Evaluating the economic value of the precautionary principle: using cost benefit analysis to place a value on precaution

Abstract The assessment of environmental risks and appropriate policy action is often confounded by uncertainty, due to the complexity of environmental and human systems and their interactions. Support for precautionary action to hedge against uncertain, but potential damaging environmental risks, often appears in environmental policy, but the economic value of precaution is often difficult to evaluate. This paper proposes three ways to quantify precautionary action consistent with a cost–benefit paradigm and based on the precautionary saving model. The three proposed methods are: (1) a precautionary premium, analogous to an insurance premium; (2) a precautionary response that alters current actions to hedge against possible future negative welfare shocks; and (3) a modification to risk assessment that takes into consideration the implications of low-probability, but high-consequence outcomes for precautionary measures. An illustrative example is developed using the third method to evaluate global climate policy. Each method demonstrates that uncertainty itself imposes a penalty beyond risk aversion that stimulates an additional precautionary response to future uncertainty. The value of these applications is to place the precautionary principle on firmer economic foundations by connecting the precautionary principle criteria with cost–benefit analysis.