Perspectives on using cost-benefit analysis to set environmental targets – a compilation and discussion of arguments informed by the process leading to the 2016 EU air pollution emission targets

Abstract

Cost-Benefit Analysis (CBA) is an increasingly important form of environmental impact assessment. CBA has long been used for analysing existing air pollution policy proposals and ensuring that the benefits of proposed policies outweigh the costs. However, with the Clean Air Policy package proposed in 2013, the European Commission reversed the conventional approach. Instead of using CBA to calculate economic welfare of proposed emission levels, they used CBA to calculate a precise economic welfare-maximising solution and used the corresponding calculated emission levels as basis for their proposal.Despite the year 2016 adoption of much of the policy package proposal, air pollution will still be problematic in Europe in year 2030. It is expected that most parts of the European Union will experience air pollution levels above those recommended in the new air quality guideline values recently updated by the World Health Organization (WHO). The European Commission is now revising the air quality targets for the European Union, and it reasonable to assume that CBA will once again be influential.At the same time as the influence of CBA has grown with respect to air pollution policy, the literature criticising standard welfare economics and CBA as a concept has increased, albeit in an unfocused way. Given these two opposing trends, it is timely to compile a variety of perspectives and an in-depth discussion as to whether this current use of CBA to support air pollution policies is scientifically robust.This conceptual paper discusses the implicit methodological choices made when using an economic welfare-maximising CBA as an impact assessment tool to set targets in air quality policy proposals. The discussion applies an air pollution CBA-perspective to the existing critique of CBA and welfare economics and adds seminal papers from a well-established body of criticism of economic analysis. Perspectives from the disciplines of behavioural economics, economic psychology, and complexity economics are included and compared in terms of the way in which standard economics represents economic decision-making. This paper is the first to include perspectives from all these disciplines in a discussion of applied air pollution CBAs. The body of criticism is contrasted with theories from science-technology-society studies and an empirical description of the actual process from the production of an impact assessment to a final policy agreement. Potential pathways are discussed, including a discussion of alternatives to the current approach.On balance, minor adjustments, major adjustments (requiring further research), as well as methodological improvements are needed. Desirable minor adjustments include the need to avoid perfect foresight CBAs. It is important to include a range of potential air policy ambitions that are contingent on economic development, climate policy development, and equity preferences. Furthermore, the CBA should be based on a combination of climate and air pollution control options, and not just air pollution control. Appropriate major adjustments include better representation of technology learning, and potentially positive system feedbacks from, for example, electric vehicles. Another major adjustment is the monetisation and inclusion of all known environmental and human health externalities. A final major adjustment is ensuring that CBAs can accommodate existing environmental policy targets as feasible model solutions. The main and important methodological recommendation is that the fundament of CBA methodology should be left as it is, although policy proposal impact assessments should be expanded with analyses made with other methodologies. Such methodologies may adopt other ethical perspectives, based on, for example, egalitarian and hierarchical rationales, when analysing or proposing the ambition levels of air pollution policies.