Social discount rates in cost benefit analysis of regional pest management plans: Guidance and recommendations for the uninitiated

Abstract

Decisions concerning pest management frequently carry long-term consequences for the environment and human interests. This situation then leads to a pertinent question: should we value future outcomes equally with immediate ones in our current decision-making processes? This is the question of discounting. • A central purpose of Regional Pest Management Plans (RPMP) is to provide a framework to manage identified pests efficiently and effectively. Within a limited budget, RPMP decision-makers are tasked with determining which pests to focus response resources on, and the tools of Cost Benefit Analysis (CBA) or other related analytic approaches to analysis of benefits and costs (ABC) can contribute information to inform how to best allocate response budget. • Discounting in CBA converts future costs and benefits into present value (PV), enabling consistent comparison across different time periods. Discounting is particularly important in determining the PV of environmental projects with significant timing differences between costs and benefits, where benefits are delayed, or where benefits accrue over a long time horizon. • An important implication of the exponential discounting approach currently used by New Zealand Treasury (TSY), is that this can substantially undervalue long-term benefits, contradicting pest management strategies emphasising preventative actions, and diminishing the role of future societies’ wellbeing. • An important limitation of the TSY approach, is that discount rates are based in estimates of the government's cost of capital using market rate of return data. This approach has limited applicability to environmental decision making and is unlikely to capture the full range of relevant social preferences. For example, the market rate of return is unlikely to reflect the non-market values of environmental goods and services. That is, there are no markets for most of the environmental goods and services society benefits from such as those provided by natural ecosystems, and therefore no relevant market rate of return is directly observable in many instances. • An alternative approach to setting discount rates is based in maximising the wellbeing of society through time, explicitly considering the importance of future generations’ wellbeing. This is known as the social rate of time preference (SRTP). This approach allows for the incorporation of society's preferences for environmental outcomes into the discount rate, is consistent with ethical principles of intergenerational equity and sustainability, and promotes transparency and stakeholder engagement in rates setting. • The SRTP approach is able to incorporate te ao Māori considerations regarding the choice of discount rate. Discounting from a Māori perspective is relevant because Māori conceptualisations of time may differ from what may be considered as Eurocentric time preferences. The principle of tauutuutu (reciprocity) ethics highlights the obligation Māori have to future generations and the importance of creating and maintaining intergenerational equity. Through whakapapa (genealogy), Māori identify the natural world as a continuum of both ancestors and family through time. This means that the future value of environmental quality to future Māori generations should be considered equally valuable to present generations. Applying te ao Māori considerations to discounting supports the use of lower rates. • Alongside an increase in the use of SRTP discount rates, in high income countries, is a move toward implementing declining discount rates over time. This differs from the current TSY approach applying a constant rate in each year. A declining discount rate can promote intergenerational equity by recognising the rights and interests of future generations in decision making. This can help ensure that environmental resources are shared fairly over generations and are more responsive to indigenous world views/te ao Māori. A declining discount rate can reflect the uncertainty associated with long-term decision-making, such as climate change. By reducing the discount rate over time, decision-makers can account for the uncertainty associated with long-term projections.