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Benefit–cost analysis of non-marginal climate and energy projects

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  • Dietz, Simon
  • Hepburn, Cameron
Abstract
Conventional benefit–cost analysis incorporates the normally reasonable assumption that the policy or project under examination is marginal. Among the assumptions this entails is that the policy or project is small, so the underlying growth rate of the economy does not change. However, this assumption may be inappropriate in some important circumstances, including in climate-change and energy policy. One example is global targets for carbon emissions, while another is a large renewable energy project in a small economy, such as a hydropower dam. This paper develops some theory on the evaluation of non-marginal projects, with empirical applications to climate change and energy. We examine the conditions under which evaluation of a non-marginal project using marginal methods may be wrong, and in our empirical examples we show that both qualitative and large quantitative errors are plausible.

Suggested Citation

  • Dietz, Simon & Hepburn, Cameron, 2013. "Benefit–cost analysis of non-marginal climate and energy projects," Energy Economics, Elsevier, vol. 40(C), pages 61-71.
    • Handle: RePEc:eee:eneeco:v:40:y:2013:i:c:p:61-71
    DOI: 10.1016/j.eneco.2013.05.023
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    5. Kine Josefine Aurland-Bredesen, 2020. "The Benefit-Cost Ratio as a Decision Criteria When Managing Catastrophes," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 77(2), pages 345-363, October.
    6. Jindal, Abhinav & Shrimali, Gireesh, 2022. "Cost–benefit analysis of coal plant repurposing in developing countries: A case study of India," Energy Policy, Elsevier, vol. 164(C).
    7. Nel, A.J.H. & Vosloo, J.C. & Mathews, M.J., 2018. "Financial model for energy efficiency projects in the mining industry," Energy, Elsevier, vol. 163(C), pages 546-554.
    8. Foley, Duncan K. & Rezai, Armon & Taylor, Lance, 2013. "The social cost of carbon emissions: Seven propositions," Economics Letters, Elsevier, vol. 121(1), pages 90-97.
    9. Knoke, Thomas & Paul, Carola & Härtl, Fabian, 2017. "A critical view on benefit-cost analyses of silvicultural management options with declining discount rates," Forest Policy and Economics, Elsevier, vol. 83(C), pages 58-69.
    10. Cees A. Withagen, 2018. "The Social Cost of Carbon and the Ramsey Rule," CESifo Working Paper Series 7359, CESifo.
    11. Diane Coyle, 2017. "Homo Economicus, AIs, Humans and Rats: Decision-Making and Economic Welfare," Economics Discussion Paper Series 1710, Economics, The University of Manchester.
    12. Cees Withagen, 2022. "On Simple Rules for the Social Cost of Carbon," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 82(2), pages 461-481, June.
    13. Penny Mealy & Pete Barbrook-Johnson & Matthew C Ives & Sugandha Srivastav & Cameron Hepburn, 2023. "Sensitive intervention points: a strategic approach to climate action," Oxford Review of Economic Policy, Oxford University Press and Oxford Review of Economic Policy Limited, vol. 39(4), pages 694-710.
    14. J. Farmer & Cameron Hepburn & Penny Mealy & Alexander Teytelboym, 2015. "A Third Wave in the Economics of Climate Change," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 62(2), pages 329-357, October.
    15. Mattauch, Linus & Hepburn, Cameron, 2016. "Climate policy when preferences are endogenous – and sometimes they are," INET Oxford Working Papers 2016-04, Institute for New Economic Thinking at the Oxford Martin School, University of Oxford.

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    More about this item

    Keywords

    Benefit–cost analysis; Non-marginal; Project appraisal; Discount rate; Infrastructure investment; Climate change; Energy; Hydropower dam;
    All these keywords.

    JEL classification:

    • H43 - Public Economics - - Publicly Provided Goods - - - Project Evaluation; Social Discount Rate
    • D61 - Microeconomics - - Welfare Economics - - - Allocative Efficiency; Cost-Benefit Analysis
    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming

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