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Transcript of Complementary information package for the Delphi study Public University of Navarra (Spain)...
Complementary information package for the Delphi study
Public University of Navarra (Spain) University of Murcia (Spain)
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.
Different discounting
approaches1. 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.
If you are in favour of
using reduced discount rates…
0 < EDR SDR
SDR = Social Discount Rate
EDR = Environmental Discount Rate
... what specific value of EDR?
0
100.000
200.000
300.000
400.000
500.000
600.000
0 10 20 30 40 50 60 70 80 90 100Time (years)
Cur
rent
val
ue (E
uros
)
5%
3%
1%
Exponential discount factor (100 years)
505 797 €/year
27 161 €189 242 €
4 047 €
A numerical example(*)
(*)
Alm
an
sa
an
d
Cala
trava
(20
07
)
0
50.000
100.000
150.000
200.000
250.000
300.000
350.000
400.000
450.000
500.000
0 100 200 300 400 500
Time (years)
Cu
rren
t va
lue
(Eu
ros)
1%
3%
5%
What would you recommend for a 500 year horizon?
Exponential discount factor (500 years)
Would you recommend a time-
variable discount factor (in time span of
centuries?) … (e.g. hyperbolic)
0
100.000
200.000
300.000
400.000
500.000
600.000
0 100 200 300 400 500
Time (years)
Cu
rren
t va
lue
(Euro
s)
hiperbolic discount factor r=1%
hiperbolic discount factor r=3%
hiperbolic discount factor r=5%
t1
1DFa
ab
a=b=2r
Hyperbolic discount factor
(500 years)
0
50.000
100.000
150.000
200.000
250.000
300.000
350.000
400.000
450.000
500.000
0 100 200 300 400 500
Time (years)
Cu
rren
t va
lue
(Eu
ros)
1%
3%
5%
Exponential discount factor
(500 years)
Would you vary the discount rate with
the time span?
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)
Discount rate Time 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
505.797
188.869
43.885 27.108
-
100.000
200.000
300.000
400.000
500.000
600.000
SDR =0 % SDR =1 % TSD =2,5 % SDR =3 %
Green BookWeitzman
A n
um
eri
cal exam
ple
: A
lman
sa a
nd
Cala
trava (
20
07
)
The effect of Discounting:
The present value in year + 100
505.797
3.494 0
45.982 16.316
-
100.000
200.000
300.000
400.000
500.000
600.000
SDR =0 % SDR =1 % SDR =3% HDF (r =1 %) HDF (r = 3%)
Exponential Discounting Factors Hyperbolic Discounting Factors
Green BookWeitzman
t1
1HDFa
ab
; a=b=2r
The effect of Discounting:
The present value in year + 500
A n
um
eri
cal exam
ple
: A
lman
sa a
nd
Cala
trava (
20
07
)
Would you recommend different discount rates
for tangible and intangible effects,
in the same CBA?
v1
CiBi
r1
CtBtt
nt
0tt
nt
0t
NPV
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)
SDR = ce + pce 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 .
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!