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Relative price increase for nature and ecosystem services

Report | 26-02-2018

In 2015, the Dutch working group on discount rates recommended using the standard discount rate in cost-benefit analyses (CBAs) of nature, while taking into account annual relative price increases of 1% for the effects on ecosystem services. In this background document, PBL substantiates this advice.

Two matters play an important role in determining the relative price increase:

  • the relative growth rate of nature compared to the growth rate of consumption, and
  • the degree to which nature is substitutable.

Nature is getting scarcer

If nature grows more slowly than consumption and is not or only partly substitutable, it will become scarcer in the future. This justifies the application of a relative price increase for ecosystem services. It is important to note that applying a relative price increase equals using a lower discount rate.

Substitution, here, refers to replacing ecosystem services with other goods and services for consumption. The degree of substitutability is not the same for all ecosystem services. Apples grown in the Netherlands can be substituted with imported apples, whereas outdoor recreation in protected nature areas cannot be perfectly substituted with a visit to a museum.

Advice: relative price increase of 1%

Our empirical analysis shows that an annual price increase of 1% for ecosystem services relative to the price of consumer goods reflects differences in trends in the relative scarcity of ecosystem services and consumer goods. We advise to use this relative price increase in cost-benefit analysis. Cost-benefit analysis, generally, use a discount rate of 3%; this becomes 2% for changes in ecosystem services.    

It is possible to deviate from the advised percentage. A discount rate of 3% could be used if ecosystem services do not become scarcer; for example if growth keeps pace with growth in regular consumption or if the ecosystem services can be substituted with other consumer goods. If the reverse is true, and ecosystem services become much scarcer, a discount rate exceeding 2% would be defensible.

Author(s)Mark J. Koetse, Gusta Renes, Arjan Ruijs, Aart J. de Zeeuw
Publication date26-02-2018