On non-marginal cost-benefit analysis

Conventional benefit-cost analysis incorporates the normally reasonable assumption that the policy or project under examination is marginal. In particular, it is assumed that the policy or project does not change the underlying growth rate of the economy. However, this assumption may be inappropriate in some important circumstances, notably responding to climate change. One example is the benefit-cost analysis of global targets for carbon emissions, while another might be 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 policies and projects, with simple empirical applications to climate change. 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.