Benefit-cost analysis of non-marginal climate and energy projects
with Dietz, Energy Economics, 40, 61-71, 2013.
Keywords: Benefit-cost analysis; non-marginal; project appraisal; discount rate; infrastructure investment; climate change; energy; hydropower dam
JEL: H43; D61; Q54
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.