Evaluating the Impacts of Discount Function and Rate Selection on the Net Present Valuation of Coastal Wetland Ecosystem Services: An Exploratory Meta-Analysis

Abstract

This thesis explores the impact of discount function and rate selection on the net present valuation of coastal wetland ecosystem services in the context of benefit cost analysis. Using valuation estimates from peer-reviewed literature, the effects of exponential and hyperbolic discounting functions are compared across several discount rates and time horizons. The choice of discount rates, as well as discount functions, appears to have a considerable impact on net present value, especially on a long time horizon. This thesis questions the seemingly arbitrary assignment of high discount rates for benefit cost analyses involving ecosystem services, addressing the underlying economic theory and associated market failures that arise from attempting to value public goods that likely exhibit increasing returns. A close examination of transaction cost economics suggests that the biophysical characteristics of ecosystem services, coupled with incomplete information regarding preferences of future generations and the sheer number of individuals and firms acting as stakeholders, may serve as a barrier to transactions and the establishment of an efficient market to signal the true value of an ecosystem. Uncertainty regarding estimated ecosystem service values and the future impacts of climate change lead to the conclusion that a regulatory framework may provide a more effective means of protecting natural capital.