Determining discount rates for the evaluation of natural assets in land-use planning: An application of the Equivalency Principle

Abstract

One of the most pressing issues when making decisions over long-term environmental problems is deciding on an appropriate discount rate. This can be a highly technical discussion. While some argue in favour of market rates, which usually tend to be high, others support the use of near-zero rates to ensure that both current and future generations are properly accounted for. This paper presents an alternative approach to determining the discount rate for environmental assets in the case of land-use planning - the Equivalency Principle (EP) - based on the normative proposition that the social value of protected natural land should be at least the same as the market price of an adjacent land with similar environmental characteristics that has been granted permission for development. The paper first provides a theoretical overview of the approach, followed by an application of the EP at the land plot level across 11 European countries. Based on the EP, pure rates of social time preference that would equate natural and development land values within each administrative unit have been calculated. The findings show that the application of the EP usually results in discount rates that are lower-than-market rates and that are geographically differentiated. This implies discount rates that account for preferences of the society where the land or natural resource is located, with results ranging between 0% and 11%, with an average rate of 1% across study sites.