This is a summary of the course Environmental Economics in Practice (ENR21806). All the reading questions asre answered with material out of the lecture slides, readings and knowledge clips. This gives a full overview of the material you need to know for the exam.
Learning outcomes:
- Explain for a selection of current environmental policy issues what economic
mechanisms underlie these problems and how they might be analyzed
- Apply basic quantitative economic analysis tools in environmental economic research
- Explain the different steps in a cost-benefit analysis and its role in the process of
environmental policy-making
∫Themes
1. Cost-Benefit Analysis and Discounting
2. Social-ecological systems
3. Microeconomics Applied to Human-Environment Interactions
4. Climate change and Uncertainty
,1 Cost-Benefit Analysis and Discounting
Cost-Benefit Analysis is a widely used method to evaluate policies on their benefits and costs to
individuals and society at large. Discounting is the way of how we convert future values associated
with a project into the equivalent present value, usually in monetary terms. For intertemporal projects
or policy evaluation, we need to use a discount rate to calculate the present value of the future
benefits and costs. It is interesting to see that project evaluation results are highly sensitive to the
discount rate and therefore discounting has great implications for decision making
Learning outcomes:
- Explain where in the public decision-making process CBA is used, and why
- Explain the main differences between a financial CBA and an economic (or social, or
environmental) CBA
- Explain why we discount future costs and benefits
- Explain the different approaches to discounting, including the social discount rate and
time-varying discount rates
- Explain the Kaldor-Hicks principle
- Calculate annual net cash flows in a spreadsheet
- Calculate the present value of future net cash flows with a constant and a
time-variant discount rate
- Discuss the effect of different discount rates and time horizons
Introduction to CBA
● What is CBA
Definition: A decision-making tool to evaluate and compare projects and policies
by systematically identifying, quantifying, valuing, and comparing the positive
(benefits) and negative (costs) effects.
Je vergelijkt de opbrengsten van een project met de opbrengsten als je het
geïnvesteerde geld gewoon op de bank zou zetten. (en dus rente krijgt)
● What are the steps in a public decision-making process?
- Problem identification
- Problem analysis
- Define policy objectives
- Define programme, plan, or policy
- Political choice
- Implementation
- Ex post evaluation
● In which step or steps in this process are CBAs used, and why?
- Define programme, plan, or policy
- Ex post evaluation
What you need to remember is that CBA is used to make a systematic overview of
the negative and positive consequences of a policy, so that it can be compared to
other policy options. The ultimate choice, however, rests with politicians. Sometimes
they follow the CBA advice, but just as often they do not.
, ● What is the difference between a financial cost-benefit analysis and a social
cost-benefit analysis (also called economic cost-benefit analysis, or environmental
cost-benefit analysis)?
Financial CBA: single firm/individual maximising own profits. Looking at money
coming in and out of the company. How decisions affect a single firm.
Social CBA: Concerned with everyone, all people involved in costs and benefits.
● What are the main steps in a (social) CBA?
Steps in Benefit-Cost Analysis
1. Identify alternatives
2. Quantify effects of alternatives
3. Monetize effects
4. Take into account when effects occur
5. Calculate Net Present Value
1. Identify alternatives
- The baseline alternative is essentially a benchmark against which all relevant policy
alternatives are measured
2. Quantify effects of alternatives
- Normally calculate around 4 - 5 policy alternatives also including the effects of doing
nothing
3. Monetize effects
○
○ Valuation methods
i. Revealed preference: het wordt duidelijk zonder te zeggen hoeveel
mensen iets waard vinden, bijvoorbeeld als ze naar een huis gaan
kijken, wat vind iemand belangrijk (real choices)
1. Hedonic pricing method → Base the price of the environment
on a market good price by controlling for other factors to
isolate how people value a “healthy/good” environment
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