An Inconsistency in the European Union Guidelines for Cost-Benefit Analysis of Investment Projects

European Union Guidelines have been for long the cornerstone of the evaluation of European funding for projects. An important aspect of this method is the general exclusion of taxation from the computation. We argue that when applied on projects that shift demand from a highly taxed mode to a slightly less taxed one, the modus operandi described by the guidelines and used by analysts in documented papers actually violates the principle of the net of taxes computation. In most cases, this inconsistency will be hardly visible to the analyst. However, when the procedure deals with projects where mode shift is important, in absolute or relative terms, the inconsistency will create important distortions in the results