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Additional information package for the Delphi study (2 nd Round). University of Murcia (Spain). Public University of Navarra (Spain). Different discounting approaches.
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University of Murcia (Spain)
Public University of Navarra (Spain)
The central idea that we propose for intergenerational discounting is to defend the rationality of applying simultaneously in the same CBA exercise discount rates for intangible effects (e.g. environmental) that are different than those we use for tangible ones.
We have not found in the literature specific theoretical developments postulating this approach, nor practical applications thereof, although we did find, as referred above, a few studies that use two different discount rates. However, these studies (Tol, 1994; Rabl 1996; Hasselmann et al. 1997; Hasselmann, 1999, Philibert, 1999) are in reality only versions of the Krutilla-Fisher approach. The only theoretical development that we believe to be different is that of Yang (2003), which we will discuss latter.
Thus, our concept is based on the following two reasoning:
1. Since environmental goods are not market goods, individuals have different mindsets and act differently when dealing with “merchandise” that when handling with “environmental goods”.
If we consider that the most coherent Social Discount Rate that should be applied to market effects is the Social Time Preference Rate (STPR= ce + p), it is only logical to suppose that the interest rate of pure time preference (p) will be smallerin the case of environmental goods, whether it be out of an ethical “imposition” of intergenerational equity (a), or simply because of empirical evidence that certain studies seem to reveal in this direction (b).
(a) In fact, governments carry out environmental enhancement projects that often would not pass the decision making criteria of the conventional CBA, and whose benefits will be enjoyed by future generations, from which one can infer a very low discount rate (and therefore, very low interest rate of pure time preference), as the United Kingdom does, by applying a lower-than-usual discount rate in the case of forestry projects, as a “grant for future generations.”
(b) Kopp and Portney (1999) believe that there are no reasons for taking for granted that individuals will be willing to exchange money and the environment with the same logic. This idea is implicit in Lumeley (1997) commenting on empirical studies that link individual discount rates with practices carried out in land preservation projects, in which there does not seem to be any clear relationship between one and the other. Gintis (2000) arrives to the same conclusion. In a study already mentioned above, Luckert and Admowicz (1993), deduce different behaviours when dealing with discounting of forests and of holdings securities. Similarly, Taylor et al. (2003) obtained implicit discount rates that were different for forest benefits of distinct nature, namely timber and recreation
2. It seems logical to think that the hypothesis of the marginal decline in utility consumption will not hold for environmental goods
If the environmental benefits or costs take place over a long period of time, the term ce of the STPR formula may decrease for this type of goods, since the hypothesis of the marginal utility consumption decline is not fulfilled. For example, if in two hundred years people are worse off in terms of “environmental welfare”, the damage caused by depriving them of an environmental good (a natural space for recreational purposes, for example) will not be slighter in any way than the damage it would cause to those that live today, as it is usually claimed.
The idea that per capita consumption decreases instead of increasing with the passage of time has been held by many authors (based on the idea that future growth and natural capital stock go hand in hand), and it is one of the central themes in criticising discounting by many ecological economists, who are accused by others of creating pessimistic scenarios (see Azar and Sterner, 1996 and Dasgupta et al.,1999; respectively).
This proposal on discounting could be represented as follows (equation 1):
where NPV is the Net Present Value, Ft represents the annual net financial cost or benefit (in general, the shadow price of the tangible effects), and N0 the annual environmental cost or benefit at the current time for the current generation (or, more generally, the shadow price of the intangible effects). The discount rate is the appropriate STPR (Social Time Preference Rate) value to account for the financial effects (first term), and a lower Environmental Discount Rate (EDR), for the environmental effects (second term).
In what does this proposal differs from that of Krutilla-Fisher?
A comparison of equations (1) and (2) clearly shows that, despite of the similarities, our proposal differs significantly from the Krutilla-Fischer (K-F) method in that while K-F uses Nt (the value of the environmental good that increases with time as a result of its decreasing supply) in the numerator and the same STPR for the environmental and financial term; our approach explicitly considers two different discount rates by applying an EDR to the environmental term, which clearly entails a different underlying principle.
A combination of both equations as in (3) (proposed by Yang, 2003) would be, in practice, difficult to implement and, importantly, it would result in double accounting, since the rationale for the use of EDR already includes the hypothesis of a declining consumption of marginal utility for environmental goods.
EROSION CONTROL Project of Almería (Spain)
The Erosion Control Project of Lubrín (Almería) covers an area of 8.830 Has. that experiences “accelerated” or “extremely accelerated” erosion processes in 82% of its territory.
The main corrective actions considered in the project are: a) maintaining farmland but improving the step slopes, b) reforesting 85% of the areas currently covered with degraded Mediterranean scrub with indigenous species and regenerating the remaining 15% of Mediterranean scrub, and c) to construct specific infrastructures of hydraulic correction.
The project covers a time span of 100 years. Logically, this period was chosen by convention for the analysis, due to the long maturing period of the species.
In order to apply environmental cost-benefit analysis, the following stages were carried out:
Identification of the positive and negative effects (economic, social and environmental) of the project. Given the multidisciplinary nature of the project, numerous experts in various relevant areas of the study were consulted. Defining, among many other matters, various future scenarios of the zone both for the hypothetical case of the project start-up and that of its non-implementation. In parallel, members of the population concerned were consulted through qualitative techniques (mainly semi-structured interviews), endeavouring to ensure representation of the different groups affected by the project. (Table 1)
Identification and application, from among the different available methods of environmental benefits valuation, the most suitable one for the case study, which led us to choose, for various reasons, a Contingent Valuation (CV) exercise on the project as a whole. The information package showed, between other information, the current situation of the zone affected by the project and the future situation of the zone in future scenarios within 50 and 100 years, if no corrective measures were taken of an environmental nature (Figure 1). A net annual benefitwas finally obtained of around 506,797 €/year.
INCREASE IN DIRECT USE VALUE:
INCREASE IN THE INDIRECT USE VALUE OF PRODUCTION:
INCREASE IN THE INDIRECT USE VALUE OF CONSERVATION:
Increase of ecological values:
INCREASE IN FUTURE USE VALUE AND EXISTENCE VALUE
DECRASE IN DIRECT USE VALUE:
DICRASE IN THE INDIRECT USE VALUE OF PRODUCTION:
COST OF CONSTRUCTION WORK AND MAINTENACE
+ 50 years
+ 100 years
303 637 €
4 790 643 €
13 788 068 €
NPV ( 5 %) =
NPV ( 3 %) =
NPV ( 1 %) =
NPV ( 5 % , 3 % ) =
NPV ( 3 % , 1 % ) =
NPV ( 5 % , 1 % ) =
6 236 495 €
20 558 271 €
22 004 126 €
for tangibles and
Almansa and Calatrava. 2007. Reconciling Sustainability and Discounting in Cost Benefit Analysis: a methodological proposal. Ecological Economics, 60 (4): 712-725.
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