Has Cost Benefit Analysis Improved Decisions in Colombia? Evidence from the Environmental Licensing Process

Abstract

Environmental cost benefit analysis, CBA, is often the preferred method for economists to assess policy changes which have environmental consequences. It is argued that CBA can help governments focus their resources to maximize the social returns of investments or projects. CBA is also viewed as a useful framework for organizing disparate information and subsequently improve the decision process. Despite the enthusiasm for the method, there have been few attempts outside developed countries to assess CBA's influence on decisions. In this article we used content analysis of official documents to analyse the role played by CBA in the Colombian environmental licensing process. Our results show that CBA's influence on the final decisions has been limited. The problem, we conclude, does not reside in CBA but in the process. Although there is a procedural requirement to do CBA, there is no requirement that the results must be considered in the decision-making. Since the problem lies in the process, not the instrument, we think that merely using a non-monetary assessment method instead of CBA, such as multicriteria analysis, will not lead to better decisions. This latter point is a discussion missing from the ecological economics literature that deserves more attention.

Introduction

Environmental cost benefit analysis, CBA, is widely advocated as a useful method for guiding policy choices and project appraisals. The standard approach to CBA is justified on the grounds that it can identify efficiency-enhancing policies or projects (Hammitt, 2013). Economists thus think that CBA ought to be one of the fundamental criteria for evaluating environmental regulations (Arrow et al., 1996). In developed countries, although CBA is part of formal procedures for decision making used for regulatory and project assessment purposes, proponents of the method lament the limited influence of CBA in environmental decisions (Atkinson and Mourato, 2008). The evidence, however, is mixed. Recent empirical studies have failed to find a positive association between CBA results and project selection in Norway, The Netherlands and Germany (Eliasson and Lundberg, 2012; Eliasson et al., 2015; Annema et al., 2017; Dehnhardt, 2013). Similarly, for the United States there is evidence pointing to the limited impact of CBA on regulatory decisions (Hahn and Tetlock, 2008; Shapiro and Morrall III, 2012). On the contrary, evidence for Chile (Gómez-Lobo, 2012) and Sweden (Eliasson et al., 2015) suggest that CBA results do influence project selection.

That the same approach has differential influence in different countries leads to reflections on the political and administrative dimensions of CBA (Nyborg, 1998; Cole, 2011; Gómez-Lobo, 2012). While the normative theory of environmental regulation presumes an enlightened public sector that promotes the well-being of society through the design of policies and/or the selection of projects for which benefits outweigh costs, in practice CBA is better conceived as an informational input into a decision making process that involves multiple actors whose interests and values may conflict. Particularly if one takes into account the normative assumptions that have to be made in order to interpret CBA as a measure of welfare change (Nyborg, 2014).

In this paper we view CBA as an informational input and draw on the literature on the use of knowledge in the policy process to analyse the various ways in which CBA could influence decisions. In this way, our paper contributes to the literature that examines the political and administrative dimensions of CBA. Previous research on the topic, mostly in developed countries, has focused on how politicians use CBA and/or why they do not make better use of it (Nyborg, 1998; Mouter, 2017; Annema et al., 2017; Hahn and Tetlock, 2008; Dehnhardt, 2013; Sager, 2016). This research focuses on the role of CBA in administrative decision making in a developing country, and thus contributes to the discussion on how political factors affect how results of CBA inform decision-making.

Our study analyses the Colombian experience because ex-ante CBA is mandatory for large projects requiring an environmental license. The environmental license is an administrative act that authorizes the execution of large projects that may produce serious environmental impacts. The licensing process is structured around the environmental impact assessment study, EIA. Environmental valuation and CBA are part of the EIA study. The EIA is elaborated and financed by the license applicant, which could be a private or public entity, and reviewed by the National Authority of Environmental Licenses, ANLA, an administrative agency of the government. Based on the EIA the ANLA decides whether to grant the license and under what conditions. As we elaborate in the discussion section, this institutional arrangement gives rise to a principal-agent problem.

In this paper we examine the role that CBA has played in the environmental licensing decision. Our premise is that an ex-ante CBA exercise informs and affects a decision if it helps the decision maker to know whether the project is likely to be welfare/efficiency enhancing. This is possible if the decision maker accepts the CBA results as being correct before deciding. Therefore, the aim of this paper is to determine if CBA has contributed to better decisions in Colombia. By better we mean decisions that consider the benefits and costs of a project's environmental impacts.

To this end we answer the following research questions. First (RQ1), what are the factors determining the acceptance of the ex-ante CBA results the environmental authority? Second, because some projects get the license even if they are required to make adjustments to the ex-ante CBA study and present the revised ex-ante CBA once the project is running, our next research question is (RQ2): what are the main adjustments required by the environmental authority? An analysis of those adjustments allows us to infer how often the authority grants the license even if the proponent has overestimated the project net benefits. Third (RQ3), are the adjustments required in past licensing processes considered by the applicant when presenting the CBA for another project? In this way, this article offers an overview of the gap between the rhetoric on which CBA has been justified, at least in the Colombian context, and its actual use, and discusses the main challenges to the effective implementation of the method.

The data for this research come from the content analysis of the legal document through which the environmental agency grants or denies an environmental license in Colombia – known as a Resolution. This article is organized as follows. The next section provides an overview of the literature examining how technical knowledge is used in the decision-making process. Section 3 describes the data and methods while Section 4 presents the results. In Section 5 we discuss the results through the lens of the use of technical knowledge by government agencies in decision making, and principal-agent theory. Section 6 presents the conclusions of the study.