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Incorporating environmental costs and benefits into a project economic analysis

Successful economic development depends on the rational use of natural resources and on reducing as far as possible the adverse environmental impacts of development projects. Environmental impact assessment (EIA) is a primary tool for achieving this objective, by inserting critical environmental information into the process of project identification, preparation, and implementation. Economic analysis, by comparison, is employed to determine if the overall economic benefits of a proposed project exceed its costs, and to help design the project in a way that produces a solid economic rate of return. Adverse environmental impacts are part of the costs of a project, and positive environmental impacts are part of its benefits. Consideration of environmental impacts, therefore, should be integrated with the other aspects of the project in the economic analysis to the extent possible. EIA is an information-gathering and analytical process that helps avoid environmentally unsound development. It focuses on environmental externalities: unintended adverse effects of development projects on the environment. The impacts identified in the EIA process have not often been converted into monetary terms, however. A major reason behind the generally weak link between EIA and economic analysis has been the lack of useful guidance on converting physical impacts into monetary terms. Environmental impacts are often dislocated in time and space, making cause and effect difficult to establish. The severity of environmental impacts often depends on the accumulation of problems (over time, over space, or both). Many environmental goods and services do not enter markets, or do so only imperfectly. The difficulties this causes for valuation are compounded by the empirical limitation that available data are often scarce or of poor quality.

Environmental Impact Assessment; cost benefit analysis; indirect methods

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