Cost-Benefit analysis in the context of long horizon projects—a need for a social and holistic approach

Abstract

Discounting has always been a controversial subject among economists and philosophers yet discounting practice remained an essential element of any public policy. The purpose of this paper is to argue against using the practice of discounting in Cost-Benefit analysis for large engineering/public projects particularly aimed at mitigating the effects of global warming, as it creates bias against the future generation. Using systems thinking approach the paper has counter argued against all the three arguments, used to justify discounting, i.e., pure time preference, the opportunity cost of capital, and risk. The paper has shown intuitively that both the consumption- and the investment-based rationales used to justify discounting are in conflict when we take the holistic approach to the environment. The paper clearly is on a topic of great significance for environmental economists and environmental policy specialists. The perspective taken in the paper is a thought-provoking one with the relevance of “systems thinking” for the discounting debate.

Keywords

• cost-benefit analysis
• public policy
• discounting
• discount rate
• systems thinking
• economic analysis