The Economics of Desertification, Land Degradation, and Drought

Figure 1.3—Prevention, mitigation, and rehabilitation costs over time
Source: Schwilch et al. 2009.
Note: SLM = sustainable land management
The choice of discount rates and time horizon is crucial, because the size of the discount rate,
as well as the length of the considered time horizon, can radically change the results. Discount rates
relate to people’s time preference, with higher discount rates indicating a strong time preference and
attaching a higher value to each unit of the natural resource that is consumed now rather than in the
future. Assume a future benefit of sustainable land management of $10,000. If the discount rate were
3 percent, then the present value of the benefit of $10,000 earned in 10 years from now would only be
$7.441. A zero discount rate refers to no time preference at all and the equal valuation of a unit of the
resource consumed in the present or in the future. High discount rates, therefore, tend to discourage
investments that generate long-term benefits and favor those that create short-term benefits but
significant long-term costs. The social discount rate, from the perspective of society as a whole, is
usually much lower than the discount rate of individuals; from a societal point of view, the value of a
unit of the natural resource consumed by this generation or the next is the same, everything else being
kept constant, whereas this does not hold from an individual’s perspective. Further, discount rates can
actually differ across individuals, based on socioeconomic factors, attitude toward risk, and
uncertainty. When applying the methodology presented in this report, the issue of discounting and
time and planning horizons needs to be clearly elaborated. What discount rate to set is primarily an
ethical question. Following the argument that present generations have the moral obligation to protect
the interests of future generations would lead to rather low discount rates. Actions of today’s
generation impose intergenerational externalities, such as loss of biodiversity, on future generations.
On the other hand, today’s investments are likely to increase the wealth of future generations, which
allows them to more easily address environmental protection, at least as long as environmental
damage is reversible. The existence of inflation, time preference, and the opportunity cost of capital
suggests that a positive discount rate better reflects societal preferences. Similar to Stern (2006), we
propose using a low discount rate (around the 0.5 percent mark) for the economic assessment of
DLDD. This kind of value is particularly motivated by the long-term nature of DLDD processes and
their impacts; it also reflects the need to assess the costs of DLDD from the perspective of society as a
whole—now and in the future. The choice of discount rate for the valuation of environmental goods is
essentially an ethical issue, not one of economic calculation only.
As stated earlier, the time preference of individuals, especially in developing countries, is
often much higher than the value proposed here for the global analysis. For instance, for land
degradation, a strong time preference can reflect constrained choices in land management due to
poverty, leading to land-degrading rather than land-conserving practices, or due to the land user’s
high level of risk aversion. Typically, in poor rural areas, land degradation, poverty, and a high time
preference are all interrelated, which can take the form of a vicious circle, as illustrated in Figure 1.4.
As poverty increases, land users form ever-higher preferences for the present over the future, thereby
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