The Equivalency Principle for Discounting the Value of Natural Assets: An Application to an Investment Project in the Basque Coast

The authors introduce the 'equivalency principle' to resolve uncertainties in setting social discount rates for natural assets. This rule posits that the present value of a naturally preserved land track should be at least equal to the market price of an identical track with permission for residential development. By applying this principle to various case studies and a specific proposed seaport in Pasaia, Gipuzkoa, the paper demonstrates that traditional cost-benefit analyses using high market discount rates often bias results in favor of development, whereas the equivalency principle typically yields much lower discount rates that favor environmental conservation.

• The proposed "equivalency principle" suggests that the discount rate for natural assets should be derived by assuming the present value of a naturally preserved land track is at least equivalent to the market price of an identical track with permission for residential development.
• Application of the equivalency principle to various case studies in the UK, USA, and Spain generally results in very small discount rates, which are even lower when constant flows are assumed compared to scenarios accounting for real GDP growth.
• In the case of the proposed seaport in Pasaia (Gipuzkoa), a traditional cost-benefit analysis using a market discount rate of 11% for both benefits and costs justifies the project across all environmental damage scenarios.
• When the equivalency principle is applied to the Pasaia seaport project, the resulting low discount rates (ranging from 1.31% to 3.97% depending on the damage scenario) turn the project's total impact negative, suggesting it should not be constructed.
• The authors argue that relying solely on expectations of future economic growth to set discount rates is insufficient due to current uncertainties regarding global GDP and the increasing scarcity and value of critical natural ecosystems.

APA

Chiabai, A., Galarraga, I., Markandya, A., & Pascual, U. (2011). The Equivalency Principle for Discounting the Value of Natural Assets: An Application to an Investment Project in the Basque Coast. Basque Centre for Climate Change. https://www.bc3research.org/h6T8Uy8Nm4gFs0O/20111005093601878634043.pdf

Chicago

Chiabai, Aline, Ibon Galarraga, Anil Markandya, and Unai Pascual. The Equivalency Principle for Discounting the Value of Natural Assets: An Application to an Investment Project in the Basque Coast. Basque Centre for Climate Change, 2011. https://www.bc3research.org/h6T8Uy8Nm4gFs0O/20111005093601878634043.pdf.

Wikipedia

{{cite report |last1=Chiabai |first1=Aline |last2=Galarraga |first2=Ibon |last3=Markandya |first3=Anil |last4=Pascual |first4=Unai |title=The Equivalency Principle for Discounting the Value of Natural Assets: An Application to an Investment Project in the Basque Coast |publisher=Basque Centre for Climate Change |date=October 2011 |url=https://www.bc3research.org/h6T8Uy8Nm4gFs0O/20111005093601878634043.pdf |access-date=23 October 2026 |via=Climate Insights Directory}}

BibTeX

@techreport{chiabai2011equivalency, author = {Chiabai, Aline and Galarraga, Ibon and Markandya, Anil and Pascual, Unai}, title = {{The Equivalency Principle for Discounting the Value of Natural Assets: An Application to an Investment Project in the Basque Coast}}, institution = {Basque Centre for Climate Change}, year = {2011}, month = oct, url = {https://www.bc3research.org/h6T8Uy8Nm4gFs0O/20111005093601878634043.pdf}, urldate = {2026-10-23}, note = {Indexed by Climate Insights Directory} }