Civil Engineering Reference
In-Depth Information
the construction of the Channel Tunnel, the relocation of Covent Garden and the
proposed third runway at London Heathrow airport. In most of these cost-benefit
studies, a recurring aspect has been the measurement of time saved expressed
in monetary terms. The pricing of an indirect benefit (such as time saved) is as
difficult as the pricing of an indirect cost, because market forces fail to determine
these prices. In fact, a good way to distinguish between direct (internal) and indirect
(external) prices is that the private (direct, internal) cost or benefit will always
have a definite monetary value. In practice, some external costs and benefits will
be expressed in monetary values in a cost-benefit analysis, and others will not.
For example, when appraising new road schemes, government economists usually
choose not to put monetary values on traffic noise, visual obstruction, community
severance, impact on pedestrians and cyclists, disruption during construction
and impacts on climate change. Their excuse is that these costs are uncertain and
difficult to pin down.
However, the influential Stern Report (2007) claimed that national governments
were committing a serious error in ignoring the future costs of climate change.
Nicholas Stern urged them to identify and use a social cost of carbon. The
UK government responded by establishing a shadow price for carbon of
£25 per tonne. This represents what we are willing to pay now to account
for the cost of future damage caused by carbon emissions (Defra 2007: 2).
As Stern (2007: 33) explained, consumption is not just about goods that we might
buy from the supermarket, as people also value their health and the environment;
and although expressing mortality and environmental quality in monetary terms
raises profound difficulties it is essential to avoid global disaster. Slightly further
on in the report Stern (2007: 54) adds the dimension of 'time', arguing for the
need to assess the flow of costs and benefits over a number of years to effectively
compare the welfare and value of future generations with those of today. He
strongly supports the case of adopting the convention of expressing calculations in
present value terms, using the process of 'discounting' (which is described in the next
section). In other words, Stern endorsed the environmental economists approach
that the best way to tackle the complex problem of carbon emissions is to ensure
that each activity which produces carbon is priced in a way that reflects its true cost
to society over time.
The recommendations made by Nicholas Stern were taken on board, to some
degree, when the Department for Transport (DfT 2007) conducted a cost-benefit
analysis to support its enquiry into the proposal to build a third runway at London
Heathrow airport. The DfT's calculations assumed a project with a 70 year life
span, and it concluded that the total benefits were an estimated £17.1 billion (at
net present values) while the total costs were between £11.9 and £12.7 billion
(depending on infrastructure connections). These costs include £4.8 billion to allow
for the damage caused by climate change (that is, as much as 40 per cent of the total
costs). In short, the total economic benefits of a third runway at London Heathrow
would outweigh the total economic costs. To put it bluntly, the project generates
a net benefit of between £4.4 and £5.2 billion - or, to put it cynically, around the
same amount as the cost allowed for climate change. In interrogating the basis of
