The use of cost-benefit analysis of environmental policy is spreading from the United States, where it has the longest tradition, to other parts of the globe. Already firmly rooted in Europe and other advanced economies, cost-benefit analysis is becoming more prevalent in developing countries as a way to evaluate environmental regulation. The spread of cost-benefit analysis raises questions about whether it is an appropriate tool for evaluating policy in these contexts, and what, if any, reforms are needed.
This paper discusses the challenges posed for cost-benefit analysis as it spreads, and how it can evolve to meet those challenges. Cost-benefit analysis can be valuable, and its use is likely to continue to grow. Before it is likely to become widespread in many developing countries, however, several important reforms will have to be made. There are many practical challenges to its adoption, including political issues and problems of institutional capacity. In addition, certain features of cost-benefit analysis as currently practiced will need to be reformed in light of the particular issues confronted by developing countries.