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Discounting the value of natural resources in costbenefit analysis: a case study for policy making

Keywords: Equivalency principle,Cost-benefit analysis,Total Economic Value, Discounting, Basque Country

Author(s): Aline Chiabai and Ibon Galarraga

Date: 2014-04-10

Issue: 2014-01

  Download this Policy Briefings (254 KB.)


Keypoints

  • The issue of discounting (i.e. how future cost and benefits are
    valued today) plays a major role in policies with long-term effects
    on the natural environment, such as those required in a climate
    change context, or decisions which might lead to environmental
    degradation and biodiversity losses with impacts on future
    generations.
  • The “equivalency principle” suggests the idea that two pieces of
    land, one developed and the other one undeveloped, should be
    given the same utility (and therefore economic value) by future
    generations, if they are identical in size, environmental, ecological
    and site-specific attributes.
  • In practical terms, the principle implies that the discount rate to be
    applied for projects with long-term environmental impacts on
    undeveloped land, should be calculated by assuming equal
    present value for both types of land (developed and undeveloped).
  • The case study carried out in the Basque Country supports the
    idea of using low discount rates for the projects mentioned above,
    sustaining, therefore, a policy action oriented towards the
    preservation of the environment.
  • If the environment and natural resources are to be sustainably
    managed, market discount rates should not be used to account for
    future environmental quality in any cost-benefit analysis.

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