Discounting and the environment should current impacts be weighted differently than impacts harming future generations?
Hellweg, Stefanie ; Hofstetter, Thomas ; Hungerbuhler, Konrad
In: The International Journal of Life Cycle Assessment, 2003, vol. 8, no. 1, p. 8-18
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- Background: In Life-Cycle Assessment (LCA), decision makers are often faced with tradeoffs between current and future impacts. One typical example is waste incineration, where immediate emissions to the air from the incineration process have to be weighted against future emissions of slag landfills. Long-term impacts are either completely taken into account or they are entirely disregarded in case of a temporal cut-off. Temporal cutoffs are a special case of discounting. Objective: In this paper, discounting is defined as valuing damages differently at different points of time using a positive or negative discount rate. Apart from temporal cut-offs, discounting has rarely been applied in LCA so far. It is the goal of this paper to discuss the concept of discounting and its applicability in the context of LCA. Methods: For this purpose, we first review the arguments for discounting and its principles in economic sciences. Discounting in economics can be motivated by pure time preference, productivity of capital, diminishing marginal utility of consumption, and uncertainties. The nominal discount rate additionally includes changes in the price level. These arguments and their justification are discussed in the context of environmental impacts harming future generations. Results and Discussion: It is concluded that discounting across generations because of pure time preference contradicts fundamental ethical values and should therefore not be applied in LCA. However, it has to be acknowledged that in practice decision makers often use positive discount rates because of pure time preference — either because they might profit from imposing environmental damage on others instead of themselves or because people in the far future are not of immediate concern to them. Discounting because of the productivity of capital assumes a relationship between monetary values and environmental impact. If such a relationship is accepted, discounting could be applied. However, future generations should be compensated for the environmental damage. It is likely that they would demand a higher compensation if the real per capita income increases. As both the compensation and the discount rate are related to economic growth, the overall discount rate might be close to zero. It is shown that the overall discount rate might even be negative considering that the required compensation could increase (even to infinite) if natural assets remain scarce, whereas the utility of consumption diminishes with increasing income. Uncertainties could justify both positive and negative discount rates. Since the relationship between uncertainties and the magnitude of damage is generally not exponential, we recommend to model changes in the magnitude of damage in scenario analysis instead of considering it in discounting (which requires an exponential function of time in the case of a constant discount rate). We investigated the influence of discounting in a case study of heavy metal emissions from slag landfills. It could be shown that even small discount rates of less than 1 % lead to a significant reduction of the impact score, whereas negative discount rates inflate the results. Conclusions and Recommendations: Discounting is only applicable when temporally differentiated data is available. In some cases, such a temporal differentiation is necessary to take sound decisions, especially when long emission periods are involved. An example is the disposal of nuclear or heavy metal-containing waste. In these cases, the results might completely depend on the discount rate. This paper helps to structure arguments and thus to support the decision about whether or not discounting should be applied in an LCA