FEEM working papers "Note di lavoro" series
2006 .096

Valuing Environmental Factors in Cost-Benefit Analysis Using Data Envelopment Analysis

Authors: Timo Kuosmanen, Mika Kortelainen
Series: Climate Change and Sustainable Development
Editor: Carlo Carraro
Type: Journal
Keywords: Cost-Benefit Analysis,Data Envelopment Analysis,Eco-Efficiency,Environmental Valuation,Environmental Performance,Performance Measurement
JEL n.: C61,D61,Q51
JEL: Ecological Economics
Pages: Vol. 62, Issue 1, pp. 56-65
Date: 04/2007


Environmental cost-benefit analysis (ECBA) refers to social evaluation of investment projects and policies that involve significant environmental impacts. Valuation of the environmental impacts in monetary terms forms one of the critical steps in ECBA. We propose a new approach for environmental valuation within ECBA framework that is based on data envelopment analysis (DEA) and does not demand any price estimation for environmental impacts using traditional revealed or stated preference methods. We show that DEA can be modified to the context of CBA by using absolute shadow prices instead of traditionally used relative prices. We also discuss how the approach can be used for sensitive analysis which is an important part of ECBA. We illustrate the application of the DEA approach to ECBA by means of a hypothetical numerical example where a household considers investment to a new sport utility vehicle.

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