How to Discount Monetized Ecosystem Services - Comment on ‘High Economic Costs of Reduced Carbon Sinks and Declining Biome Stability in Central American Forests’

Abstract

Baumbach et al.1 estimate that climate damages to the carbon storage and habitat services provided by Central American forests will cost society $51-314 billion per year through the end of the century. Their costs greatly exceed past estimates of the total value of critical biodiversity hotspots in the Amazon rainforest2 and even the potential costs caused by regime shifts in tropical-forest-neighbouring deforestation areas3. We show that the upper end of Baumbach et al.’s cost range arises from their use of an arbitrary discounting method that lacks ecological or economic justification, and suggest an alternative approach using appropriate discounting techniques that yields revised costs between 2-24% of their median values for habitat loss. Next, we identify inconsistencies in their assessment of climate-regulating services suggesting that they misapplied social cost of carbon (SCC) values, which do not correspond to their claimed 2% discount rate. Overall, inconsistent discounting results in >99% of climate costs being attributed to habitat loss and <1% to reduced carbon sequestration. Finally, we raise general concerns that their approach does not provide an adequate baseline for assessing climate damages and overlooks relative price effects driven by economic growth and increasing habitat scarcity. In conclusion, Baumbach et al.’s cost estimates are too high (potentially by a factor of 44 for habitat losses in Belize) and unsuitable to quantify economic climate change impacts on forests.

Keywords: Habitat service value; discounting; climate change; tropical forest; climate regulation services

JEL Classification: Q01, Q57