Discounting is the process of calculating the present value of Costs and Benefits being considered for future periods. This economic principle recognises that money and resources have different values at different points in time, reflecting factors such as inflation, opportunity costs, and time preference.
The fundamental concept underlying discounting is that a monetary unit available today is worth more than the same monetary unit available in the future. This is because present resources can be invested to generate returns, and individuals typically prefer immediate consumption over delayed consumption. By applying discounting, future costs and benefits are converted to their equivalent present values, enabling meaningful comparison and aggregation across different time periods.
Discounting is implemented through the use of a discount rate, which determines how rapidly future values decrease when expressed in present terms. The discount rate can vary over time and may reflect different considerations depending on the assessment context. A discount factor is then calculated from this rate and applied as a multiplier to future monetary amounts, converting them to present value equivalents.
In the context of Life Cycle Assessment and sustainability evaluation, discounting plays an important role in Environmental Life Cycle Costing and Cost-Benefit Assessment. When evaluating product systems with impacts occurring over extended time periods, discounting allows practitioners to calculate the net present value of all costs and benefits throughout the system's life cycle. This facilitates informed decision making by expressing diverse temporal impacts in a common, comparable metric.
However, the application of discounting to long-term environmental and social impacts remains a subject of ongoing debate in sustainability assessment. Critics argue that conventional discount rates may undervalue impacts on future generations, potentially conflicting with the principles of sustainable development and intergenerational equity.
