Krutilla’s Rule provides an argument in traditional cost-benefit analysis (CBA).
When the conservation of amenities of the natural environment is at stake, some economists argue for very low or zero discount rates. The reason is that for projects with long time horizons, any discounting reduces future costs and benefits almost to zero after a finite number of years. This implies a bias for projects with either short-term benefits (such as development projects rather than projects designed to preserve environmental amenities) or long-term costs (such as the creation of a nuclear plant). In both cases, the well-being of future generations is in danger. Given this, some economists argue that intergenerational equity justifies no discounting at all. Others have even gone further and argued for negative discounting to reflect a need for greater protection of the interests of future generations in natural resource management decisions, as for example in the case of irreversible outcomes such as global warming.
John Krutilla proposed such a modified cost benefit analysis in order to give more weight to natural amenities. In a famous case, Krutilla (1967) defended mountain landscapes against hydroelectricity by arguing superior electricity-generating technologies will evolve over time. (He was actually thinking of nuclear energy!) The possibility of the emergence of new technology would lower the present value of the future hydroelectricity. On the other hand, beautiful landscapes and cultural heritage were irreplaceable; their supply is inelastic (fixed) and they will be more valuable in the future. Hence Krutilla‘s criterion was: to modify discount rates to be applied to the stream of benefits (kwh) and to the opportunity costs (loss of landscape amenities) in order to obtain their ‘corrected’ present-values. For Krutilla, environmental amenities such as mountain landscapes or coral reefs will increase their relative scarcity with time, and therefore we should discount their present value at a zero or very low rate of discount.
There are two objections to Krutilla‘s criterion, reflected in the following questions: Will commodity resources really become cheaper (including environmental costs) relative to amenity resources? Why are all those the natural conditions of livelihood and production left out of such analyses, which are not yet commodities, and which are not really ‘amenities’?
References
Krutilla, J. (1967) Conservation reconsidered, The American Economic Review, 57 (4), 777-786.
This glossary entry is based on a contribution by Julien Francois Gerber
EJOLT glossary editors: Hali Healy, Sylvia Lorek and Beatriz Rodríguez-Labajos
