certainty associated with the projection of outcomes, and discounts outcomes that occur in the future. Then, by comparing the ratio of benefits to costs (or using a similar metric), benefit-cost analysis allows for comparisons across alternative decisions, including across different policy options.

As discussed in Chapter 17, the current limits of benefit-cost analysis applied to global climate change decision making are substantial. A research program focused on improvements to benefit-cost analysis and other valuation approaches, especially for ecosystem services (see below), could yield major contributions to improved decision making. Equity and distributional weighting issues, including issues related to weighting the interests of present versus future generations, are areas of particular interest. In all, five major research needs are identified in Chapter 17: (1) estimating the social value of outcomes for which there is no market value, such as for many ecosystem services; (2) handling low-probability/high-consequence events; (3) developing better methods for comparing near-term outcomes to those that occur many years hence; (4) incorporating technological change into the assessment of outcomes; and (5) including equity consideration in the analysis.

In contrast to benefit-cost analysis, cost-effectiveness analysis compares costs of actions to predefined objectives, without assigning a monetary value to those objectives. Cost-effectiveness analysis, which is also discussed in Chapter 17, can be especially useful when there is only one policy objective, such as comparing alternative policies for pricing GHG emissions to reach a specific emissions budget or concentration target. Cost-effectiveness analysis avoids some of the difficulties of benefit-cost analysis. However, when more than one outcome matters to decision makers, cost-effectiveness analysis requires a technique for making trade-offs. Again, additional research can help to extend and improve such analyses.

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