Discounting?

In a paper in press in the journal Environmental Impact Assessment Review, Erhun Kula and David Evans discuss how long term impacts on the environment (and environmental gains) should be taken into account in cost-benefit assessments of projects. Their discussion mainly focuses on the tricky question of the discount rate which is used to calculate the net present value of future gains and losses.

The authors’ main argument is that different discount rates should be used for economic and social costs and benefits and for environmental costs and benefits, because man-made capital (i.e. the former) is not finite and is – largely – substitutable while natural capital (i.e. the latter) is finite and not substitutable (because it is being degraded beyond its capacity to sustain ecosystem goods and services).

(…) economic and social costs and benefits should be streamed separately from environmental costs and benefits within a cost-benefit analysis. Indeed, each stream should have its own set of objectives and constraints, costs and benefits, risks and uncertainties.

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