The economic costs and benefits of biogas projects in developing countries

Abstract

Cost-benefit analysis (CBA) consists of five distinct logical steps: (1) to list the alternative courses of action open to the decision-maker; (2) to identify costs and benefits for every alternative; (3) to measure them in monetary terms; (4) to weight them for inter-personal and inter-temporal considerations so a to express them in their present value; and (5) to add up all costs and benefits suitably weighted to obtain the net present value (NPV) of the alternatives. Projects are acceptable if they have a positive NPV. CBA may be used to predict the actual behaviour of economic agents (positive CBA), e.g. to explain the uneven success of agroindustrial biogas installations in developed countries, or to prescribe behaviour (normative CBA), e.g. to tell a government what to do. CBA can be applied on a financial level where the unit under scrutiny is a single economic agent and money is the measuring rod, or on an economical level where the point of view is that of the totality of individuals inhabiting a country. In this last type of analysis fictive prices called accounting or ‘shadow prices’ are used to capture the economy-wide repercussions associated with the project. Applied to biogas CBA shows the insufficient financial profitability of biogas installations for private decision-makers because external benefits are not taken into account. These are health benefits to the population at large, environmental benefits and agricultural benefits related to avoiding deforestation. Since the economic profitability of biogas exceeds its financial profitability it is the task of the government to choose modes of intervention such as funding research, providing institutional framework, regulation against pollution, financial incentives or convincing economic agents.