Cost-Benefit Analysis

Cost-benefit analysis (CBA) is a tool for comparing the costs of an action with its benefits in order to aid decisions and choices between alternative courses of action. CBA is useful to green businesses because it enables them to integrate environmental and economic goals in their operations and ensure that environmental and social costs are taken into consideration in their purchasing or investment decisions.

In order to weigh costs against benefits, CBA usually attempts to put a monetary value on both costs and benefits so that they are expressed in the same units and all the benefits can be added up and compared with the sum total of costs. Costs and benefits include those in the market, those outside the market, long-term impacts of varying probability, and externalities—costs and benefits external to the parties involved in producing, marketing, and consuming a product. While the simplest form of a CBA may simply ask “is the cost of these energy conservation measures worth the savings on our electricity bill,” more complicated CBAs look at situations that have multiple costs and benefits, such as the decision of a company to become a green business.

CBAs are especially associated with large public or private sector endeavors, where the costs and benefits are numerous and may not all be apparent without significant investigation. Indeed, CBAs are now a formal requirement of many large-scale projects undertaken by private enterprises, such as those in the mining sector and the building industry. The costs of a road project, for example, would include the cost of labor and materials used in construction, as well as other costs such as the loss of parkland and homes to make way for roads, and the resulting pollution, disruption to neighborhoods, or the loss of peace and quiet. The benefits of such a project might include time saved to motorists, increased predictability of journey times, and increased accessibility of a particular location.

Nevertheless, even small green businesses can utilize CBA to analyze the various costs and benefits of major decisions. For example, the decision to install waste recovery technologies would not only include the costs of the technologies and the savings in disposal costs, but also the environmental benefits of less pollution in the local waterway, the value of resources recovered, the gain in reputational value, and the lower risks of noncompliance with environmental regulations.