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Discounting procedures for environmental (and other) projects: A comment on Kolb and Scheraga

Author

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  • Jonathan A. Lesser

    (Senior Economist at Green Mountain Power Corporation, South Burlington, Vermont)

  • Richard O. Zerbe

    (Professor of Public Affairs and Adjunct Professor of Law, Graduate School of Public Affairs, University of Washington)

Abstract

We compare two alternative methods to discount the costs and benefits of environmental projects. These are (1) the shadow price of capital, which can be practically expressed by using the cost of capital and thus the discount rate on government bonds, and (2) the two-stage discounting procedure advocated by Kolb and Scheraga. We suggest that the two-stage approach is in many cases inconsistent with the shadow price of capital approach and will therefore lead to misallocations of resources. We further argue that the use of the cost of capital as the discount rate will be easier than the two-stage procedure, will yield results that are consistent with the shadow price of capital approach, and will be justified by the potential Pareto criterion. Finally, use of the shadow price of capital approach has a potential for achieving considerable consensus in practice as well as in theory, a result that could considerably enhance project evaluation.

Suggested Citation

  • Jonathan A. Lesser & Richard O. Zerbe, 1994. "Discounting procedures for environmental (and other) projects: A comment on Kolb and Scheraga," Journal of Policy Analysis and Management, John Wiley & Sons, Ltd., vol. 13(1), pages 140-156.
    • Handle: RePEc:wly:jpamgt:v:13:y:1994:i:1:p:140-156
    DOI: 10.2307/3325094
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    References listed on IDEAS

    as
    1. William R. Cline, 1992. "Economics of Global Warming, The," Peterson Institute Press: All Books, Peterson Institute for International Economics, number 39, October.
    2. Richard O. Zerbe, 1991. "Comment: Does benefit cost analysis stand alone? rights and standing," Journal of Policy Analysis and Management, John Wiley & Sons, Ltd., vol. 10(1), pages 96-105.
    3. Lyon, Randolph M., 1990. "Federal discount rate policy, the shadow price of capital, and challenges for reforms," Journal of Environmental Economics and Management, Elsevier, vol. 18(2), pages 29-50, March.
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    2. Horowitz, John K., 1996. "Environmental policy under a non-market discount rate," Ecological Economics, Elsevier, vol. 16(1), pages 73-78, January.
    3. Richard O. Zerbe, 2013. "Ethical benefit–cost analysis as art and science: ten rules for benefit–cost analysis," Chapters, in: Scott O. Farrow & Richard Zerbe, Jr. (ed.), Principles and Standards for Benefit–Cost Analysis, chapter 8, pages 264-293, Edward Elgar Publishing.
    4. Horowitz, John K., 1995. "Environmental Policy Under a Non-Market Discount Rate," Working Papers 197828, University of Maryland, Department of Agricultural and Resource Economics.
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