Cost-benefit analysis (CBA) can be a useful tool for highlighting the potential costs and benefits of a proposed decision and its alternatives. As discussed here and at the beginning of Chapter I (“Assessing Benefits and Costs of Ratifying, Complying with, and Enforcing MEAs”), CBA can be used in deciding whether to become a Party to an MEA and what form of regulation or implementing activities are most cost-effective. However, there are many limitations that need to be recognised. These include:
- Benefits often can be more difficult to quantify than costs. Costs often relate to those incurred by businesses. These costs can be in the form of added capital investment, added transaction costs (e.g., disposal of hazardous waste, rather than regular solid waste), decreased market share, or other impacts that readily lend themselves to economic quantification. In contrast, many of the benefits of an MEA are non-economic, and economic analysis seeks to translate these benefits into financial terms.
- Cost-benefit analysis is inexact. While cost-benefit analysis is common in many contexts, it can yield dramatically different numbers, especially as different methodologies for assigning economic values to non-economic benefits can vary significantly. For example, the cost of remediating a site damaged by hazardous waste can be much more than the owner would be willing to accept for payment of the site, and that amount could be more than the owner could pay to prevent the harm, which could be much more than yet another measure of “value.”
- Cost-benefit analysis often includes subjective assumptions regarding non-economic values. Another reason that cost-benefit analysis remains imperfect is that economists often have to make assumptions regarding the financial value of non-economic values, whether they are costs or benefits. For example, what is the economic value of a State’s international reputation and standing?
- Shared benefits can be underestimated. While it may be relatively straightforward to assess the immediate costs of regulation, shared benefits can be difficult to estimate. For example, how would a State estimate the benefits from implementing the Ozone MEAs? The benefits are shared by all in the world. Yet, the benefits of implementation by one particular State to the overall protection of the ozone layer may be incremental and modest. And the benefits to that particular State of it implementing the Ozone MEAs would be only a subset of the overall benefits. When weighed against the direct costs to the domestic industry, the benefits to the State may at first glance seem to be greatly outweighed by the costs. However, this is an example of the need for collective compliance — in order for the system to work and for any nation to benefit, all must comply. When all comply, all benefit. The more narrow analysis of weighing the costs that are directly accrued versus the shared benefits can lead to what is famously known as the Tragedy of the Commons.
- Limited capacity. Environmental economics is a new discipline in most developing countries. Accordingly, most developing countries have few economists who could accurately assess the potential environmental and public health benefits of an MEA or environmental legislation. Similarly, many economists would have difficulties accurately assessing the impacts of regulatory measures on domestic industry. Experience in a number of Western countries shows that — even where there are a surfeit of PhD economists — estimates of economic impacts of regulation on business often far exceed the actual costs.