UK Green Book discount rates for the value society places on environmental assets, goods and services
In my book "Unbalanced World - The Asset Stewardship Shortfall", I use a 2% discount rate when valuing natural capital. However, UK HM Treasury are considering potentially using even smaller discount rates for evaluating environmental impacts of policy decisions, in their current review of the Green Book (see below – sections 3.14 to 3.17 from the UK Green Book Review 2020):
“3.14 Measuring the value society places on the environment over time is complex due to the increasing scarcity of natural resources and their lack of close substitutes. The social time preference rate includes a wealth component, which allows for society’s increasing wealth over time. This component assumes that the welfare value placed on consumption of a particular good reduces as society becomes wealthier and can therefore consume more and across an increasing number of goods. It is not clear that this applies for consumption of the environment, where limited substitutes and scarcity of natural assets means that as society consumes more, less is left for future consumption. In this case, the value of other consumption society would be willing to trade for consumption of the environment is likely to increase over time.
3.15 A theoretically justified case can be made to lower the discount rate for environmental benefits by removing the wealth component. There is precedent in the Green Book, which already applies a reduced 1.5% rate for health impacts, on the basis that a person’s health is a scarce resource that is not readily substitutable with other purchasable benefits. As explained above, the same logic can be applied to the environment.
3.16 Discounting cannot be seen in isolation to the values to which the discount factors apply. Discounting and valuation work in tandem to provide a present value for impacts that occur in the future. In some cases, environmental values are uprated over time in line to reflect rising relative prices of environmental goods.
3.17 HMT will lead an expert external review to examine the application of the discount rate to environmental impacts, considering the interaction with valuation approaches. This review will conclude next year and any changes to discounting will be incorporated into future updates to the Green Book.”
Lower discount rates, when applied to future streams of environmental services on a discounted net present value method for asset valuation, will generally increase the valuation of those capital assets (in this case natural capital assets).
It will be good if these discount rates fall, because it will become all the more apparent the extent to which our economic circumstances rely upon our natural capital rather than other forms of capital. The increasing realisation and visibility of this, alongside better understanding of the non-substitutability of natural capital at an aggregate level, will help support agendas to protect, maintain, enhance and regenerate natural capital, in the UK and across the rest of the world.
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