DISCOUNTING THE VALUE OF NATURAL RESOURCES IN COST-BENEFIT ANALYSIS: A CASE STUDY FOR POLICY MAKING

The policy brief argues that market discount rates are unsuitable for evaluating long-term environmental impacts and proposes the 'equivalency principle' to determine social discount rates. This principle assumes that undeveloped and developed land of identical attributes should provide equal utility to future generations. Using a case study of a proposed seaport in Pasaia, Basque Country, the authors demonstrate that applying this principle results in lower, site-specific discount rates (between 0.96% and 3%) that would lead to the rejection of the project, whereas a market rate of 11% would justify it in some scenarios.

• The choice of discount rate is a primary source of uncertainty when assessing the economic impacts of climate change and policies with long-term environmental consequences, as ethics and financial considerations often conflict.
• The 'equivalency principle' suggests that for projects on undeveloped land, the discount rate should be calculated by assuming that undeveloped and developed land with identical size and ecological attributes provide the same utility and economic value to future generations.
• To apply the equivalency principle, the economic value of developed land is based on market price, while undeveloped land is valued using Total Economic Value (TEV), which incorporates both use and non-use benefits.
• In a case study regarding a proposed seaport in Pasaia (Gipuzkoa), the application of the equivalency principle yielded low, site-specific discount rates of 0.96%, 1.93%, and 3% for low, medium, and high impact scenarios, respectively.
• The Pasaia seaport case study demonstrates that the choice of discount rate fundamentally alters the project's outcome: a market rate of 11% would justify the project in low and medium impact scenarios, but the equivalency principle results in a negative ratio across all scenarios, suggesting the project's rejection.
• The authors argue that market discount rates should be avoided in cost-benefit analyses that account for future environmental quality if natural resources are to be managed sustainably.

APA

Chiabai, A., & Galarraga, I. (2014). DISCOUNTING THE VALUE OF NATURAL RESOURCES IN COST-BENEFIT ANALYSIS: A CASE STUDY FOR POLICY MAKING. Basque Centre for Climate Change. https://www.bc3research.org/h6T8Uy8Nm4gFs0O/201404100505551436280223.pdf

Chicago

Chiabai, Aline, and Ibon Galarraga. DISCOUNTING THE VALUE OF NATURAL RESOURCES IN COST-BENEFIT ANALYSIS: A CASE STUDY FOR POLICY MAKING. Basque Centre for Climate Change, 2014. https://www.bc3research.org/h6T8Uy8Nm4gFs0O/201404100505551436280223.pdf.

Wikipedia

{{cite report |last1=Chiabai |first1=Aline |last2=Galarraga |first2=Ibon |title=DISCOUNTING THE VALUE OF NATURAL RESOURCES IN COST-BENEFIT ANALYSIS: A CASE STUDY FOR POLICY MAKING |publisher=Basque Centre for Climate Change |date=January 2014 |url=https://www.bc3research.org/h6T8Uy8Nm4gFs0O/201404100505551436280223.pdf |access-date=23 October 2026 |via=Climate Insights Directory}}

BibTeX

@techreport{chiabai2014discounting, author = {Chiabai, Aline and Galarraga, Ibon}, title = {{DISCOUNTING THE VALUE OF NATURAL RESOURCES IN COST-BENEFIT ANALYSIS: A CASE STUDY FOR POLICY MAKING}}, institution = {Basque Centre for Climate Change}, year = {2014}, month = jan, url = {https://www.bc3research.org/h6T8Uy8Nm4gFs0O/201404100505551436280223.pdf}, urldate = {2026-10-23}, note = {Indexed by Climate Insights Directory} }