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Benefit–cost analysis of non-marginal climate and energy projects

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  • Dietz, Simon
  • Hepburn, Cameron

Abstract

Conventional benefit–cost analysis incorporates the normally reasonable assumption that the policy or project under examination is marginal. Among the assumptions this entails is that the policy or project is small, so the underlying growth rate of the economy does not change. However, this assumption may be inappropriate in some important circumstances, including in climate-change and energy policy. One example is global targets for carbon emissions, while another is 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 projects, with empirical applications to climate change and energy. 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.

Suggested Citation

  • Dietz, Simon & Hepburn, Cameron, 2013. "Benefit–cost analysis of non-marginal climate and energy projects," Energy Economics, Elsevier, vol. 40(C), pages 61-71.
  • Handle: RePEc:eee:eneeco:v:40:y:2013:i:c:p:61-71 DOI: 10.1016/j.eneco.2013.05.023
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    Cited by:

    1. Aurland-Bredesen , Kine Josefine, 2017. "Averting catastrophes in a more complex world," Working Paper Series 06-2017, School of Economics and Business, Norwegian University of Life Sciences.
    2. Lee, Amy H.I. & Chen, Hsing Hung & Chen, Jack, 2017. "Building smart grid to power the next century in Taiwan," Renewable and Sustainable Energy Reviews, Elsevier, vol. 68(P1), pages 126-135.
    3. Simon Dietz & Nicoleta Anca Matei, 2016. "Spaces for Agreement: A Theory of Time-Stochastic Dominance and an Application to Climate Change," Journal of the Association of Environmental and Resource Economists, University of Chicago Press, pages 85-130.
    4. Simon Dietz & Nicoleta Anca Matei, 2016. "Spaces for Agreement: A Theory of Time-Stochastic Dominance and an Application to Climate Change," Journal of the Association of Environmental and Resource Economists, University of Chicago Press, pages 85-130.
    5. Foley, Duncan K. & Rezai, Armon & Taylor, Lance, 2013. "The social cost of carbon emissions: Seven propositions," Economics Letters, Elsevier, vol. 121(1), pages 90-97.
    6. repec:eee:forpol:v:83:y:2017:i:c:p:58-69 is not listed on IDEAS
    7. Diane Coyle, 2017. "Homo Economicus, AIs, humans and rats: decision-making and economic welfare," The School of Economics Discussion Paper Series 1710, Economics, The University of Manchester.
    8. J. Farmer & Cameron Hepburn & Penny Mealy & Alexander Teytelboym, 2015. "A Third Wave in the Economics of Climate Change," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, pages 329-357.

    More about this item

    Keywords

    Benefit–cost analysis; Non-marginal; Project appraisal; Discount rate; Infrastructure investment; Climate change; Energy; Hydropower dam;

    JEL classification:

    • H43 - Public Economics - - Publicly Provided Goods - - - Project Evaluation; Social Discount Rate
    • D61 - Microeconomics - - Welfare Economics - - - Allocative Efficiency; Cost-Benefit Analysis
    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming

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