According to neoclassical environmental economics, how should future environmental benefits and costs be discounted? What are the possible effects of such discounting?

Résumé du document

Since environmental problems are long run problems with, eventually, long run solutions, environmental economics has been much occupied with discount rates, which is a tool used to estimate the value of future costs and benefits, related to present costs or benefits. In other words, discounting is an instrument that can help people decide what is best for them and their future. While planning a project for the future, one needs to be able to evaluate the outcome of such a project and see if it is going to be beneficial or not for the society. According to neoclassical economics, everything can be valued in terms of money. Benefits and costs are calculated according to a money-metric system, and this exercise allows economists to define the utility, or the worth of any economical process.

Extraits

[...] PERMAN R. and al., Natural Resource and Environmental Economics, 3rd Edition Harlow: Pearson Education Limited. PERMAN R., STERN D.I, Sustainable Development, Growth Theory, Environmental Kuznets Curves, and Discounting, 2000/4, Glasgow: University of Strathclyde. HOROWITZ J.K., ‘Preferences in the Future', Environmental and Resource Economics Vol pp.241-259, p.242. PERMAN R. and al., Natural Resource and Environmental Economics, 3rd Edition Harlow: Pearson Education Limited, p.374. HEAL G.M., ‘Economics and Resources' in R.Butlin Economics of the environmental and natural Resource Policy Boulder, CO: Westview Press. [...]

[...] It proceeds in two steps. First, one needs to estimate the costs and benefits of a project or policy at each point in time. Second, one needs to compare these costs and benefits across time. In this essay I assume that future costs and benefits of a project are known and I restrict my attention to the second step, the inter-temporal comparison of costs and benefits. For doing so, economists discount the costs and benefits of a project at a constant positive rate. [...]

[...] Thus, we have: consumption or social discount rate >utility discount rate. In CBA the value of a project is its Net Present Value which is the difference between the costs and the benefits of the project, discounted at a chosen rate over the time period T of the project. It can be expressed as , where b denotes the benefits and c the costs of the project, and r is the social discount rate. The project should go ahead iff NPV>0. [...]

[...] Therefore equation can be written as The weight of utility from consumption declines over time with rate ρ. The utility discount rate can be described as the pure rate of time preference. If the pure rate of time preference is positive, this implies some form of impatience, utility is preferred sooner rather than later. Considering the intergenerational equity, a low utility discount rate, possibly a zero rate should be used. Using a positive utility discount rate gives less weight to the well-being of future generations. [...]

[...] With high discount rates, the further into the future benefit and costs streams occur, the lower their present value. Therefore ‘Growing oak trees becomes unattractive and storing nuclear waste seems less onerous'[4]. As a result, when projects with significant environmental impacts are concerned, it is sometimes argued that ‘discounting discriminates against environmentally friendly projects, and discriminates in favour of environmentally unfriendly ones.'[5] However, concerning the case of the dam construction programmes in the USA in the 60s and 70s, Page observed that raising the discount rate used by the Army Corps of engineers from the used to ‘would have killed off 80 percent of the dam projects approved in 1962 '[6] In this case, as opposed as above (oak trees and nuclear wastes), environmentalists should favour rates over rates. [...]