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Complementary information package for the Delphi study

Complementary information package for the Delphi study. University of Murcia (Spain). Public University of Navarra (Spain). Discounting.

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Complementary information package for the Delphi study

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  1. Complementary information package for the Delphi study University of Murcia (Spain) Public University of Navarra (Spain)

  2. Discounting The incorporation of the intergenerational equity objective may have made the traditional Cost-Benefit Analysis (CBA) approach obsolete for the evaluation of certain types of projects, particularly those exhibiting a large number of environmental externalities and those with very long term effects.

  3. Different discounting approaches • To question the CBA technique, as the right approach in the decision making process when dealing with problems bearing significant intergenerational consequences. • To consider unnecessary and/or inappropriate any reduction in the traditional Social Discount Rate (SDR) due to intergenerational equity issues. • To promote the use of reduced discount rates. • To apply for time-variable discount rates : hyperbolic discounting. • To apply for different discount rates for certain time spans (“Gamma” or “Green Book” propose). • To use different discounting rates for tangible and intangible effects, simultaneously, in the same CBA application.

  4. If you are in favour of using reduced discount rates…

  5. ... what specific value of EDR? 0 <EDRSDR SDR = Social Discount Rate EDR= Environmental Discount Rate

  6. A numericalexample(*) 505 797 €/year (*) Almansa and Calatrava (2007) 4 047 € 27 161 € 189 242 € Exponential discount factor (100 years)

  7. What would you recommend for a 500 year horizon? Exponential discount factor (500 years)

  8. Would you recommend a time- variable discount factor (in time span of centuries?) …(e.g. hyperbolic)

  9. Exponential discount factor (500 years) Hyperbolic discount factor (500 years) a=b=2r

  10. Would you vary the discount rate with the time span?

  11. Discount rate Time span (years) 3,5 % 3% 2,5 % 2 % 1,5 % 1% 0 - 30 31 - 75 76 - 125 126 - 200 201 - 300 años > 301 Treasury Green Book proposal H M Treasury (2003): The Green Book: Appraisal and Evaluation in Central Government. HM Treasury, London. http://greenbook.treasury.gov.uk/

  12. Gamma-Weitzman discounting Discount rate Time span (years) 3 - 4 % 2 % 1 % 0 % 0 - 25 25 - 75 76 - 300 > 301 Weitzman, M.L. (1999) Just Keep Discounting, But.… In: Portney, P.R. and Weyant, J.P. (eds.). Discounting and intergenerational equity. Resources for the future. Washington.

  13. The effect of Discounting: The present value in year + 100 A numerical example: Almansa and Calatrava (2007) Weitzman Green Book

  14. The effect of Discounting: The present value in year + 500 A numerical example: Almansa and Calatrava (2007) Weitzman Green Book Exponential Discounting Factors Hyperbolic Discounting Factors ; a=b=2r

  15. Would you recommend different discount rates for tangible and intangible effects, in the same CBA?

  16. (1/2) Non-market costs and benefits; e.g. environmental goods (intangible effects) Market costs and benefits (tangible effects) Net PresentValue 0 <EDRSDR SDR Almansa and Calatrava (2007) Reconciling sustainability in Cost Benefit Analysis: a methodological proposal. Ecological Economics, 60 (4): 712-725 .

  17. (2/2) Reasoning forEDRSDR SDR = ce + p cerepresents the principle known as decreasing marginal utility of consumption.This term may decrease since this hypothesis does not hold. Thus, if in 200 years’ time, people are going to be worse off in terms of “environmental well-being”, the damage to them in terms of loss of natural recreational spaces, for example, will be no less than that suffered by the current population, as usually affirmed. The termpis thepure temporal preference rate, and it is logical to assume that p is lower in the case of environmental goods, either because of an “imperative” of inter-generational equity, or simply, due to certain empirical evidence. Almansa and Calatrava (2007) Reconciling sustainability in Cost Benefit Analysis: a methodological proposal. Ecological Economics, 60 (4): 712-725 .

  18. Thank you very much for your participation! If you are interested in receiving references to works concerning the discounting approaches described in this presentation, please let us know.

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