Tools

The tools of the Economics of Sustainability include benefit-cost analysis, ecosystem services valuation, life-cycle analysis and resource balance analysis

Benefit-Cost Analysis

Benefit-cost analysis is an economic tool that has generally been applied to project analysis. With its basis in Social Welfare theory, it seeks to assess the aggregate impact of investment decisions. In general, benefit-cost analysis has the ability to determine whether a given investment decision will make society better off. That is, the returns from investment are greater than the costs. Economic BCA is similar to, but distinctly different from, financial analysis. Whereas financial analysis deals strictly with real cash flows, BCA considers both monetary and non-monetary costs and benefits, although in practice the scope of analysis can be quite limited.

Ecosystem Services Valuation

Ecosystem Services Valuation is the current classification for the economic accounting of natural assets. Ecosystem Services are defined as the benefits people receive from a functioning ecosystem. This tool was developed in recognition that many of the value that people receive from ecosystems is typically unknown and often not considered in decisions that can impact both the ecosystem and the benefits arising from its existence. This results from the public goods nature typical of these benefits in that they are non-excludable and non-rival. Non-excludable means that it is difficult or impossible to keep people from enjoying the benefits from an ecosystem service. For example, storm surge mitigation from a coastal wetland will be realized by everybody in the vicinity and cannot be allocated only to specific households. Non-rival is the condition where one person’s consumption does not not diminish the ability of another person to enjoy that benefit. Therefore, the benefits from public goods cannot be easily captured and traded as typical with most goods bought and sold in a market.

The Economic Valuation of Ecosystem Services is an attempt to estimate values in monetary terms in order to develop information on how various states of a given ecosystem will affect the beneficial flow of ecosystem services. More importantly, this information can be developed in comparison to alternative investment and management decisions. Additional analysis can be undertaken to assess issues of distribution of benefits - by different social groups, different geographic areas, and different generations.

Life Cycle Assessment

Life Cycle Assessment (LCA) is a comprehensive approach for assessing products and industrial systems. LCA considers all stages involved in the life of a product ranging from raw mineral extraction to final disposal. LCA also considers factors such as energy use and pollution emissions resulting from the production process. The purpose of LCA is to allow for a complete assessment of the cumulative impacts from a product’s entire life cycle. The knowledge produced with LCA provides a more accurate picture of the trade-offs, particularly environmental, involved in the production of good. LCA is a well-developed technique that involves several specific steps including:

1. Goal Definition and scoping - This step identifies the context and sets the boundaries of analysis.
2. Inventory Analysis - This step makes an accounting of natural resource and energy use and waste and pollution production.
3. Impact Assessments - Impacts on people and environment are assessed in this step.
4. Interpretation - Outcome of previous steps is assessed to make a recommendation on the preferred option. This step should also include discussion of assumptions and uncertainty involved with the results.

LCA by itself does not identify production processes that are most cost effective or efficient. Economics methods can be used to make estimates of the value of assessed impacts, which can be used to make comparable judgments on the preferred option.

Resource Balance Analysis

Resource balance analysis is a technique that expands traditional economic analysis to focus on the use of and outputs from various resources. Typical economic analysis focuses on profit or net benefit maximization which is similar to standard financial accounting and answers questions about returns on investment or the production of benefits relative to costs. Another common metric is returns to labor - for an owner of a business supplying their own labor, this is akin to the wage rate and answers the question: How much revenue can be generated for each unit of labor input? This does not necessarily lead to the most efficient use of a scarce resource, however. For example, large farm are extremely productive relative to labor inputs, but smaller more labor intensive farms, are often more productive in terms of output per land or water unit. Resource Balance Analysis focuses on output per resource unit to determine more efficient economic uses, particularly in regards to scale of production.