Monday, May 19, 2008

Cost benefit analysis: friend or foe of nature?

There is quite a debate going on the use of standard economic evaluation tools such as cost-benefit analysis in the protection of nature and the provision of a sustainable flow of environmental goods and services spawned by this article on Environmental Capital.

I think the debate can be enhanced by reflection on our departing points on the type of uncertainty we are implicitly accepting in our models of the future. Do we assume that the future will be like the past? Do we assume that the future will not be like the past at all? How much novelty is in the system? 

It is not only economists who have to deal with an uncertain future, anyone else, including environmentalists and politicians, to whom we may look for alternatives when discarding economic evaluation techniques, cannot escape an unknown future, and often implicit assumptions about future events.

Cost-benefit analysis plays an important role, even in the evaluation of projects and programmes with environmental implications.  Cost-benefit analysis is no substitute for good decision making though.  It helps, but is as bound by the uncertainty of future events as all other (often much less rigorous) techniques.

As Voltaire once saidDoubt is not a pleasant condition, but certainty is absurd. 

Invest in good evaluation techniques, but simultaneously invest in decision making skills for uncertain and complex environments.  In the process, do not try to get lost in methodological battles.

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