Reconciling Sustainability and Discounting in Cost Benefit Analysis: a methodological proposal

The incorporation of the intergenerational equity objective has turned the traditional Costbenefit Analysis (CBA) approach into an obsolete tool in the evaluation of certain types of projects, particularly those presenting an important number of environmental externalities and those whose impacts extend throughout a long period of time. Therefore there is a strong controversy in the scientific community, as to whether or not the traditional social discount rate should be changed on the basis of intergenerational ethical considerations. The different positions are difficult to reconcile since they are based on different environmental ethical standpoints and consequently on different concepts of sustainability. Based on the assumption that applying a discount rate rewards current consumption and, therefore, that it is only possible to introduce a certain intergenerational equity (at the consensual level of the current generation) in a cost-benefit analysis, in this work we propose an approach to discounting based on a different rationale for tangible and intangible goods. To this end, we propose two different indicators of environmental profitability: one, the Intergenerational Transfer Value (ITV), quantifies in monetary units what the current generation is willing to pass on future generations when an environmental restoration project is carried out. The second indicator, the Critical Environmental Rate (CER), measures the implicit environmental profitability. These concepts are tested through an empirical case study pertaining the assessment of a Erosion Control Project in the southeast of Spain. The results obtained by applying the proposed discounting methodology reveal traditional profitability indicators that are higher and probably closer to the real values set by the contemporary society (e.g., a Net Present Value of ?22 million as compared to the value of ?4.8 calculated by traditional approaches). In addiction, the environmental restoration project described entails a quantifiable generational equity level that can be calculated, through the indicators proposed, as ?15.8 Million in absolute terms and 4.5% in relative terms. The information provided by the environmental profitability indicators proposed renders more transparency to the quantification of the levels of intergenerational equity applied, thereby facilitating the difficult reconciliation of the CBA technique with the objective of sustainability and, as whole, it is potentially very useful in assisting public decision-making.