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Ramsey Discounting of Ecosystem Services

Abstract

Most ecosystem services, which are essential for human well-being, are globally declining, while the production of consumption goods, measured by GDP, is still growing. To adequately account for this opposite development in public cost-benefit analyses, it has been proposed—based on a two-goods extension of the Ramsey growth model—to apply good-specific discount rates for manufactured consumption goods and for ecosystem services. Using empirical data for ten ecosystem services across five countries and the world at large, we estimated the difference between the discount rates for ecosystem services and for manufactured consumption goods. In a conservative estimate, we found that ecosystem services in all countries should be discounted at rates that are significantly lower than the ones for manufactured consumption goods. On global average, ecosystem services should be discounted at a rate that is 0.9 \(\pm \) 0.3 %-points lower than the one for manufactured consumption goods. The difference is larger in less developed countries and smaller in more developed countries. This result supports and substantiates the suggestion that public cost-benefit-analyses should use country-specific dual discount rates—one for manufactured consumption goods and one for ecosystem services.

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Notes

  1. 1.

    The general idea of differentiating between good-specific discount rates when consumption goods are heterogenous goes back to Malinvaud (1953).

  2. 2.

    The main motivation and achievement of his analysis are theoretical, anyway. The empirical analysis in Sect. 6 of his paper only serves as a numerical illustration of the theoretical results.

  3. 3.

    Some of the contributions quoted here have theoretically taken into account uncertainty of ecosystem-service-growth and risk-aversion of the decision-maker (e.g. Gollier 2010).

  4. 4.

    Strictly speaking, the function \(U(C,E)\) is defined by the term on the right-hand side of Eq. (10) for all \(\eta \ne 1\) (as this term is not defined for \(\eta =1\)). For \(\eta =1\), \(U(C,E)\) is defined by the continuous extension of this term for \(\eta \rightarrow 1\), which is \(\log \left( \alpha C^{(\sigma -1)/\sigma } + (1-\alpha ) \, E^{(\sigma -1)/\sigma } \right) ^{\sigma /(\sigma -1)}\).

  5. 5.

    We discuss this selection bias due to data availability in detail in Sect. 5.

  6. 6.

    In line with the Common International Classification of Ecosystem Services (Haines-Young and Potschin 2012), which is compatible with the internationally adopted System of Environmental-Economic Accounting (United Nations et al. 2012), we understand provisioning services as the final ecosystem services from the environment that cross the production boundary and thus become benefits in the economy. Their provision may depend on human inputs, such as e.g. capital, labor, energy and fertilizer, but they are still inextricably linked to ecosystems as they critically depend on a number of intermediate and supporting services, such as e.g. soil formation or nutrient cycling.

  7. 7.

    Established and well documented national biodiversity indicators exist for Germany and the UK.

  8. 8.

    Road density is calculated as the total length of a country’s road network divided by the the country’s land area.

  9. 9.

    In this dataset, “agriculture” corresponds to ISIC divisions 1–5 and includes forestry, hunting, and fishing, as well as cultivation of crops and livestock production.

  10. 10.

    Different ecosystem services do not need to be perfect substitutes to each other, though, as long as they all have the same elasticity of substitution with respect to manufactured consumption goods.

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Acknowledgments

We are grateful to Dave Abson, Kjell Brekke, Simon Dietz, Moritz Drupp, Charles Figuières, Monica Hernández, Terry Iverson, Larry Karp, Duncan Knowler, Vincent Martinet, David Pannell, Jack Pezzey, Martin F. Quaas and Michael Rauscher for discussion and comments.

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Correspondence to Stefan Baumgärtner.

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Baumgärtner, S., Klein, A.M., Thiel, D. et al. Ramsey Discounting of Ecosystem Services. Environ Resource Econ 61, 273–296 (2015) doi:10.1007/s10640-014-9792-x

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Keywords

  • Discounting
  • Ecosystem services
  • (De)growth
  • Heterogeneous consumption
  • Relative scarcities
  • Ramsey model
  • Substitution

JEL Classification

  • H43
  • Q28
  • Q51
  • Q57