What weight should be assigned to future environmental impacts? A probabilistic cost benefit analysis using recent advances on discounting

• Published in: The Science of the total environment Vol. 409; no. 7; pp. 1305 - 1314
• Main Authors: Almansa, Carmen, Martínez-Paz, José M.
• Format: Journal Article
• Language: English
• Published: Kidlington Elsevier B.V 01.03.2011; Elsevier
• Subjects: Agricultural Irrigation - economics; Agricultural Irrigation - statistics & numerical data; Animal, plant and microbial ecology; Applied ecology; Applied sciences; Biological and medical sciences; Conservation of Natural Resources - economics; Conservation of Natural Resources - methods; Cost benefit analysis; Cost-Benefit Analysis - methods; Delphi; Desalination plant; Environment; Environment and sustainable development; Environmental discounting; Environmental Monitoring - methods; Environmental Pollution - economics; Environmental Pollution - statistics & numerical data; Exact sciences and technology; Financing; Fundamental and applied biological sciences. Psychology; Horizon; Investment; Models, Statistical; Monte Carlo Method; Monte Carlo methods; Monte Carlo simulation; Panels; Pollution; Profitability; Risk Assessment - methods; Social discount rate; Water Purification - economics; Water Purification - statistics & numerical data; Water treatment and pollution; Europe; Spain; Spain, Murcia, Mar Menor; Environmental discounting; Desalination plant; Cost benefit analysis; Delphi; Social discount rate; Monte Carlo simulation; Economic analysis; Irrigation; Monte Carlo method; Uncertainty; Probabilistic approach; Discount rate; Intensive farming; Sustainable development; Discounting; Risk assessment; Environment impact; Environmental protection
• ISSN: 0048-9697; 1879-1026
• DOI: 10.1016/j.scitotenv.2010.12.004

Cost–benefit analysis is a standard methodological platform for public investment evaluation. In high environmental impact projects, with a long-term effect on future generations, the choice of discount rate and time horizon is of particular relevance, because it can lead to very different profitability assessments. This paper describes some recent approaches to environmental discounting and applies them, together with a number of classical procedures, to the economic evaluation of a plant for the desalination of irrigation return water from intensive farming, aimed at halting the degradation of an area of great ecological value, the Mar Menor, in South Eastern Spain. A Monte Carlo procedure is used in four CBA approaches and three time horizons to carry out a probabilistic sensitivity analysis designed to integrate the views of an international panel of experts in environmental discounting with the uncertainty affecting the market price of the project's main output, i.e., irrigation water for a water-deprived area. The results show which discounting scenarios most accurately estimate the socio-environmental profitability of the project while also considering the risk associated with these two key parameters. The analysis also provides some methodological findings regarding ways of assessing financial and environmental profitability in decisions concerning public investment in the environment. ► Cost–benefit analysis (CBA) is a standard platform for public investment evaluation. ► We describe some recent approaches to environmental discounting. ► We integrate the views of an international panel of experts in environmental discounting. ► A Monte Carlo procedure is used in four CBA approaches and three time horizons. ► We present the economic evaluation of a plant for the desalination of drainages.