Search Climate Insights Directory

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 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.