Chapter 5: Implications of Declining Discount Rates for UK Climate Change Policy
Ben Groom, Cameron Hepburn, Phoebe Koundouri and David Pearce INTRODUCTION Discussions about applied cost–beneﬁt analysis (CBA) are incomplete without the thorny issue of discounting emerging at some point. Indeed, since the calculation of net present value (NPV), and hence the efﬁciency of a project or policy, hinges so crucially upon the level of the discount rate applied across time, the analysis of time preference and discounting has become an active area of research in its own right. Nowhere is this debate more hotly contended than when CBA is used to evaluate projects with impacts that extend into the far distant future such as biodiversity conservation, nuclear power and, of course, climate change. This chapter aims to review some of the more recent contributions to this debate and in particular, the theory that underpins recent calls for the use of declining discount rates (DDRs). We then discuss how a schedule of DDRs can be estimated and illustrate their impact upon two topical policy questions: climate change and nuclear power. Economists and others have argued at length over which of several potential discount rates should be used as the Social Discount Rate (SDR) (e.g. Marglin, 1963; Baumol, 1968; Lind, 1982; Portney and Weynant, 1999). Several candidates exist, the most widely recognized of which are 1. the social rate of return on investment and 2. the rate at which society values consumption at different points of time (the social rate of time preference), henceforth r and δ respectively. The distinction between...
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