Should Governments Use a Declining Discount Rate in Project           Analysis?

Arrow, Kenneth J.; Cropper, Maureen; Gollier, Christian; Groom, Ben; Heal, Geoffrey; Newell, Richard G.; Nordhaus, William D.; Pindyck, Robert S.; Pizer, William A.; Portney, Paul R.; Sterner, Thomas; Tol, Richard S.J.; Weitzman, Martin L.

doi:10.1093/reep/reu008

Cited by 220 publications

(154 citation statements)

References 41 publications

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“…[18,19,55,59,61]. 1 This conclusion is more or less robust to one's stance on the normative-positivist debate provided that the primitives of the discounting problem, growth or the interest rate, exhibit persistence over time [3,4,14,18]. 2 Consensus in an area of theory as potentially fraught as social discounting is a rare thing.…”

Section: Introductionmentioning

confidence: 99%

“…This result can be generalized, with the decline of the term structure increasing with both the persistence over time and the volatility of interest rates. 4 These are the simple mechanics of the ENPV approach. A deeper story is that the declining term structure reflects a precautionary savings motive that increases the further one looks into the future [23,18].…”

Section: Introductionmentioning

confidence: 99%

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Declining discount rates and the Fisher Effect: Inflated past, discounted future?

Freeman

Groom

Panopoulou

et al. 2015

Journal of Environmental Economics and Management

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Uncertain and persistent real interest rates underpin one argument for using a declining term structure of social discount rates in the Expected Net Present Value (ENPV) framework. Despite being controversial, this approach has influenced both the Inter-Agency Working Group on Cost-Benefit Analysis and the UK government's guidelines on discounting. We first clarify the theoretical basis of the ENPV approach. Then, rather than following previous work which used a single series of U.S. Treasury bond returns, we treat nominal interest rates and inflation as co-integrated series and estimate the empirical term structure of discount rates via the 'Fisher Effect'. This nests previous empirical models and is more flexible. It also addresses an irregularity in previous work which used data on nominal interest rates until 1950, and real interest rates thereafter. As we show, the real and nominal data have very different time series properties. This paper therefore provides a robustness check on previous discounting advice and updated methodological guidance at a time when governments around the world are reviewing their guidelines on social discounting. The policy implications are discussed in the context of the Social Cost of Carbon, nuclear decommissioning and public health.JEL: Q48, C13, C53, E43

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Section: Introductionmentioning

confidence: 99%

Section: Introductionmentioning

confidence: 99%

Declining discount rates and the Fisher Effect: Inflated past, discounted future?

Freeman

Groom

Panopoulou

et al. 2015

Journal of Environmental Economics and Management

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“…14 This parametrization has been used by Karp and Zhang (2006), Athanassoglou and Xepapadeas (2012) for the study of linear quadratic climate change models. We use the same parametrization here, although we are not calibrating a spatial climate change model, to show how the spatially dependent solution for the states and the controls can be constructed…”

Section: An Examplementioning

confidence: 99%

Modeling Coupled Climate, Ecosystems, and Economic Systems

Brock¹,

Xepapadeas²

2015

SSRN Journal

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Human economies and ecosystems form a coupled system coevolving in time and space, since human economies use ecosystems services and at the same time a¤ect ecosystems through their production and consumption activities. The study of the interactions between human economies and ecosystems is fundamental for the e¢ cient use of natural resources and the protection of the environment. This necessitates the development and use of models capable of tracing the main interactions, links and feedbacks. In developing this chapter, our objective was to focus on a segment of rapidly developing literature on coupled ecological/economic models with an emphasis on climate change. The advantage of this approach is that it introduces the reader to a very important current research topic, but it also allows, by using climate as the reference ecosystem, the exploration of new modeling approaches which are relevant and useful for the modeling of other types of coupled ecological/economic systems. These include modeling of deep structural uncertainty by using robust control methods, exploring modeling through cumulative carbon budgeting, studying spatial transport phenomena and spatial aspects in economic/ecological modelling.

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“…Issues, therefore, such as melting of land ice or thawing of permafrost suggest that polar amplification might be an important factor in the effort to design efficient climate policies. 6 In this context, the two-box models help to focus our attention on economic cross effects of temperature increases in the higher latitudes upon the lower latitudes, as well as the economic effects of temperature increases for each latitude. We shall see that the sign of the derivative of total energy use and, hence, emissions, w.r.t.…”

Section: Introductionmentioning

confidence: 99%

“…For example, we show that neglect of transport effects leads to overstating (understating) how big carbon taxes should be if marginal damages from one degree temperature increases are smaller (larger) at the higher latitudes compared to the lower latitudes. 6 Melting of land ice and permafrost thawing are reletaed to the concept of damage reservoirs. (see Brock et al 2014a) With hindsight this insight into climate economics is quite clear but the two box model does a nice job of helping us to see it.…”

Section: Introductionmentioning

confidence: 99%

Climate change policy under polar amplification

Brock

Xepapadeas

2017

European Economic Review

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Polar amplification is an established scientific fact which has been associated with the surface albedo feedback and to heat and moisture transport from the Equator to the Poles. In this paper we unify a two-box climate model, which allows for heat and moisture transport from the southern region to the northern region, with an economic model of welfare optimization. Our main contribution is to show that by ignoring spatial heat and moisture transport and the resulting polar amplification, the regulator may overestimate or underestimate the tax on GHG emissions. The direction of bias depending on the relations between marginal damages from temperature increase in each region. We also determine the welfare cost when a regulator mistakenly ignores polar amplification. Finally we show the adjustments necessary to the market discount rate due to transport phenomena as well as how our two-box model can be extended to Ramsey-type optimal growth models. Numerical simulations confirm our theoretical results.

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Should Governments Use a Declining Discount Rate in Project Analysis?

Cited by 220 publications

References 41 publications

Declining discount rates and the Fisher Effect: Inflated past, discounted future?

Declining discount rates and the Fisher Effect: Inflated past, discounted future?

Modeling Coupled Climate, Ecosystems, and Economic Systems

Climate change policy under polar amplification

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