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

32 Pages Posted: 14 Jul 2006

See all articles by Timo Kuosmanen

Timo Kuosmanen

Aalto University School of Business

Mika Kortelainen

University of Joensuu

Date Written: June 2006

Abstract

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.

Keywords: Cost-Benefit Analysis, Data Envelopment Analysis, Eco-Efficiency, Environmental Valuation, Environmental Performance, Performance Measurement

JEL Classification: C61, D61, Q51

Suggested Citation

Kuosmanen, Timo and Kortelainen, Mika, Valuing Environmental Factors in Cost-Benefit Analysis Using Data Envelopment Analysis (June 2006). FEEM Working Paper No. 96.06, Available at SSRN: https://ssrn.com/abstract=912464 or http://dx.doi.org/10.2139/ssrn.912464

Timo Kuosmanen (Contact Author)

Aalto University School of Business ( email )

P.O. Box 1210
Runeberginkatu 22-24
Helsinki, Finland 00101
Finland

HOME PAGE: http://www.aalto.fi

Mika Kortelainen

University of Joensuu ( email )

Finland

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