Cost-benefit analysis and ecological discounting

Abstract

The discounting of costs and benefits is a critical operation when projects, plans and programmes with long-term extra-financial effects need to be assessed. Therefore, the aim of the paper is first to show the potential deriving from the use of specific procedures to discount the environmental impact of the investment, then to define a probabilistic model for the estimate of the “ecological” Declining Discount Rate and “economic” Declining Discount Rate. The implementation of the model to the data of the Italian economy returns an ecological discount rate lower than the economic one. This means giving more weight to environmental externalities rather than strictly financial repercussions. This has a clear impact on the decision-making process for projects with intergenerational environmental implications.