Limits to Substitution Between Ecosystem Services and Manufactured Goods and Implications for Social Discounting

Abstract

This paper examines implications of limits to substitution for estimating substitutability between ecosystem services and manufactured goods and for social discounting. Based on a model that accounts for a subsistence requirement in the consumption of ecosystem services, we provide empirical evidence on substitution elasticities. We nd an initial mean elasticity of substitution of two, which declines over time towards complementarity. We subsequently extend the theory of dual discounting by introducing a subsistence requirement. The relative price of ecosystem services is non-constant and grows without bound as the consumption of ecosystem services declines towards the subsistence level. An application suggests that the initial discount rate for ecosystem services is more than a percentage-point lower as compared to manufactured goods. This dierence increases by a further half percentage-point over a 300-year time horizon. The results underscore the importance of considering limited substitutability in long-term public project appraisal. JEL-Classication: Q01, Q57, H43, D61, D90

Over-exploitation of natural resources is followed by inevitable declines in economic growth and discount rate

“…We consider a social welfare function that is given by the widely-used form 12,32,36,37 where u ( c , f ) is the instantaneous utility that increases as c and f increase (Table 1), ρ is a constant rate of pure time preference, and T is a time horizon (we are interested in the limit T ∞). The distinction between the provision or consumption of the natural resource, f ( t ), and that of the other goods, c ( t ) is necessary here because, if the natural resource and the other goods are not entirely substitutable and the ratio between them varies over time, then social welfare depends on the ratio between c and f over time and cannot be written as a function of a single variable 29 . In turn, the substitutability is determined by the form of u 12,29,37 .…”

“…Also, several authors 16,20–23 proposed that policymakers should use a discount rate that declines over time, and they showed that this is justified if future economic growth is uncertain. Another mechanism that could affect the discount rate is a large perturbation that significantly affects social welfare 24,25 , such as an environmental degradation that may occur due to climate change or over-harvesting 26–29 . Particularly, several authors showed that global changes in the provision of non-substitutable natural resources might affect their relative prices 30,31 and the discount rate 25,32 .…”

Substituting freshwater: Can ocean desalination and water recycling capacities substitute for groundwater depletion in California?

“…To assess the applicability of the substitutability assumption, it is advisable to focus on one specific resource (Sterner and Persson 2008). Limited substitutability is generally more likely observed at the macro scale as it becomes increasingly difficult to import a resource externally (Drupps 2015;Stern 1997). Although California is part of a federal structure, the closest State with surplus water capacities is Alaska.…”

“…Empirical work on the substitutability of water is very scarce regardless of its policy relevance. Measuring the economic value of water is a major challenge, making it seemingly impossible to 'test' its substitutability quantitatively (Drupps 2015; Atkinson et al 2012). Therefore, this article seeks to shed new light on the matter by using a case study to assess feasible water substitution capacities within the State of California.…”

Reflections—Looking Back at Social Discounting Policy: The Influence of Papers, Presentations, Political Preconditions, and Personalities

“…Christian Gollier, Mark Freeman and Ben Groom were invited as external experts. Also present were several academics from the Netherlands including Aart de Zeeuw, Rob Aalbers (CPB) and Herman Volleburgh (EEA).15 The commission was influenced by Baumgartner etal (2014) andDrupp (2016), who built onWeikard and Zhu (2005), andHoel and Sterner (2007).…”