1932

Abstract

Governments across the world are coming under increasing pressure to invest heavily in projects that have maturities of decades or even centuries. Key areas of concern include climate change mitigation, environmental and biodiversity protection, nuclear decommissioning, enhancing infrastructure and coastal defenses, and long-term health care management. Whether such projects are evaluated as being economically justifiable depends on the social discount rate (SDR) that the government deploys. This variable converts the future costs and benefits of public policy into their value today, thereby facilitating the comparison of social investments with different maturities. Critically, the result of such analysis is extremely sensitive to small changes in the choice of the SDR, yet policy guidelines differ widely across countries and international institutions. In this article, we provide a review of the academic literature on long-term SDRs, with particular emphasis on how these insights have been integrated into governmental guidance.

Loading

Article metrics loading...

/content/journals/10.1146/annurev-resource-111920-020721
2022-10-05
2024-10-06
Loading full text...

Full text loading...

/deliver/fulltext/resource/14/1/annurev-resource-111920-020721.html?itemId=/content/journals/10.1146/annurev-resource-111920-020721&mimeType=html&fmt=ahah

Literature Cited

  1. Ackerman F, Stanton EA, Bueno R. 2013. Epstein–Zin utility in DICE: Is risk aversion irrelevant to climate policy?. Environ. Resour. Econ. 56:173–84
    [Google Scholar]
  2. Adler MD. 2012. Well-Being and Fair Distribution: Beyond Cost-Benefit Analysis Oxford, UK: Oxford Univ. Press
    [Google Scholar]
  3. Adler MD. 2016. Benefit–cost analysis and distributional weights: an overview. Rev. Environ. Econ. Policy 10:2264–85
    [Google Scholar]
  4. Adler MD, Anthoff D, Bosetti V, Garner G, Keller K, Treich N. 2017. Priority for the worse-off and the social cost of carbon. Nat. Clim. Change 7:6443–49
    [Google Scholar]
  5. Adler MD, Treich N. 2015. Prioritarianism and climate change. Environ. Resour. Econ. 62:279–308
    [Google Scholar]
  6. Anthoff D, Emmerling J. 2019. Inequality and the social cost of carbon. J. Assoc. Environ. Resour. Econ. 6:2243–73
    [Google Scholar]
  7. Arrow K 1966. Discounting and public investment criteria. Water Resources Research S Kneese 13–32 Baltimore, MD: Johns Hopkins Univ. Press
    [Google Scholar]
  8. Arrow K, Cline W, Mäler KG, Munasinghe M, Squitieri R, Stiglitz J 1996. Intertemporal equity, discounting, and economic efficiency. Climate Change: Economic and Social Dimensions of Climate Change, Contribution of Working Group III to the Second Assessment Report of the Intergovernmental Panel on Climate Change JP Bruce, H Lee, EF Haites 125–44 Cambridge, UK: Cambridge Univ. Press
    [Google Scholar]
  9. Arrow K, Cropper M, Gollier C, Groom B, Heal G et al. 2013. Determining benefits and costs for future generations. Science 341:6144349–50
    [Google Scholar]
  10. Asheim GB. 2010. Intergenerational equity. Annu. Rev. Econ. 2:197–222
    [Google Scholar]
  11. Atkinson AB, Stern NH. 1974. Pigou, taxation and public goods. Rev. Econ. Stud. 41:1119–28
    [Google Scholar]
  12. Barrage L. 2018. Be careful what you calibrate for: social discounting in general equilibrium. J. Public Econ. 160:33–49
    [Google Scholar]
  13. Bauer M, Rudebusch GD. 2020. Interest rates under falling stars. Am. Econ. Rev. 110:51316–54
    [Google Scholar]
  14. Bauer M, Rudebusch GD. 2021. The rising cost of climate change: evidence from the bond market. Rev. Econ. Stat. https://doi.org/10.1162/rest_a_01109
    [Crossref] [Google Scholar]
  15. Baumgärtner S, Klein AM, Thiel D, Winkler K. 2015. Ramsey discounting of ecosystem services. Environ. Resour. Econ. 61:2273–96
    [Google Scholar]
  16. Baumol WJ. 1968. On the social rate of discount. Am. Econ. Rev. 58:4788–802
    [Google Scholar]
  17. Beckerman W, Hepburn C. 2007. Ethics of the discount rate in the Stern Review on the economics of climate change. World Econ. 8:187–210
    [Google Scholar]
  18. Belli P, Anderson J, Barnum H, Dixon J, Tan J-P. 1998. Handbook on Economic Analysis of Investment Operations. Washington, DC: World Bank
    [Google Scholar]
  19. Berger L, Emmerling J. 2020. Welfare as equity equivalents. J. Econ. Surv. 34:4727–52
    [Google Scholar]
  20. Botzen WJW, van den Bergh JCJM. 2014. Specifications of social welfare in economic studies of climate policy: overview of criteria and related policy insights. Environ. Resour. Econ. 58:1–33
    [Google Scholar]
  21. Botzen WJW, van den Bergh JCJM, Chichilnisky G. 2018. Climate policy without intertemporal dictatorship: Chichilnisky criterion versus classical utilitarianism in DICE. Clim. Change Econ. 9:21850002
    [Google Scholar]
  22. Bradford DF. 1975. Constraints on government investment opportunities and the choice of discount rate. Am. Econ. Rev. 65:5887–99
    [Google Scholar]
  23. Browning EK. 1976. The marginal cost of public funds. J. Political Econ. 84:2283–98
    [Google Scholar]
  24. Burgess DF. 2013. Reconciling alternative views about the appropriate social discount rate. J. Public Econ. 97:9–17
    [Google Scholar]
  25. Burgess DF, Zerbe RO. 2011. Appropriate discounting for benefit-cost analysis. J. Benefit-Cost Anal. 2:21–20
    [Google Scholar]
  26. Burgess DF, Zerbe RO. 2013. The most appropriate discount rate. J. Benefit-Cost Anal. 4:3391–400
    [Google Scholar]
  27. Caplin A, Leahy J. 2004. The social discount rate. J. Political Econ. 112:61257–68
    [Google Scholar]
  28. Chichilnisky G. 1996. An axiomatic approach to sustainable development. Soc. Choice Welfare 13:2231–57
    [Google Scholar]
  29. Chichilnisky G. 1997. What is sustainable development?. Land Econ. 73:4467–91
    [Google Scholar]
  30. Chichilnisky G. 2009. Avoiding extinction: equal treatment of the present and the future. Economics 3:120090032
    [Google Scholar]
  31. Cropper ML, Freeman MC, Groom B, Pizer WA. 2014. Declining discount rates. Am. Econ. Rev. 104:5538–43
    [Google Scholar]
  32. Dahlby B. 2008. The Marginal Cost of Public Funds: Theory and Applications. Cambridge, MA: MIT Press
    [Google Scholar]
  33. Daniel KD, Litterman RB, Wagner G. 2019. Declining CO2 price paths. PNAS 116:4220886–91
    [Google Scholar]
  34. Dasgupta P 2005. Three conceptions of intergenerational justice. Ramsey's Legacy H Lillehammer, DH Mellor 149–69 Oxford, UK: Oxford Univ. Press
    [Google Scholar]
  35. Dasgupta P. 2008. Discounting climate change. J. Risk Uncertain. 37:2/3141–69
    [Google Scholar]
  36. Dep. Environ. Food Rural Aff 2021. Air quality appraisal: damage cost guidance. Guid., UK Dept. Environ. Food Rural Aff. London, UK: https://www.gov.uk/government/publications/assess-the-impact-of-air-quality/air-quality-appraisal-damage-cost-guidance
    [Google Scholar]
  37. Dietz S, Asheim GB. 2012. Climate policy under sustainable discounted utilitarianism. J. Environ. Econ. Manag. 63:3321–35
    [Google Scholar]
  38. Dietz S, Gollier C, Kessler L. 2018. The climate beta. J. Environ. Econ. Manag. 87:258–74
    [Google Scholar]
  39. Dietz S, Hepburn C. 2013. Benefit–cost analysis of non-marginal climate and energy projects. Energy Econ. 40:61–71
    [Google Scholar]
  40. Dietz S, Rising J, Stoerk T, Wagner G. 2021. Economic impacts of tipping points in the climate system. PNAS 118:34e2103081118
    [Google Scholar]
  41. Dinwiddy C, Teal F. 1995. Principles of Cost-Benefit Analysis for Developing Countries. Cambridge, UK: Cambridge Univ. Press
    [Google Scholar]
  42. Drupp MA. 2018. Limits to substitution between ecosystem services and manufactured goods and implications for social discounting. Environ. Resour. Econ. 69:1135–58
    [Google Scholar]
  43. Drupp MA, Freeman MC, Groom B, Nesje F. 2018. Discounting disentangled. Am. Econ. J. Econ. Policy 10:4109–34
    [Google Scholar]
  44. Drupp MA, Hänsel MC. 2021. Relative prices and climate policy: how the scarcity of nonmarket goods drives policy evaluation. Am. Econ. J. Econ. Policy 13:1168–201
    [Google Scholar]
  45. Emmerling J, Groom B, Wettingfeld T. 2017. Discounting and the representative median agent. Econ. Lett. 161:78–81
    [Google Scholar]
  46. Epstein LG, Zin SE. 1989. Substitution, risk aversion, and the temporal behavior of consumption and asset returns: a theoretical framework. Econometrica 57:4937–69
    [Google Scholar]
  47. Epstein LG, Zin SE. 1991. Substitution, risk aversion, and the temporal behavior of consumption and asset returns: an empirical analysis. J. Political Econ. 99:2263–86
    [Google Scholar]
  48. Feldstein MS. 1970. Choice of technique in the public sector: a simplification. Econ. J. 80:320985–90
    [Google Scholar]
  49. Fleurbaey M. 2015. Equality versus priority: how relevant is the distinction?. Econ. Philos. 31:2203–17
    [Google Scholar]
  50. Fleurbaey M, Zuber S. 2015. Discounting, beyond utilitarianism. Economics 9:120150012
    [Google Scholar]
  51. Freeman MC, Groom B. 2015. Positively gamma discounting: combining the opinions of experts on the social discount rate. Econ. J. 125:5851015–24
    [Google Scholar]
  52. Freeman MC, Groom B. 2016. How certain are we about the certainty-equivalent long term social discount rate?. J. Environ. Econ. Manag. 79:152–68
    [Google Scholar]
  53. [Google Scholar]
  54. Freeman MC, Groom B, Spackman M. 2018. Social discount rates for cost-benefit analysis: a report for HM Treasury Tech. Rep. , HM Treasury London, UK:
    [Google Scholar]
  55. Giglio S, Maggiori M, Stroebel J. 2015. Very long-run discount rates. Q. J. Econ. 130:11–53
    [Google Scholar]
  56. Gollier C. 2010. Ecological discounting. J. Econ. Theory 145:2812–29
    [Google Scholar]
  57. Gollier C. 2013. Pricing the Planet's Future: The Economics of Discounting in an Uncertain World Princeton, NJ: Princeton Univ. Press
    [Google Scholar]
  58. Gollier C. 2014. Discounting and growth. Am. Econ. Rev. 104:5534–37
    [Google Scholar]
  59. Gollier C. 2015. Discounting, inequality and economic convergence. J. Environ. Econ. Manag. 69:53–61
    [Google Scholar]
  60. Gollier C. 2019. Valuation of natural capital under uncertain substitutability. J. Environ. Econ. Manag. 94:54–66
    [Google Scholar]
  61. Gollier C, Hammitt JK. 2014. The long-run discount rate controversy. Annu. Rev. Resour. Econ. 6:273–95
    [Google Scholar]
  62. Groom B, Hepburn C. 2017. Reflections—looking back at social discounting policy: the influence of papers, presentations, political preconditions, and personalities. Rev. Environ. Econ. Policy 11:2336–56
    [Google Scholar]
  63. Groom B, Maddison D. 2019. New estimates of the elasticity of marginal utility for the UK. Environ. Resour. Econ. 72:41155–82
    [Google Scholar]
  64. Hänsel MC, Drupp MA, Johansson DJ, Nesje F, Azar C et al. 2020. Climate economics support for the UN climate targets. Nat. Clim. Change 10:8781–89
    [Google Scholar]
  65. Harberger A. 1972. On measuring the social opportunity cost of public funds. Project Evaluation A Harberger 94–122 Chicago: Univ. Chicago Press
    [Google Scholar]
  66. Harberger AC, Jenkins GP. 2015. Musings on the social discount rate. J. Benefit-Cost Anal. 6:16–32
    [Google Scholar]
  67. Harrison M. 2010. Valuing the future: the social discount rate in cost-benefit analysis. Work. Pap. Aust. Gov. Product. Comm., Melbourne https://pc.gov.au/research/supporting/cost-benefit-discount
    [Google Scholar]
  68. HM Treas 2020. The green book Guid., Eval. Task Force, HM Treas. London, UK: www.gov.uk/government/collections/the-green-book-and-accompanying-guidance-and-documents
    [Google Scholar]
  69. HM Treas 2021. Green book supplementary document: environmental discount rate review, conclusion. Guid. HM Treas. London, UK.: https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/1014758/20210817_-_Environmental_discount_rate_review_conclusion.pdf
    [Google Scholar]
  70. Hoel M, Sterner T. 2007. Discounting and relative prices. Clim. Change 84:3265–80
    [Google Scholar]
  71. Jacobs B. 2018. The marginal cost of public funds is one at the optimal tax system. Int. Tax Public Finance 25:4883–912
    [Google Scholar]
  72. Kimball MS. 1990. Precautionary saving in the small and in the large. Econometrica 58:153–73
    [Google Scholar]
  73. Koetse MJ, Renes G, Ruijs A, de Zeeuw AJ. 2017. Relatieve prijsstijging voor natuur en ecosysteemdiensten in de MKBA [Relative price for nature in ecosystem services in the MKBA] Achtergrondstud., Planbur. Leefomgeving (PBL) The Hague, Neth: PBL Neth.
    [Google Scholar]
  74. Kopp RE, Golub A, Keohane NO, Onda C. 2012. The influence of the specification of climate change damages on the social cost of carbon. Economics 6:120120013
    [Google Scholar]
  75. Kornek U, Klenert D, Edenhofer O, Fleurbaey M. 2021. The social cost of carbon and inequality: when local redistribution shapes global carbon prices. J. Environ. Econ. Manag. 107:102450
    [Google Scholar]
  76. Lemoine D. 2021. The climate risk premium: how uncertainty affects the social cost of carbon. J. Assoc. Environ. Resour. Econ. 8:127–57
    [Google Scholar]
  77. Li Q, Pizer WA. 2021. Use of the consumption discount rate for public policy over the distant future. J. Environ. Econ. Manag. 107:102428
    [Google Scholar]
  78. Liu L. 2003. A marginal cost of funds approach to multi-period public project evaluation: implications for the social discount rate. J. Public Econ. 87:71707–18
    [Google Scholar]
  79. Liu L. 2011. From the shadow price of capital to the marginal cost of funds: in search of the implementation of a principle. J. Public Econ. Theory 13:3369–89
    [Google Scholar]
  80. Lucas D. 2014. Rebutting Arrow and Lind: why governments should use market rates for discounting. J. Nat. Resour. Policy Res. 6:185–91
    [Google Scholar]
  81. Marglin SA. 1963. The social rate of discount and the optimal rate of investment. Q. J. Econ. 77:195–111
    [Google Scholar]
  82. Matthey A, Bünger B. 2020. Methodenkonvention 3.1 zur Ermittlung von Umweltkosten [Methodological convention 3.1 for the determination of environmental costs] Kostensätze Stand 12/2020, Umweltbundesamt [Federal Environmental Agency] Dessau-Roßlau, Ger: https://www.umweltbundesamt.de/sites/default/files/medien/1410/publikationen/2020-12-21_methodenkonvention_3_1_kostensaetze.pdf
    [Google Scholar]
  83. Mehra R, Prescott EC. 1985. The equity premium: a puzzle. J. Monetary Econ. 15:2145–61
    [Google Scholar]
  84. Millner A. 2020. Nondogmatic social discounting. Am. Econ. Rev. 110:3760–75
    [Google Scholar]
  85. Millner A, Heal G. 2021. Choosing the future: markets, ethics, and rapprochement in social discounting NBER Work Pap. 28653
    [Google Scholar]
  86. Moore MA, Boardman AE, Vining AR. 2013. More appropriate discounting: the rate of social time preference and the value of the social discount rate. J. Benefit-Cost Anal. 4:11–16
    [Google Scholar]
  87. Natl. Audit Office 2012. Cross government: managing budgeting in government. Rep. HC 597 Comp. Audit. Gen., UK Parliam Sess. 2012–2013 London, UK: https://nao.org.uk/wp-content/uploads/2012/10/1213597.pdf
    [Google Scholar]
  88. Nesje F. 2022. Cross-dynastic intergenerational altruism. CESifo Work. Pap. 9626 CESifo Munich: https://www.cesifo.org/en/publikationen/2022/working-paper/cross-dynastic-intergenerational-altruism
    [Google Scholar]
  89. Newell RG, Pizer WA. 2003. Discounting the distant future: How much do uncertain rates increase valuations?. J. Environ. Econ. Manag. 46:152–71
    [Google Scholar]
  90. Nordhaus WD. 2007. A review of the Stern Review on the Economics of Climate Change. J. Econ. Lit. 45:3686–702
    [Google Scholar]
  91. Nordhaus WD. 2008. A Question of Balance New Haven, CT: Yale Univ. Press
    [Google Scholar]
  92. O'Callaghan D, Prior S. 2018. Central technical appraisal parameters: discount rate, time horizon, shadow price of public funds and shadow price of labour Staff Pap. 590 Ir. Gov. Econ. Eval. Serv. Dublin:
    [Google Scholar]
  93. OECD (Organ. Econ. Coop. Dev.) 2018. Cost-Benefit Analysis and the Environment: Further Developments and Policy Use Paris: OECD Publ.
    [Google Scholar]
  94. Pigou AC. 1947. Economic progress in a stable environment. Economica 14:55180–88
    [Google Scholar]
  95. Rietz TA. 1988. The equity risk premium a solution. J. Monetary Econ. 22:1117–31
    [Google Scholar]
  96. Sandmo A, Dreze JH. 1971. Discount rates for public investment in closed and open economies. Economica 38:152395–412
    [Google Scholar]
  97. Sjaastad LA, Wisecarver DL. 1977. The social cost of public finance. J. Political Econ. 85:3513–47
    [Google Scholar]
  98. Snow A, Warren RS. 1996. The marginal welfare cost of public funds: theory and estimates. J. Public Econ. 61:2289–305
    [Google Scholar]
  99. Spackman M. 2020. Social discounting and the cost of public funds: a practitioner's perspective. J. Benefit-Cost Anal. 11:2244–71
    [Google Scholar]
  100. Stern N. 2007. The Economics of Climate Change: The Stern Review Cambridge, UK: Cambridge Univ. Press
    [Google Scholar]
  101. Sterner T, Persson UM. 2008. An even sterner review: introducing relative prices into the discounting debate. Rev. Environ. Econ. Policy 2:161–76
    [Google Scholar]
  102. Stiglitz JE, Dasgupta P. 1971. Differential taxation, public goods, and economic efficiency. Rev. Econ. Stud. 38:2151–74
    [Google Scholar]
  103. Stiglitz JE, Sen A, Fitoussi J-P. 2010. Mismeasuring Our Lives: Why GDP Doesn't Add Up New York: New Press
    [Google Scholar]
  104. Tol R. 1999. Time discounting and optimal control of climate change: an application of fund. Clim. Change 3–4:41351–62
    [Google Scholar]
  105. Traeger CP. 2009. Recent developments in the intertemporal modeling of uncertainty. Annu. Rev. Resour. Econ. 1:261–86
    [Google Scholar]
  106. Traeger CP. 2011. Sustainability, limited substitutability, and non-constant social discount rates. J. Environ. Econ. Manag. 62:2215–28
    [Google Scholar]
  107. Traeger CP. 2021. ACE – analytic climate economy. Discuss. Pap. DP15968 Cent. Econ. Policy Res. London:
    [Google Scholar]
  108. US EPA (Environ. Prot. Agency) 2010. Guidelines for Preparing Economic Analyses. Washington, DC: EPA https://epa.gov/sites/default/files/2017-08/documents/ee-0568-50.pdf
    [Google Scholar]
  109. Venmans F, Groom B. 2021. Social discounting, inequality aversion, and the environment. J. Environ. Econ. Manag. 109:102479
    [Google Scholar]
  110. Weikard HP, Zhu X. 2005. Discounting and environmental quality: When should dual rates be used?. Econ. Model. 22:5868–78
    [Google Scholar]
  111. Weitzman ML. 1998. Why the far-distant future should be discounted at its lowest possible rate. J. Environ. Econ. Manag. 36:3201–8
    [Google Scholar]
  112. Weitzman ML. 2001. Gamma discounting. Am. Econ. Rev. 91:1260–71
    [Google Scholar]
  113. Weitzman ML. 2007. A review of The Stern Review on the Economics of Climate Change. . J. Econ. Lit. 45:3703–24
    [Google Scholar]
  114. Zuber S, Asheim GB. 2012. Justifying social discounting: the rank-discounted utilitarian approach. J. Econ. Theory 147:41572–601
    [Google Scholar]
/content/journals/10.1146/annurev-resource-111920-020721
Loading
/content/journals/10.1146/annurev-resource-111920-020721
Loading

Data & Media loading...

  • Article Type: Review Article
This is a required field
Please enter a valid email address
Approval was a Success
Invalid data
An Error Occurred
Approval was partially successful, following selected items could not be processed due to error