Building a Social Discount Rate to be Applied in US Afforestation Project Appraisal

Abstract

This paper is focused on searching for the suitable discount rate to be applied to the valuation of a project related to forests in the USA, e.g., a recreational area inside a national park. To do this, we propose a new model based on hazard rate concepts, i.e., based on the risk that waiting time implies. More specifically, we derive the discount function whose instantaneous discount rate is the hazard rate of the system supporting the investment. We determine the rate of failure corresponding to different partition criteria of the whole system; in our case, we can use the information on forest fires caused in different ways, in different states or in different types of forest surfaces. After showing independence between the forest fires by states and causes, we derive a specific discount function for each cause which can be applied to every state or set of states which agree to fight against a concrete cause of forest fire. Additionally, we obtain a unique discount function by weighting the partial discount functions by type of forest surfaces. Our results are in line with the recommendations from several authors about using decreasing discount rates for projects with very long-term impacts.

The Role of Discounting in Energy Policy Investments

“…Vazquez-Lavín et al [40], with reference to projects aimed at preserving biodiversity in marine protected areas in Chile, estimate a declining SDR for eco-system services. Muñoz-Torrecillas et al [41] estimate an SDR to be employed in the appraisal of afforestation projects in the United States.…”

“…Energy systems [11,42] Application for different investment sectors [15] GHG emissions [23] Ecosystem Services [31,40] Afforestation Projects [41] Considering the framework outlined, this research intends to characterise new approaches for estimating SDR for use in economic evaluations of energy interventions and policies. As the literature review shows, there is a lack of studies proposing both constant and declining dual models specifically for the economic evaluation of energy projects.…”