ABSTRACT

Under the 1992 Rio agreements on climate change control and the conservation of biological diversity, the developed world agrees to bear the ‘incremental’ costs that developing countries will face when implementing actions to secure global environmental benefits. The terminology of incremental cost followed on from its use in the earlier 1987 Montreal Protocol dealing with ozone layer depletion. The concept of incremental cost is clearly important since it appears to determine the flow of resources from North to South to secure global environmental benefits: the obligation of the developed world appears to be open-ended. Whatever the incremental cost is of achieving global benefits, the developed world appears to have agreed to pay it. On the other hand, Chapter 10 showed that the total of these resources has already been agreed for the first three years of the Global Environment Facility’s operational phase. Incremental cost, whatever it means, appears unrelated to this grand total which was determined by political bargaining. In this ‘fixed budget’ context, incremental cost takes on a different purpose, that of helping to guide the allocation of the fixed budget among competing schemes. Partly because of these differences of interpretation, incremental cost has become a controversial concept. Yet, its economic interpretation is simple in concept. What, then, is incremental cost?