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

Abstract

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.