PROJECT EVALUATION AND RESOURCE SUSTAINABILITY

Abstract

This paper outlines a procedure for embodying the principle of resource sustainability in evaluating projects that use significant amounts of natural resources. In this analysis, sustainability requires maintaining the productivity of the resource used over time, either by renewing the resource or by investing its depletion in other capital assets. The basis of a project's evaluation is its net present social value (NPSV), including resource depletion as a social cost. The social cost of depletion is the amount that must be saved and reinvested annually to accumulate a fund that will yield a perpetual annual income equal to the net output lost by resource depletion. By treating resource depletion as a social cost in calculating NPSV, projects causing a high rate of resource depletion receive a relatively low valuation compared with projects causing less resource depletion. Resource depletion includes environmental damage caused by constructing and operating a project, as well as the direct consumption of natural resources. Several problems arise in reinvesting depletion to preserve the value of a resource base. One major problem relates to the substitutability of man-made capital for natural resources. The conclusion of the analysis here is that society must invest a substantial amount of resource depletion in: (i) replenishing renewable resources, (ii) increasing product output per unit of resource used, or (Hi) increasing the end-use efficiency of resource-intensive products.