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Biodiversity valuation and the discount rate problem

Author

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  • Mark C. Freeman
  • Ben Groom

Abstract

Purpose - The aim of this paper is to demonstrate that the application of standard environmental accounting practices for estimating long‐term discount rates is likely to lead to the rejection of biodiversity‐sensitive projects that are in the greater societal good. Design/methodology/approach - The authors combine estimates of marginal ecosystem damages from two forestry case studies, one local, one global, with ten different term structures of discount rates taken from both the academic literature and policy choices to calculate present values. Findings - Standard environmental accounting approaches for estimating the long‐term discount rate result in the under‐valuation of projects that are sensitive to biodiversity conservation. Research limitations/implications - This paper is set within a full cost accounting (FCA) framework, and therefore has the limitations that generally follow from taking this approach to biodiversity problems. Recommended extensions include looking at broader ranges of biodiversity costs and benefits. Social implications - Unless environmental accountants engage with environmental economists over the issue of intergenerational discount rates, then it is likely that socially responsible managers will reject projects that are in the greater societal good. Originality/value - The paper introduces both normative discount rates and declining discount rates to estimates of shadow environmental provisions within FCA and contrasts these with current environmental accounting practices. It also provides two detailed case studies that demonstrate the extent to which biodiversity‐sensitive investment choices are likely to be undervalued by managers who follow current accounting recommendations concerning the appropriate choice of discount rate.

Suggested Citation

  • Mark C. Freeman & Ben Groom, 2013. "Biodiversity valuation and the discount rate problem," Accounting, Auditing & Accountability Journal, Emerald Group Publishing Limited, vol. 26(5), pages 715-745, June.
  • Handle: RePEc:eme:aaajpp:v:26:y:2013:i:5:p:715-745
    DOI: 10.1108/AAAJ-02-2013-1226
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    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
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    Cited by:

    1. Kollenberg, Sascha & Taschini, Luca, 2016. "Emissions trading systems with cap adjustments," Journal of Environmental Economics and Management, Elsevier, vol. 80(C), pages 20-36.
    2. Freeman, Mark C. & Groom, Ben, 2016. "How certain are we about the certainty-equivalent long term social discount rate?," Journal of Environmental Economics and Management, Elsevier, vol. 79(C), pages 152-168.
    3. Torelli, Riccardo & Balluchi, Federica, 2020. "Business Legitimacy, Agricultural Biodiversity and Environmental Ethics: Insights from Sustainable Bakeries," OSF Preprints sxzjf, Center for Open Science.
    4. Moritz Drupp & Mark Freeman & Ben Groom & Frikk Nesje, 2015. "Discounting disentangled: an expert survey on the determinants of the long-term social discount rate," GRI Working Papers 196a, Grantham Research Institute on Climate Change and the Environment.
    5. Lee Roberts & Abeer Hassan & Ahmed Elamer & Monomita Nandy, 2021. "Biodiversity and extinction accounting for sustainable development: A systematic literature review and future research directions," Business Strategy and the Environment, Wiley Blackwell, vol. 30(1), pages 705-720, January.
    6. Marjan van den Belt & Daniella Blake, 2015. "Investing in Natural Capital and Getting Returns: An Ecosystem Service Approach," Business Strategy and the Environment, Wiley Blackwell, vol. 24(7), pages 667-677, November.
    7. Freeman, Mark C. & Groom, Ben, 2016. "How certain are we about the certainty-equivalent longterm social discount rate?," LSE Research Online Documents on Economics 67258, London School of Economics and Political Science, LSE Library.
    8. Olivier Boiral, 2016. "Accounting for the Unaccountable: Biodiversity Reporting and Impression Management," Journal of Business Ethics, Springer, vol. 135(4), pages 751-768, June.
    9. Tregidga, Helen & Laine, Matias, 2022. "On crisis and emergency: Is it time to rethink long-term environmental accounting?," CRITICAL PERSPECTIVES ON ACCOUNTING, Elsevier, vol. 82(C).

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