DISCOUNTING PROCEDURES FOR ENVIRONMENTAL (AND OTHER) PROJECTS - A COMMENT ON KOLB AND SCHERAGA

We compare two alternative methods to discount the costs and benefits of environmental projects. These are (1) the shadow price of capital, which can be practically expressed by using the cost of capital and th us the discount rate on government bonds, and (2) the two-stage discou nting procedure advocated by Kolb and Scheraga. We suggest that the tw o-stage approach is in many cases inconsistent with the shadow price o f capital approach and will therefore lead to misallocations of resour ces. We further argue that the use of the cost of capital as the disco unt rate will be easier than the two-stage procedure, will yield resul ts that are consistent with the shadow price of capital approach, and will be justified by the potential Pareto criterion. Finally, use of t he shadow price of capital approach has a potential for achieving cons iderable consensus in practice as well as in theory, a result that cou ld considerably enhance project evaluation.