Chapter 6

“What is more to blame for the collapse of the northern cod stocks, mismanagement or conventional discounting?”

In cost-​benefit analysis (CBA), conventional discounting is often unable to sanction long-​term environmental policies that fulfill the frequently stated mandate to provide for the needs of future generations (e.g., (Department of Fisheries and Oceans, 2001) (Environment Canada, 2002)). Scaling down the value of future benefits exponentially through time ensures that immediate costs will outweigh far-​off benefits at any practicable level of discounting, so that only myopic policies can result (Clark, 1973) (Sumaila et al., 2001). In valuing the stream of benefits from a fisheries resource, use of conventional discounting may lead to early profit taking at the expense of sustained productive potential. Evidence of this type of ‘front-​loading’ of fisheries benefits is clear in the catch record of Northern Atlantic cod (Gadus morhua) in the years before the 1992 collapse.

In a departure from what he called the ‘standard economic argument for overexploitation’, Clark (1973) (Clark, 1973) proposed that depletion of the Grand Banks demersal fisheries could be blamed on the discounting practices of fishing consortiums rather than open competition among impoverished fishermen. If true, then a cost-​benefit analysis of the harvest record would find depletion justified over a more conservative harvest strategy at a discount rate equal to the market interest rate.

Among other factors, the discount rate used in CBA reflects investors’ time-​preference for early consumption and delayed payment, and reflects uncertainties associated with the investment (Brennan 1997) (Brennan & Oates, 1997). In this respect, discounting is used to model human behavior; it provides an analytical basis for our value-​based decisions. Yet, a CBA of education by Ainsworth and Sumaila (2003) (Ainsworth et al., 2003) demonstrates that conventional discounting does not wholly capture human tendency. If an alternate investment were to promise a greater return than a person’s increased earning potential through education, we would expect children to be rarely educated to the highest levels. However, parents and society chose to do so. People, perhaps unwittingly, apply some form of intergenerational valuation – where assured benefit to one’s children carries significant value in the present. For long-​term environmental conservation to work economically, similar intergenerational consideration may be required.

A very low discount rate has been suggested as a means to protect the environment ((Hasselmann et al., 1997) (“Kyoto Protocol to the United Nations Framework Convention on Climate Change,” 1997), though others have cautioned against this (Fisher & Krutilla, 1975) (Goulder & Stavins, 2002). Recently, alternatives to standard discounting have been proposed that limit discounting of future benefits (Heal, 1998) (Weitzman, 2001) (Nielsen, 2001). A method by Sumaila and Walters (2003) (U. R. Sumaila et al., 2001) (available for download at http://​www​.fisheries​.ubc​.ca/​publications/​reports/​fcrr​.php) allows us to separate the discount rates we use to value benefits to ourselves (i.e., standard discount rate – ∂) and benefits destined for future generations (∂fg). Their approach is applied here.

We test the ability of three intergenerational discount rates to preserve the cod resource from a pre-​collapse perspective: one that is less than, one that is equal to, and one that is greater than the standard discount rate (equivalent to market interest rate). A CBA of education by Ainsworth and Sumaila (2003) (U. Sumaila et al., 2003) informs us as to what may be considered an upper and lower estimate of ∂fg that society may be willing to apply in order to value benefits destined for future generations. The lower-​limit discount rate is set approximately equal to the internal rate of return (IRR) needed to make a PhD education financially worthwhile; the upper-​limit corresponds to the IRR needed to make a grade 10 education worthwhile. By finding the effective discount rate that parents and society use to value a child’s education, we account for a variety of non-​monetary benefits which may be considered by those investors. Similar benefits, we argue, could also apply to resource conservation where future generations are the recipients of today’s investment.

Comparing conventional and intergenerational discounting approaches, we perform cost benefit analyses on five cod harvest profiles: the actual historic trend since 1985 followed by projected post-​collapse earnings, the conventional optimum estimated using an ecosystem model, and three intergenerational optima – maximizing net present value (NPV) when ∂ > ∂fg, ∂ = ∂fg and ∂ < ∂fg. Although optimal scenarios generate less immediate benefit than the historic pattern, they maintain higher resource abundance at equilibrium and so permit greater sustained yields over time.

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