Economics

Cost-Benefit Analysis for Climate Change

July 9, 2012, 10:08 pm
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Mitigation of greenhouse gas emissions may require large (priced at greater than $100 million), government sponsored projects. Governments, in theory, choose the course of action that yields the highest benefits at the lowest costs. In practice, cost-benefit analyses suffer from several problems. Analyses of large projects must account for the complexity and longevity of such endeavors as well as their dependence on leading edge—and often “bleeding edge”—technologies. Moreover, project planning is an imperfect process. that tend to underestimate costs and overestimate benefits.

To improve the planning process for large-scale projects such as those for climate change mitigation will require more accurate forecasting methods and better incentives for objectivity. [1]

Reference class forecasting

One method that may increase the accuracy of cost–benefit analyses is reference class forecasting (Figure 10.18). It has five steps [2]

1. Select a reference class of comparable completed projects. The class should be broad enough to provide a large sample size for robust statistical testing but narrow enough to share many attributes with the project under evaluation.

2. Assess the distribution of outcomes for these completed projects. Quantitative data on projects in the reference class should fall into a distribution that can provide the appropriate statistical measures.

3. Predict the position of the current project in each distribution. Similarities between the current project and others in the reference class should indicate where it falls along a distribution of outcomes.

4. Evaluate the reliability of the predictions. Past performances on a variety of forecasts can establish a correlation between prior estimates and actual outcomes.

Planners of large projects play two roles that often conflict [3].  First, they are “scientists” who collect and analyze data to determine the best course of action. Second, they are “advocates” who prepare information to support their clients’ preferred course of action. Clients, understandably, shop for an expert who will tell them what they want to hear and who thereby increases the probability that their project will compete successfully for funding.

Several procedures could improve this situation: [4]

• Cost–benefit analyses for large public project should be subject to independent peer review conducted by governmental offices such as the General Accounting Office in the United States or the National Audit Office in the United Kingdom.

• Governments should make all information about a project publicly available and hold open hearings.

• Planners who consistently produce deceptive analyses should receive professional sanctions and, occasionally, criminal penalties.

• Planners or their organizations must share financial responsibility for cost overruns or benefit shortfalls.

[1] Flyvbjerg, B. (2007) Policy and planning for large-infrastructure projects: problems, causes, cures. Environment and Planning B-Planning & Design 34:578-597.

[2] Lovallo, D. and D. Kahneman (2003) Delusions of success: How optimism undermines executives' decisions. Harvard Business Review 81:56-63.

[3] Wachs, M. (1989) When planners lie with numbers. Journal of the American Planning Association 55:476-479.

[4] Flyvbjerg, B. (2007) Policy and planning for large-infrastructure projects: problems, causes, cures. Environment and Planning B-Planning & Design 34:578-597.

This is an excerpt from the book Global Climate Change: Convergence of Disciplines by Dr. Arnold J. Bloom and taken from UCVerse of the University of California.

©2010 Sinauer Associates and UC Regents

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Citation

Bloom, A. (2012). Cost-Benefit Analysis for Climate Change. Retrieved from http://www.eoearth.org/view/article/51cbf00a7896bb431f69fff6

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