TCS Daily

Costs and Benefits in Europe

By Martin Egerup - October 11, 2002 12:00 AM

TechCentralStation-Europe recently had a conference in Copenhagen on the merits of using cost-benefit analysis in environmental policy making.

While I agree with the general conclusion of the participants that the use of such tools is gaining wider acceptance I would like to stress another point which also emerged from the conference: we still have a long way to go before governments actually base their decisions on the findings of cost-benefit analyses.

Far too often cost-benefit analyses are viewed by policy makers as little more than in-teresting exercises that ought to be made but not necessarily listened to, except of course if they happen to support the government position.

Governments obviously have a right to base their decisions on other considerations than the findings of cost-benefit analyses. But since more or less everyone seems to agree that such analyses are a valuable tool in decision-making it's puzzling that so few deci-sions about the environment are actually based on them.

This is true at both the national and at the international level.

In Denmark the government is actively supporting the use of ecological methods in ag-riculture and the purchase and consumption of ecological foods among consumers. Is this policy based on cost-benefit analyses? No. Why not? Before we answer that ques-tion let's make our own mini-analysis of the costs and benefits of ecological farming.

The use of fertilisers and pesticides has both costs and benefits. The direct benefits to the farmers clearly exceed the direct costs (purchasing the fertiliser and the pesticides and fungicides). That is why conventional foods are cheaper than ecological foods.

But there are also external costs and benefits. The external costs include the facts that some of the fertilisers are washed away and pollute streams, lakes and the seas around Denmark. And the fact that pesticide residues are found in some foods and in ground water in certain areas of the country.

The external benefits include the fact that the use of pesticides and fertilisers increase yield and thus decreases the total area needed to grow a given amount of food. In fact, increased yield has resulted in a significant decrease in the share of the Danish land ar-eas being occupied by farming over the last sixty years.

Around 1940, 76 percent of Denmark was farmland. By the mid-1990s the share of farmland had fallen to 63 percent. Despite the fact that food production has increased massively over those 60 years - Denmark has a huge trade surplus in agriculture - we now have more nature and more trees than 60 years ago. And it's fertilisers and pesti-cides that made it possible.

So why hasn't the Danish government made a cost-benefit analysis of ecological farm-ing? The answer is simple: Such an analysis would show that ecological farming is a bad idea. Since the use of fertilisers and pesticides has both external costs and external benefits, the optimal level of consumption in agriculture is above zero. But in ecological farming no pesticides and no fertilisers (other than animal manure) are used. Therefore, a cost-benefit analysis would show that ecological farming does more harm than good for the environment. Including the internal costs and benefits only makes it worse, since ecological farming has higher production costs than conventional farming.

The most prominent example of cost benefit analyses being completely ignored by poli-cymakers is in the area of global warming. The United Nations Intergovernmental Panel on Climate Change (IPCC) has conducted several studies comparing costs and benefits of the Kyoto Protocol on carbon dioxide emissions. All of them show that the costs ex-ceed the benefits. That is: the studies unanimously conclude that we would be better off doing nothing. This has not prevented European governments from pressing on with the ratification process and - which to my mind is even worse - completely ignoring the findings of these studies.

Obviously both expected costs and expected benefits of reducing greenhouse emissions are very uncertain. But the fact that none of the IPCC studies shows positive net bene-fits should be given at least some consideration by European politicians. We have a right to know why they've chosen to disregard the findings of the IPCC in this respect - especially since it takes a lot more than just a slight net benefit for Kyoto to be worth-while. After all, there are so many other environmental projects that would have enor-mous benefits.

As Bjørn Lomborg has pointed out, the cost of Kyoto for just one year could - if put to alternative use - provide every person in the world with clean water. This alone would save two million lives each year. So in this sense the reluctance of policy makers to use the findings of cost benefit analyses not only costs money. It costs lives - millions of lives.



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