DISCOUNTING PROCEDURES IN LARGE ENGINEERING PROJECTS

In economic analysis of any engineering project discounting is a standard procedure used in cost-benefit analysis. With careful selection of the assumptions used in cost-benefit analysis it can be made to support, or oppose, almost anything. This is particularly so when the decision being studied involves some cost or benefit, for which there is no market price or which, because of an externality, is not fully reflected in the market price. Typical examples would be a project to build a hydroelectric dam in an area of outstanding natural beauty or a law to require factories to limit emissions of gases that may cause ill-health. Discounting tends to give less weight to future costs and benefits. The future environmental costs are either ignored or given less weight due to discounting in the economic analysis. This paper argues against using the practice of discounting and shows that both the time preference and the opportunity cost of capital arguments, used to justify discounting, are in conflict when we take the holistic approach to the environment.