An academic from the University of Exeter Business School was instrumental in a government review of how we value tomorrow’s environment in evaluating investment decisions made today.
In the Treasury’s Environmental Discount Review, the conclusion of which was published earlier this month, officials recommended more accurate future monetary valuations of the natural environment as a critical way to ensure that the future environment is taken into account in policy evaluation.
An important part of this process is ensuring that assessments reflect the growing value of the environment over time, due to factors such as increased scarcity and changes in society’s priorities and attitudes.
Their recommendation was made following an external and independent consultation chaired by Professor Ben Groom, Dragon Capital Chair in Biodiversity Economics at the University of Exeter Business School.
The treasury social discount rate of 3.5% is used by ministries to determine how costs and benefits that will occur in the future, including the impacts of projects, policies and programs on the environment, are assessed. today.
The rate approaches the value attached today to impacts at different times in the future.
In cost-benefit analysis, which is part of the Green Paper methodology, higher discount rates mean that lower values are assigned to future costs and benefits, so projects with large upfront costs and Benefits in the distant future have a lower value than an equivalent project but with lower costs. – term payments
Professor Groom has been invited to chair a consultation of world-renowned economists and treasury officials to answer the question of whether environmental costs and benefits should be discounted differently from other goods and services.
Specifically, economists were asked whether to apply an environmental discount rate lower than the current rate of 3.5% in the central government’s guidance on cost-benefit analysis, known as the “Book green “.
Increasing values for the environment in the future can be reflected by adjusting the discount rate or focusing on relative environmental assessments. Each has largely the same effect.
The consultation therefore concluded that the most “practical” and precise approach would be to focus on future prices for different aspects of the environment rather than introducing a global environmental discount rate.
This, in turn, puts more emphasis on the need for an evidence base and process to improve environmental impact assessments over time.
It would also be a more practical approach that would give more accurate estimates of likely future costs and benefits, argued Prof Groom.
The approach, he said, would have the same implications as reducing the discount rate by reflecting the state of the world that future societies will face and the value that future societies will place on the environment.
For long-term horizons, the approach better reflects the well-being of future generations in decisions made today for public sector policy initiatives, projects or programs that involve the environment.
The academics recommended that the Treasury continue to develop its valuation guidelines, including on how environmental values should be “uplifted” in the future, and particular attention being paid when environmental damage cannot be replaced. through other goods and services.
Their recommendation to focus on improving environmental impact assessments will lead to further consultations and influence updates to the Green Paper and its further guidance.
The approach is also consistent with that outlined in the recent Dasgupta review on the economics of biodiversity.
Professor Groom said: “This is an important step to properly reflect the value of the environment for society in the future in public decision-making today and to orient public policies towards more results. sustainable. This fits perfectly with the objectives of the British Natural Capital Committee and the recommendations of the journal Dasgupta, to integrate environment and biodiversity into central government decisions.
The University of Exeter has launched a Green Futures campaign and website to take action on the environment and the climate emergency. To learn more, please visit https://greenfutures.exeter.ac.uk.