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The Equivalency Principle for Discounting the Value of Natural Assets: An Application to an Investment Project in the Basque Coast

Keywords: Economic valuation, discounting, equivalency principle, Basque Country

Author(s): Aline Chiabai, Ibon Galarraga, Anil Markandya and Unai Pascual

Date: 2011-10-05

Issue: 2011-10

  Download this working paper (367 KB.)



Making decisions about optimal investments in green infrastructure necessitates setting social discount rates. This paper suggests a practical way for determining the discount rate for projects or programmes in which one of the options is to maintain or improve land in its natural state. We propose an “equivalency principle” to derive a simple rule that sets the discount rate. The rule is based on the premise that the long term value of a naturally preserved land track ought to be at least the same as the value of an identical land track in the vicinity to which permission has been granted for development. We illustrate this principle with various case studies and we apply it to a contentious investment project in the Basque Country associated with the regeneration of a large scale harbour in the province of Gipuzkoa (North of Spain) that involves reclaiming natural land that has important ecological value, including for the conservation of a marine ecosystem.

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