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

Publications

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

Author(s): Aline Chiabai and Ibon Galarraga

Date: 2014-10-04

Issue: 2014-01

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.