Policy Venues and Cost-Benefit Analysis

The policy venues in which CBA might be used and, in turn, influence policy formulation can be viewed from a number of perspectives. First, there is use according to (the scale of a) particular intervention. While such interventions are typically conceived as discrete projects, these can be relatively large or relatively small. Quite often there is a cost threshold above which the need for a CBA is triggered (see, for example, European Commission, (2008), in the context of the EU). Indeed, some of these projects might have economic and social consequences across a significant geographical area and population (for example, in the UK, the proposals for a high-speed rail network). In many instances, the 'project' might be better construed as a (change in) policy (for example, the introduction of the London Congestion Charge) or even an entire strategy (which may itself imply that a range of policies are initiated or reformed). The use of CBA in the UK's air quality management strategy would be one example of the latter (see Defra 2007). It is also worth noting that CBA has been used for an agenda-setting role too. In the UK, the Stern Review on the Economics of Climate Change (Stern 2007) and the National Ecosystems Assessment (NEA 2011) are prominent examples of this.

Second, there is use as classified by tier of government or institution. In the UK, national government (or those performing appraisals on its behalf) is arguably the principal user of CBA. There is less (if any) evidence of use amongst local government authorities. However, in the environmental sector, a range of public bodies also employ this approach, including the Environment Agency as well as other regulatory agencies such as OfGEM (the Office of Gas and Electricity Markets) for the electricity sector, and OfWAT (the Water Services Regulation Authority) for the water sector.

Moreover, social CBA is also used in the private sector. Companies in the water industry in England and Wales, for example, must use social CBA as one element of the investment case that they put forward to OfWAT under the periodic pricing reviews that the sector is subject to.

Third, there is use of CBA by characteristic of the policy sector, be this transport, environment or criminal justice for example. In the UK, impact assessment obligations provide the institutional impetus behind CBA (see Chapter 9, this volume), a feature shared by many countries. Perhaps unsurprisingly it is the policy department in the UK that is most associated with economic policy - HM Treasury - that is both custodian of how CBA is done and responsible for extending its use across government. Focal to this is the detailed guidance on how to value costs and benefits in monetary terms in what is popularly known as the Greenbook (HM Treasury 2003). In effect, such guidelines are the bridge between the CBA textbook world and the real world of practical implementation. Some organizations develop this guidance further. The Department for Transport's WebTAG (its online Transport Appraisal Guidelines: dft.gov.uk/webtag/) is the UK exemplar here. Dunn (2012) provides detailed guidance on non-market valuation of environmental impacts which has the status of supplementary Greenbook guidance. What this more specific guidance reflects is not only the increasing use of CBA in environmental policy but also the growing need for 'non-environment' ministries nevertheless to appraise the environmental impacts of their own proposals. For some policy departments, the application of CBA is less firmly established. Criminal justice and policing is one broad example here. However, this does not mean that economic approaches are absent altogether from policy thinking, as illustrated by the publication of figures estimating the UK costs of crime (Dubourg and Hamed 2005).

Other countries also have their own specific CBA guidance (see Chapter 9, this volume) although general principles will be broadly similar. For example, in the environmental policy context in the USA, CBA is widely used and the Environmental Protection Agency (EPA) has its own extensive guidelines (US EPA 2000) for preparing economic analyses of regulations. In many of these cases, the driving force for the use of CBA still comes from central government. Important centres of guidance have come from other institutions too. The European Commission is committed to applying some form of cost-benefit test to its directives. CBA has been used in guiding decisions about disbursing the EU's Structural and Cohesion Funds which, over the period 2007-2013, amounted to more than €300 billion. How best to spend this money is thus a very real challenge although the high-level objectives are plain enough: the assistance of socially and economically disadvantaged areas of the EU through the financing of projects which are net beneficial on the basis of a cost-benefit assessment. How parties applying to the EU's Structural and Cohesion Funds (SCF) should carry out this CBA is illustrated in a guidance document (European Commission 2008). The World Bank also has its own formal (practice) guidelines entitled Operational Policy on the Economic Evaluation of Investment Operations (Belli et al. 1998).

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