Limited substitutability, ecosystem services, subsistence, dual discounting, sustainable development, project evaluation

Abstract: This paper examines limits to substitution between ecosystem services and manufactured goods in consumer's utility and their implications for the economic evaluation of environmental policies. I provide a survey on current empirical evidence regarding substitution elasticities, which are ultimately limited by subsistence requirements in the consumption of ecosystem services. Subsequently, I extend the theory of `ecological' or dual discounting by introducing such a subsistence requirement. I find that the `relative price' of ecosystem services is non-constant and depends on the level of the consumption of ecosystem services over and above subsistence. The results suggests that the discount rate for ecosystem services should be, at present, about 1 to 5 percentage points lower compared to the rate for manufactured goods, and approach negative infinity as ecosystem services decline towards the subsistence level. This has important implications for the management of climate change and calls for safeguarding crucial ecosystem services.
Keywords: Limited substitutability, ecosystem services, subsistence, dual discounting, sustainable development, project evaluation