Benefit-Cost Analysis of Non-Marginal Climate and Energy Projects

Posted: 4 Oct 2013

See all articles by Simon Dietz

Simon Dietz

London School of Economics - Grantham Research Institute on Climate Change and the Environment and Department of Geography and Environment

Cameron J. Hepburn

London School of Economics, Grantham Research Institute

Date Written: November 1, 2013

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 the 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.

Keywords: benefit–cost analysis, non-marginal, project appraisal, discount rate, infrastructure investment, climate change, energy, hydropower dam

JEL Classification: H43, D61, Q54

Suggested Citation

Dietz, Simon and Hepburn, Cameron J., Benefit-Cost Analysis of Non-Marginal Climate and Energy Projects (November 1, 2013). Energy Economics, Vol. 40, 2013. Available at SSRN: https://ssrn.com/abstract=2335374

Simon Dietz (Contact Author)

London School of Economics - Grantham Research Institute on Climate Change and the Environment and Department of Geography and Environment ( email )

Houghton Street
London, WC2A 2AE
United Kingdom

HOME PAGE: http://personal.lse.ac.uk/dietzs

Cameron J. Hepburn

London School of Economics, Grantham Research Institute ( email )

Houghton Street
London, WC2A 2AE
Great Britain

HOME PAGE: http://www.cameronhepburn.com

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