Summary of Topic
Cost benefit analysis is used in accounting and management to compare the monetary value of the benefits of an action with the monetary costs. It takes into account the effect of the amount of time that it takes for the benefits to repay its cost. Its most simplistic form, cost benefit analysis only considers the financial costs and benefits of an action. Complex approaches to cost benefit analysis also consider intangible aspects or damages of the action. In the case of environmental economics, there can be a potential cost to taking no action. This reflective essay explores the application of cost benefits analysis in environmental economics from a business management perspective.
Core Concepts
Almost everyone agrees that taking care of the environment has a long-term benefit. Some consider it impossible to place a value on the environment. For others, the costs play a key role in the decision-making process. Those that consider only the tangible costs almost always consider the price too high for the benefits that one receives, especially if they will be the one to pay. This point is demonstrated easily when one considers the case of an oil spill or other manmade disaster. For those that only consider the tangible aspects of the cost benefit analysis, losing a little wildlife is not as Significant as having to pay out billions of dollars in cleanup costs. For those that consider the intangible benefits, there is no price too high to save the environment in the area of the spill.
In traditional accounting cost benefit analysis, discounting refers to the costs and benefits that will occur in different time periods from the present. In traditional accounting, private discounting is used to express the discount to an individual firm. In environmental economics, social discounting is used to examine the future effects of the costs and benefits on society as a whole. Using the private discount instead of a social discount can result in bias in the analysis (Simon, 2014).
The typical environmental impact of a project has an effect on Local air quality, water quality, climate change, groundwater quality, biodiversity, the landscape, and technological risks (Evaluation Unit for DG Regional Policy European Commission, 1997). To conduct an environmental cost benefit analysis, the project must first be defined and the options identified. Next, an assessment of the internal and external effects of exercising each of those options must be outlined. A choice of valuation and validation must be chosen, as well as an appropriate discount rate. The focus of an assessment of environmental impacts focuses on the external effects of the options, as this will affect local communities (Evaluation Unit for DG Regional Policy European Commission, 1997).
One of the most difficult concepts in environmental economics is how to put value on intangible aspects of the project. In some cases, the accountant is asked to place a value on a life. Whether the life is a plant, animal, or human, this is one of the most difficult tasks in environmental cost and benefit analysis. Recently, Environmental analysts have attempted to use information from other disciplines, such as insurance, to arrive at an economic value of life for purposes of the analysis (Pearce, Atkinson, & Mourato, 2006).The idea of putting a value on life may not be popular, that it is one way to compare the costs and benefits of a project. One can then see the effects of the other factors on the environment and humans. Finding monetary values for environmental factors is one of the most difficult concepts involved in cost-benefit analysis on environmental projects.
Business Impacts
Cost benefit analysis can be an important tool in measuring the impacts of environmental projects. The methods used are laced with uncertainty, largely due to questions on how to place in monetary value on intangible aspects of the environment, such as life, air quality, in water quality. Because of these uncertainties, the use of cost-benefit analysis in environmental impact studies has been given a low priority in the decision-making process (Pearce, Atkinson, & Mourato, 2006). As a business manager and the one who will be making the decisions on whether to move forward on environmental initiative, cost-benefit analysis needs a play a more significant role in the decision-making process. Although there are uncertainties in the valuations achieved in this process, the process uncovers and clearly defines the factors that need to be considered in a project.
Addressing the intangible aspects of an environmental project is one of the most problematic. Those that tend to remain on the side of simple cost benefit analysis without considering the intangible aspects of the action, or inaction in the case the name of a catastrophe, are also failing to recognize the impact of these factors on public perceptions of corporate Social responsibility. Companies that make an attempt to do what is right by the environment, gain the support and business of those with all environmental issues to influence their purchases. Public perceptions about a company and its willingness to do what is right will receive benefits that affects their bottom line. Business managers need to pay more attention to the Intangible aspects of environmental economics as it relates to their public reputation regarding social responsibility. This is one factor that can be changed by future business managers, beginning with an awareness of the issues.
- Evaluation Unit for DG Regional Policy European Commission. (1997). Guide to Cost-Benefit
Analysis of Investment Projects. - Pearce, D., Atkinson, G., & Mourato, S. (2006). Cost Benefit Analysis for the Environment.
OECD. - Simon, N. (2014). Guidelines for Preparing Economic Analyses. National Center for
Environmental Economics.
