Assessment methods for disproportionate costs

Summary

Assessing the disproportionate costs of environmental measures involves weighing up elements that describe competing interests in decision-making. To make such trade-offs, a range of different assessment methods are available. This report introduces the two methods most commonly used in the literature to weigh the costs and benefits associated with environmental measures and socially beneficial activities such as hydropower: cost-benefit analysis (CBA) and multi-criteria analysis (MCA). The report also describes the so-called Leipzig model.

As EU guidance indicates that economic costs and benefits should be the basis for assessing whether costs are disproportionate or not, CBA can be considered a first choice for assessing disproportionate costs. This is because the very purpose of a CBA is to identify all positive economic impacts (benefits) and all negative economic impacts (costs) of a project and compare them with each other. For the costs to be considered disproportionate, the margin by which costs exceed benefits should be appreciable and have a high level of confidence.

Benefits and costs are easily comparable if they are expressed in the same unit, and CBA endeavours to express them in monetary units as far as possible. A practical problem is that some benefits and costs are difficult to monetise, partly because of a lack of knowledge about their economic importance. This may be the case, for example, for environmental effects that can reasonably be assumed to affect people's well-being through changes in the provision of various ecosystem services, but where there may be insufficient information on both the relationship between environmental effects and ecosystem services and individuals' preferences for various ecosystem services. This practical problem can be addressed in several ways, including by using MCA as a complementary or alternative approach.

The report briefly presents and discusses CBA and MCA, as well as some different ways of valuing ecosystem services and other hard-to-value benefits and costs in monetary units: revealed preference methods, stated preference methods, deliberative valuation and value transfer. In the case of MCA, a range of different types of MCA methods are available. Therefore, examples are given of a number of main MCA methods: linear additive methods, multi-attribute methods, analytical hierarchical process, sorting methods and non-compensation methods.

The Leipzig model is an approach to assess disproportionate costs that follows a different methodological path from CBA and MCA in that it takes as its starting point information on past investments in environmental measures and uses this information to calculate a reference cost that provides a threshold for what constitutes disproportionate costs. The threshold further takes into account the benefits of environmental measures through non-monetary expert judgements.