Discounting in the presence of scarce ecosystem services

Research output: Contribution to journalArticleScientificpeer-review

Abstract

The discount rate for cost-benefit analysis has to take account of future scarcity of ecosystem services in consumption and production. Previous literature focuses on the first aspect and shows the importance of the relative price effect, for given growth rates of consumption and ecosystem services. This paper focuses on intermediate ecosystem services in production and shows that for limited substitutability and a low growth rate of these ecosystem services, the growth rate of consumption, and thus the discount rate, declines towards a low value. Using a Ramsey growth model, the paper distinguishes three cases. If ecosystem services can be easily substituted, the discount rate converges to the usual value in the long term. Secondly, if ecosystem services can be easily substituted in production but not in consumption, the relative price effect is important. Finally, and most interestingly, if ecosystem services cannot be easily substituted in production, the discount rate declines towards a low value and the relative price effect is less important. Another part of the previous literature has shown that a declining discount rate is the result of introducing several forms of uncertainty, but this paper reaches that conclusion from an endogenous effect on the growth rate of the economy.
Original languageEnglish
Article number102272
JournalJournal of Environmental Economics and Management
Volume98
DOIs
Publication statusPublished - Nov 2019

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ecosystem service
discount rate
cost-benefit analysis
Discounting
Ecosystem services
Discount rate
consumption
effect
price
Price effects
Relative prices

Keywords

  • discount rate
  • Ramsey balanced growth
  • ecosystem services
  • consumption value
  • production value
  • growth rate
  • discounting

Cite this

@article{775596f28c7e4e87b4e7ca92eb542826,
title = "Discounting in the presence of scarce ecosystem services",
abstract = "The discount rate for cost-benefit analysis has to take account of future scarcity of ecosystem services in consumption and production. Previous literature focuses on the first aspect and shows the importance of the relative price effect, for given growth rates of consumption and ecosystem services. This paper focuses on intermediate ecosystem services in production and shows that for limited substitutability and a low growth rate of these ecosystem services, the growth rate of consumption, and thus the discount rate, declines towards a low value. Using a Ramsey growth model, the paper distinguishes three cases. If ecosystem services can be easily substituted, the discount rate converges to the usual value in the long term. Secondly, if ecosystem services can be easily substituted in production but not in consumption, the relative price effect is important. Finally, and most interestingly, if ecosystem services cannot be easily substituted in production, the discount rate declines towards a low value and the relative price effect is less important. Another part of the previous literature has shown that a declining discount rate is the result of introducing several forms of uncertainty, but this paper reaches that conclusion from an endogenous effect on the growth rate of the economy.",
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author = "Sjak Smulders and {de Zeeuw}, Aart and Xueqin Zhu",
year = "2019",
month = "11",
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language = "English",
volume = "98",
journal = "Journal of Environmental Economics and Management",
issn = "0095-0696",
publisher = "ACADEMIC PRESS INC ELSEVIER SCIENCE",

}

Discounting in the presence of scarce ecosystem services. / Smulders, Sjak; de Zeeuw, Aart; Zhu, Xueqin.

In: Journal of Environmental Economics and Management, Vol. 98, 102272, 11.2019.

Research output: Contribution to journalArticleScientificpeer-review

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AU - de Zeeuw, Aart

AU - Zhu, Xueqin

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AB - The discount rate for cost-benefit analysis has to take account of future scarcity of ecosystem services in consumption and production. Previous literature focuses on the first aspect and shows the importance of the relative price effect, for given growth rates of consumption and ecosystem services. This paper focuses on intermediate ecosystem services in production and shows that for limited substitutability and a low growth rate of these ecosystem services, the growth rate of consumption, and thus the discount rate, declines towards a low value. Using a Ramsey growth model, the paper distinguishes three cases. If ecosystem services can be easily substituted, the discount rate converges to the usual value in the long term. Secondly, if ecosystem services can be easily substituted in production but not in consumption, the relative price effect is important. Finally, and most interestingly, if ecosystem services cannot be easily substituted in production, the discount rate declines towards a low value and the relative price effect is less important. Another part of the previous literature has shown that a declining discount rate is the result of introducing several forms of uncertainty, but this paper reaches that conclusion from an endogenous effect on the growth rate of the economy.

KW - discount rate

KW - Ramsey balanced growth

KW - ecosystem services

KW - consumption value

KW - production value

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KW - discounting

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