Reference

Christian Gollier, “Valuation of natural capital under uncertain substitutability”, IDEI Working Paper, n. 871, May 2017.

Abstract

Natural capital is complex to price notably because of the high uncertainties surrounding the substitutability of its future ecosystem services. We examine a two-tree Lucas economy where both the economic growth and the degree of substitutability are uncertain. We show that the uncertain substitutability raises the expected value of the service and the rate at which it should be discounted. The value effect dominates the discounting effect, so the economic value of natural capital is increased. When the prior beliefs about substitutability are Gaussian, the economic value of future ecosystem services goes to infinity for finite maturities.

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