A University of Exeter Business School academic has been instrumental in a government review into how we value the environment of tomorrow 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 key way to make sure the future environment is accounted for in policy appraisal.
An important part of that process is making sure the valuations reflect the environment’s increasing value over time, due to factors such as increased scarcity and changes in societal 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’s Social Discount Rate of 3.5% is used by government departments to determine how costs and benefits that occur in the future, including the impacts of projects, policies and programmes on the environment, are valued today.
The rate approximates the value attached today to impacts at different points in the future.
In cost benefit analysis, a part of the Green Book methodology, higher discount rates mean lower values are placed on future costs and benefits, so projects with large upfront costs, and benefits in the distant future have lower value than an equivalent project but with shorter-term payoffs.
Professor Groom was asked to chair a consultation of world-leading economists and Treasury officials to answer the question of whether environmental costs and benefits should be discounted differently to other goods and services.
Specifically, the economists were asked whether to apply a lower environmental discount rate than the current 3.5% in the central governmental guidance on cost benefit analysis, known as the ‘Green Book’.
Increasing values for the environment in the future can be reflected by adjusting the discount rate or by focussing on relative valuations of the environment. Each has largely the same effect.
The consultation therefore concluded that the more ‘practical’ and precise approach would be to focus on the future prices of different aspects of the environment rather than to introduce a blanket environmental discount rate.
This in turn places greater focus on the need for an evidence base and processes to improve valuations of environmental impacts over time.
It would also be a more practical approach that would give more accurate estimates of the likely future costs and benefits, Professor Groom argued.
The approach, he said, would have the same implications as lowering 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 future generations’ wellbeing in decisions made today for public sector policy initiatives, projects or programmes that involve the environment.
The academics recommended that the Treasury should continue to develop its appraisal guidance including on how environmental values should be ‘uprated’ in the future, and special consideration given where the environmental damage cannot be substituted by other goods and services.
Their recommendation to focus on improving valuations of environmental impacts will lead to further consultation and influence updates to the Green Book and its supplementary guidance.
The approach is also in line with that set out in the recent Dasgupta Review on the Economics of Biodiversity.
Professor Groom said: “This is an important step towards properly reflecting the value of the environment to society in the future in public decision-making today and guiding public policy towards more sustainable outcomes. It fits squarely with the objectives of the UK Natural Capital Committee and the recommendations of the Dasgupta Review, to mainstream environment and biodiversity in central government decisions.”