Uncertainty in Discount Models and Environmental Accounting

Abstract

Cost-benefit analysis (CBA) is controversial for environmental issues, but is nevertheless employed by many governments and private organizations for making environmental decisions. Controversy centers on the practice of economic discounting in CBA for decisions that have substantial long-term consequences, as do most environmental decisions. Customarily, economic discounting has been calculated at a constant exponential rate, a practice that weights the present heavily in comparison with the future. Recent analyses of economic data show that the assumption of constant exponential discounting should be modified to take into account large uncertainties in long-term discount rates. A proper treatment of this uncertainty requires that we consider returns over a plausible range of assumptions about future discounting rates. When returns are averaged in this way, the schemes with the most severe discounting have a negligible effect on the average after a long period of time has elapsed. This re-examination of economic uncertainty provides support for policies that prevent or mitigate environmental damage. We examine these effects for three examples: a stylized renewable resource, management of a long-lived species (Atlantic Right Whales), and lake eutrophication.

Keywords

• Atlantic right whale
• cost-benefit analysis
• discounting
• ecological economics
• ecosystem service
• eutrophication
• renewable resource
• uncertainty