Using Net Present Value versus current year value

We ran the coastal blue carbon model using the assumption that all habitat will remain the same in extent and sequestration ability over time. We used Social Cost of Carbon values outlined by the EPA for the economic portion, looking at value for years 2050 and 2100. In the feedback on our analysis, someone questioned whether using Net Present Value as a valuation method would lead to an overestimate of future economic values because the ecosystems are likely to degrade with climate change. Are there ways to account for declines in habitat quality when we don’t have good data on how that will change future sequestration rates? Would increasing the discount rate be a good solution, and if so, are there recommendations on how much to change it?

The critique seems misguided. NPV is a conceptually appropriate approach for valuation when a time preference for value/well-being exists. You could argue different functional forms of discounting might be more appropriate for large/threshold events with drastic societal impacts, but those still are generically dealing with the same issue of time preferences for money/value and are used within a NPV framework (see section 5 of this recent review here: doi 10.1146/annurev-resource-111920-020721).

That’s not to say this isn’t a real issue for estimation, just that correcting for that through the discount rate does not seem conceptually appropriate. Future maps of land cover change that estimate the temporal and geospatial habitat damage would be more appropriate. I don’t have much experience with this, maybe @swolny has done this? It seems like a potentially big undertaking, though I suspect others may have already done this that you could adapt or reuse.

Thanks. We kept the discount rate the same and ended up reporting both the NPV and select single year values, and that was enough information to address the critique.

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