[ Log In | Register]
! Skip Navigation Links
Skip Navigation Links
Image of Journal of Applied Nonlinear Dynamics
ISSN:2325-6192 (print)
ISSN:2325-6206 (online)
Journal of Environmental Accounting and Management
António Mendes Lopes (editor), Jiazhong Zhang(editor)
António Mendes Lopes (editor)

University of Porto, Portugal

Email: aml@fe.up.pt

Jiazhong Zhang (editor)

School of Energy and Power Engineering, Xi'an Jiaotong University, Xi'an, Shaanxi Province 710049, China

Fax: +86 29 82668723 Email: jzzhang@mail.xjtu.edu.cn

Declining Discount Rate Estimate in the Long-Term Economic Evaluation of Environmental Projects

Journal of Environmental Accounting and Management 8(1) (2020) 93--110 | DOI:10.5890/JEAM.2020.03.007

Antonio Nesticò, Gabriella Maselli

Department of Civil Engineering, University of Salerno, Fisciano (SA), 84084, Italy

Download Full Text PDF

 

Abstract

The decision-making processes regarding projects with long-term environmental implications are strongly influenced by the estimate of the Social Discount Rate (SDR). An economic parameter that makes it possible to compare financially the Cash Flows (CFs) that occur at different time points, in the discounting the SDR reduces excessively the costs and benefits more distant over time. If this problem is particularly marked in the Cost-Benefit Analysis (CBA) conducted with time-invariant discount rates, it can be overcome by adopting time-declining discount rates. Thus, starting from the examination of the potentialities connected with the application of hyperbolic discounting in the CBAs, the aim of the work is to characterize an innovative probabilistic model for estimating the Declining Discount Rate (DDR), able to overcome the limits of the theoretical approaches recognized in the literature. The model is implemented on the data of the Italian economy and the DDRs estimated in this way are used in the economic feasibility study of an irrigation reconversion intervention. The processing proves that the adoption of time-declining discount rate allows attributing greater “weight” to the positive long-term externalities that characterize the interventions that promote sustainable development. This with decisive repercussions on the priority order of the initiatives to be financed and therefore on the entire allocation process of resources to be used to projects with intergenerational environmental implications. (*) The contribution to this paper is the result of the joint work of the two authors, to which the paper has to be attributed in equal parts.

References

  1. [1]  Arrow, K.J., Cropper M.L., Gollier, C., Groom, B., Heal, G.M., Newell, R.G., Nordhaus,W.D., Pindyck, R.S, Pizer, W.A, Portney, P.R., Sterner, T., Tol, R.S.J., and Weitzman M.L. (2014), Should Governments Use a Declining Discount Rate in Project Analysis? Review of Environmental Economics and Policy, 8(2), 145-163.
  2. [2]  Avramenko, Y., Kamami, M., and Kraslawski A. (2010), Fuzzy performance indicators for decision making in selection of wastewater treatment methods, Computer Aided Chemical Engineering, 28(1), 127-132.
  3. [3]  Azar, S.A. (2007),Measuring the US social discount rate, Applied Financial Economics Letters, 3, 3-66.
  4. [4]  Balasubramaniam, A. and Voulvoulis, N. (2005), The appropriateness of multicriteria analysis in environmental decisionmaking problems, Environmental Technology, 26(9), 951-962.
  5. [5]  Bellinger, W.K. (1991), Multigenerational value: modifying the modified discounting method, Project Appraisal, 6, 101- 108.
  6. [6]  Bradford, D.F. (1975), Constraints on government investment opportunities and the choice of discount rate, American Economic Review, 65, 887-99.
  7. [7]  Bennaceur F., Merzouk, N.K., Merzouk, M., and Hadji, A. (2019), Technical and economic viability of a wind farm installed in a windy area of Algerian western south region, Euro-Mediterranean Journal for Environmental Integration, 4(7).
  8. [8]  Cowell, F.A. and Gardiner, K.A. (1999), Welfare Weights, STICERD Research Paper No. 20, London School of Economics, London.
  9. [9]  Cropper, M.L., Freeman, M.C., Groom, B., and William, A.P. (2014), Declining Discount Rates, American Economic Review, 104(5), 538-543.
  10. [10]  Del Giudice, V., De Paola, P., and Forte, F. (2018), Valuation of historical, cultural and environmental resources, between traditional approaches and future perspectives, In: Green Energy and Technology, 177-186.
  11. [11]  De Feo, G., Cerrato, F., Siano, P., and Torretta, V. (2014), Definition of a multi-criteria, web-based approach to managing the illegal dumping of solid waste in Italian villages, Environmental Technology, 35(1), 104-114.
  12. [12]  Evans, D.J. (2004), The Elevated Status of the Elasticity of Marginal Utility of Consumption, Applied Economics Letters, 11, 443-447.
  13. [13]  Evans, D.J. (2006), Social Discount Rates for the European Union, Paper presented at the V Milan European Economy Workshop, University of Milan - Department of Economics,Working Papers No. 20.
  14. [14]  Evans, D.J. (2008), Social Project Appraisal and Discounting for the Very Long Term, Economic Issue, 13(1), 61-70.
  15. [15]  Evans, D.J., Kula, E., and Sezer, H. (2005), Regional welfare weights for the UK: England, Scotland, Wales and Northern Ireland, Regional Studies, 39, 923-937.
  16. [16]  Evans, D.J. and Kula, E. (2009), Social Discount Rates and Welfare Weights for Public Investment Decisions under Budgetary Restrictions: The Case of Cyprus, VIII Milan European Economic Workshop, University of Milan, Working Paper No.19.Feldstein, M. (1972), The Inadequacy of Weighted Discount Rates. In: Cost–Benefit Analysis, R. Layard (Eds), Penguin Books, Middlesex, UK.
  17. [17]  Florio, M. and Sirtori, E. (2013), The social cost of capital: Recent Estimates for the EU, Centre for Industrial Studies, Milano, Working Paper No.3.
  18. [18]  Freeman, M.C., Groom, B., Panopoulou, E., and Pantelidis, T. (2015), Declining discount rates and the Fisher effect: Inflated past, discounted future? Journal of Environmental Economics and Management, 73, 32-49.
  19. [19]  Fujiwara, D. and Campbell, R. (2011), Valuation techniques for cost benefit analysis: Stated preference, revealed preference and subjective well-being approaches. http://www.hm-treasury.gov.uk/d/green book valuationtechniques 250711.pdf, last access March 2, 2019.
  20. [20]  European Commission (2008), Guide to Cost-Benefit Analysis of Investment Projects: Economic Appraisal tool for Cohesion Policy 2014-2020, Directorate General for Regional and Urban Policy, Brussels.
  21. [21]  Gollier, C. (2002a), Discounting an Uncertain Future, Journal of Public Economics, 85, 149-166.
  22. [22]  Gollier, C. (2002b), Time horizon and the discount rate, Journal of Economic Theory, 107, 463-473.
  23. [23]  Gollier, C. (2008), Discounting with Fat-Tailed Economic Growth, Journal of Risk and Uncertainty 37, 171-186.
  24. [24]  Gollier, C. (2012), Pricing the planet’s future: The economics of discounting in an uncertain world, Princeton University Press: Princeton, NJ.
  25. [25]  Groom, B., Koundouri, P., Panipoulou, E., and Pantelides, S.T. (2007), Discounting the Distant Future: How much does model selection affect the certainty equivalent rate? Journal of Applied Econometrics, 22, 641-656.
  26. [26]  Groom, B. and Maddison, D. (2013), Non-identical quadruplets: Four new estimates of the elasticity of marginal utility for the UK. Grantham Research Institute on Climate Change Economics and the Environment,Working Paper No. 121.
  27. [27]  Halicioglu, F. and Karatas, C. (2011), A Social Discount Rate for Turkey, University Library of Munich, MPRA Paper, No. 32925.
  28. [28]  HM Treasury (2003), The Green Book, Appraisal and Evaluation in Central Government, London.
  29. [29]  Kamble, S.J., Singh, A., and Kharat, M.G. (2017), A hybrid life cycle assessment based fuzzy multi-criteria decision making approach for evaluation and selection of an appropriate municipal wastewater treatment technology, Euro- Mediterranean Journal of Environmental Integration, 2(9), 1-17.
  30. [30]  Kazlauskienė, V. (2015), Application of social discount rate for assessment of public investment projects, Procedia – Social and Behavioral Sciences, 213, 461-467.
  31. [31]  Khalkhali, M., Westphal, K., and Mo, W. (2018), The water-energy nexus at water supply and its implications on the integrated water and energy management, Science of the Total Environment, 636, 1257-1267.
  32. [32]  Kula, E. (1987), Social Interest Rate for Public Sector Project Appraisal in the United Kingdom, the United States and Canada, Project Appraisal, 2, 169-174.
  33. [33]  Kula, E. (1988), Future generations: the modified discount factor, Project Appraisal 3, 85-88.
  34. [34]  Kula, E. (2004), Estimation of a social rate of interest for India, Journal of Agricultural Economics, 55, 91-99.
  35. [35]  Heal, G. (2009), The Economics of Climate Change: A Post-Stern Perspective, Climatic Change, 96, 275-297.
  36. [36]  Lind, R.C. (1982), A Primer on the Major Issues Relating to the Discount Rate for Evaluating National Energy Option, in: Lind RC (ed.) Discounting for Time and Risk in Energy Policy, Resources for the Future,Washington DC.
  37. [37]  Lopez, H. (2008), The Social Discount Rate: Estimates for Nine Latin American Countries,World Bank,Washington DC, Policy Research Working Paper, No. 4639.
  38. [38]  Mehzabeen, M., Al-Ansari, T., Mackey, H.R., and Al-Ghamdi, G. (2018), Quantifying the energy, water and food nexus: A review of the latest developments based on life-cycle assessment, Journal of Cleaner Production, 193, 300-314.
  39. [39]  Molinos-Senante, M., Gémar, G., Gómez, T., Caballero, R., and Sala-Garrido R. (2016), Eco-efficiency assessment of wastewater treatment plants using a weighted Russell directional distancemodel, Journal of Cleaner Production, 137(1),1066-1075.
  40. [40]  Moore, M.A., Boardman, A.E., and Vining, A.R. (2013), More appropriate discounting: the rate of social time preference and the value of the social discount rate, Journal of Benefit-Cost Analysis, 4, 1-16.
  41. [41]  Mu˜ñoz Torrecillas, M.J. and Cruz Rambaud, S. (2017), A multifactor approach to the social discount rate: An application to the Spanish forest system, Journal of Sustainable Forestry, 36(7), 687-702.
  42. [42]  Nesticò, A., De Mare, G., and Conte, A. (2015), Theoretical and empirical approaches to estimating the social discount rate. An estimation for Italy through the Ramsey Formula, Valori e Valutazioni, 14, 47-62.
  43. [43]  Nesticò, A., Guarini,M.R., Morano, P., and Sica, F. (2019), An Economic Analysis Algorithm for Urban Forestry Projects, Sustainability, 11(2), 314.
  44. [44]  Nesticò, A., He, S., De Mare, G., Benintendi, R., and Maselli, G. (2018), The ALARP Principle in the Cost-Benefit Analysis for the Acceptability of Investment Risk, Sustainability, 10(12), 4668.
  45. [45]  Nesticò, A. and Maselli, G (2018), Estimating the declining discount rate for the economic evaluation of projects in the energy and water sectors, in: Frontiers in Water-Energy-Nexus - Solutions, Advanced Technologies and Best Practices for Environmental Sustainability, Springer Nature, Heidelberg, in press.
  46. [46]  Nesticò, A. and Maselli, G. (2019), Intergenerational discounting in the economic evaluation of projects, Smart Innovation, Systems and Technologies, 101, 260-268.
  47. [47]  Newell, R.G. and Pizer,W.A. (2003), Discounting the Distant Future: HowMuch Do Uncertain Rates Increase Valuations? Journal of Environmental Economics and Management, 46 (1), 52-71.
  48. [48]  Percoco, M. (2008), A social discount rate for Italy, Applied Economics Letters, 15, 73-77.
  49. [49]  Price, C. (1988), Investment, reinvestment, and the social discount rate for forestry, Forest Ecology and Management, 24, 293-310.
  50. [50]  Ramsey, F.P. (1928), A Mathematical Theory of Saving, Economic Journal, 38, 543-559.
  51. [51]  Rapport Lebègue (2005), Révision du taux d'actualisation des investissements publics, Commissariat Général au Plan, Paris.
  52. [52]  Shaw, W.D. andWlodarz, M. (2013), Ecosystems, ecological restoration and economics: Does habitat or resource equivalency analysis mean other economic valuation methods are not needed? Ambio, 42(5), 628-643.
  53. [53]  Sheluntsova, M. (2009), Evaluation of a Social Discount Rate for the Russian Federation, International Conference on Administration and Business, 714-720, Bucharest, Romania.
  54. [54]  United Nations Environment Program (2010), UNEP Year book, New science and developments in our changing environment, Nairobi, Kenya.
  55. [55]  Weitzman, M.L. (1994), On the Environmental Discount Rate, Journal of Environmental Economics and Management, 26(2), 200-209.
  56. [56]  Weitzman, M.L. (1998), Why the Far-Distant Future Should be Discounted at its Lowest Possible Rate, Journal of Environmental Economics and Management, 36(3), 201-208.
  57. [57]  Weitzman, M.L. (2001), Gamma Discounting, American Economic Review, 91, 260-271.

Copyright © 2011-2023 L & H Scientific Publishing. All rights reserved. Wildcard SSL Certificates