On the other hand, consider a rural forestry development project in a currently
degraded area. The area, which may be unused or produce little, may have the
potential to support a renewable source of fuel wood and other wood products
indefinitely. However, a large amount of investment may be necessary, with no
returns to be received for a number of years.
Both of these projects have important implications for future residents of the areas
affected. In the former case (cattle grazing), future generations may have fewer
resources available to them than they would have had, without the project, while in
the latter (forestry development), both current and future generations may be
enriched by the project. Even so, it is quite possible that benefit-cost analyses of
the two projects may show the former to be more profitable than the latter. A great
deal will depend on the discount rate used in the analysis.
Discounting is used to compare costs and benefits which occur at different points
in time. The choice of the discount rate to be used will greatly affect the outcome of
the analysis. A high discount rate will favour projects with immediate net benefits
over those whose benefits will not be realized for a longer period. In addition, the
higher the discount rate, the less the influence of negative impacts that may arise in
the future. Low discount rates, on the other hand, have less restrictive effects on
projects with long-term net benefits and give more weight to negative future impacts.
In effect, discounting results in less and less attention given to successive
generations. To eliminate this bias of putting the welfare of the current generation
above that of future generations, some people have advocated the use of a very low,
or even a zero discount rate. Such suggestions, however, are ill conceived and would
not result in efficient or even equitable use of resources. Clearly, eliminating
discounting would violate two essential facts. First, people would rather be given a
certain amount of money today than the same amount of money sometime in the
future. Second, alternative opportunities exist in which sums of money invested
today will yield larger sums of money in the future. For both these reasons,
eliminating discounting would result in a net decrease, not an increase, of social
welfare.
It is true that both the choice of project selected and the discount rate to be used
will affect the intertemporal allocation of resources and thus have implications for
intergenerational equity. However, by wisely using non-renewable resources and
emphasizing projects which promote sustainable use of renewable resources, the
welfare of both current and future generations can be enhanced.
A related issue concerns projects which will have irreversible effects of various
kinds. These projects will also have important effects on future generations and are
discussed below.
8.10.3 Risk and Uncertainty
There are a number of ways in which risk and uncertainty enter into project analyses.
In a production-oriented development project, future prices and expected yields will
8.10 Economic Measurement of Environmental Impacts: Limits
247
degraded area. The area, which may be unused or produce little, may have the
potential to support a renewable source of fuel wood and other wood products
indefinitely. However, a large amount of investment may be necessary, with no
returns to be received for a number of years.
Both of these projects have important implications for future residents of the areas
affected. In the former case (cattle grazing), future generations may have fewer
resources available to them than they would have had, without the project, while in
the latter (forestry development), both current and future generations may be
enriched by the project. Even so, it is quite possible that benefit-cost analyses of
the two projects may show the former to be more profitable than the latter. A great
deal will depend on the discount rate used in the analysis.
Discounting is used to compare costs and benefits which occur at different points
in time. The choice of the discount rate to be used will greatly affect the outcome of
the analysis. A high discount rate will favour projects with immediate net benefits
over those whose benefits will not be realized for a longer period. In addition, the
higher the discount rate, the less the influence of negative impacts that may arise in
the future. Low discount rates, on the other hand, have less restrictive effects on
projects with long-term net benefits and give more weight to negative future impacts.
In effect, discounting results in less and less attention given to successive
generations. To eliminate this bias of putting the welfare of the current generation
above that of future generations, some people have advocated the use of a very low,
or even a zero discount rate. Such suggestions, however, are ill conceived and would
not result in efficient or even equitable use of resources. Clearly, eliminating
discounting would violate two essential facts. First, people would rather be given a
certain amount of money today than the same amount of money sometime in the
future. Second, alternative opportunities exist in which sums of money invested
today will yield larger sums of money in the future. For both these reasons,
eliminating discounting would result in a net decrease, not an increase, of social
welfare.
It is true that both the choice of project selected and the discount rate to be used
will affect the intertemporal allocation of resources and thus have implications for
intergenerational equity. However, by wisely using non-renewable resources and
emphasizing projects which promote sustainable use of renewable resources, the
welfare of both current and future generations can be enhanced.
A related issue concerns projects which will have irreversible effects of various
kinds. These projects will also have important effects on future generations and are
discussed below.
8.10.3 Risk and Uncertainty
There are a number of ways in which risk and uncertainty enter into project analyses.
In a production-oriented development project, future prices and expected yields will
8.10 Economic Measurement of Environmental Impacts: Limits
247