The Future, Now: A Review of Social Discounting

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. Expected final online publication date for the Annual Review of Resource Economics, Volume 14 is October 2022. Please see http://www.annualreviews.org/page/journal/pubdates for revised estimates.

Philosophers reinforce economists' support for UN climate targets, but disagree on why

“…Yet each discipline brings distinct expertise to bear on the SDR and SCC. While economists provide guidance on technical extensions to the Simple Ramsey Rule [28], philosophers point to broader extensions to Discounted Utilitarianism: the limitations of consequentialism, the rights of future generations, and the duties of the present generation.…”

“…The Discounted Utilitarianism framework dominates international discounting guidance [28], and this is often through the use of the SRR; e.g., [26]. A number of economists and philosophers both expressed discomfort with using these frameworks as the basis for evaluating intergenerational decisions but for generally different reasons.…”

“…Our survey also allows us to apply philosophers' views on discounting to determine an optimal climate policy path within a recent update [24] of a prominent IAM, DICE [25]. This model is underpinned by the 'workhorse' Simple Ramsey Rule (SRR) within the Discounted Utilitarian framework that is commonly understood by experts from both disciplines and found in government guidelines across the world [26][27][28]. The SRR equates the return to capital through real interest rates (r) on the production side of the economy, with the social rate of time preference (δ + ηg) on the consumption side: r = SDR = δ + ηg.…”

Save 4.2 Million Lives and Generate $1.1 Trillion in Economic Benefits for Only $41 Billion: Introduction to the Special Issue on the Most Efficient Policies for the Sustainable Development Goals

“…For the discount rate, one recent review assembles a list of governments' social discount rates (Groom et al, 2022, Table 1). The discount rate for high-income countries ranges from 1 to 8% with an average of 4.2%.…”

Relative Price Changes of Ecosystem Services: Evidence from Germany

“…A limited number of governmental guidelines on project appraisal have already started to reflect the increasing relative scarcity of ecosystem services. The Netherlands and the UK, for instance, consider increasing relative prices of ecosystem services by uplifting future willingness to pay (WTP) estimates of ecosystem services or air pollution damages of 1 and 2 percent per year, respectively, while guidelines by the Asian Development Bank suggest the use of lower discount rates for ecosystem services by 3 percent per year (Groom et al, 2022).…”