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

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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.

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Different discounting approaches 1.To question the CBA technique, as the right approach in the decision making process when dealing with problems bearing significant intergenerational consequences. 2.To consider unnecessary and/or inappropriate any reduction in the traditional Social Discount Rate (SDR) due to intergenerational equity issues. 3.To promote the use of reduced discount rates. 4.To apply for time-variable discount rates : hyperbolic discounting. 5.To apply for different discount rates for certain time spans (“Gamma” or “Green Book” propose). 6.To use different discounting rates for tangible and intangible effects, simultaneously, in the same CBA application.

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If you are in favour of using reduced discount rates…

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

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

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

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

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

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Would you vary the discount rate with the time span?

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Discount rate 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/ Time span (years)

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Discount rateTime 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. Gamma-Weitzman discounting

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

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

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

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

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SDR = ce + p ce represents 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 term p is the pure 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. Reasoning for EDR SDR (2/2) Almansa and Calatrava (2007) Reconciling sustainability in Cost Benefit Analysis: a methodological proposal. Ecological Economics, 60 (4): 712-725.

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

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Cost-Benefit & Risk Analysis in Public Policy

Cost-Benefit & Risk Analysis in Public Policy

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