Selected Empirical Analyses
New Horizons in Environmental Economics series
Edited by Phoebe Koundouri
Chapter 2: Sustainability informed by econometrics: the dynamics of the long-run discount rate
Ben Groom and Phoebe Koundouri 1. INTRODUCTION Discounting is an issue that continues to receive much attention in the analysis of economic growth and sustainability, Cost Beneﬁt Analysis (CBA) and in the study of microeconomic behaviour. With the advent of a distinct long-term policy arena however, in which long-term decisions must be made concerning climate change, biodiversity loss and nuclear build-up for example, attention has necessarily turned towards alternative methods of determining intertemporal values rather than exponential discounting. In particular, the use of discount rates that decline with the time horizon, that is, Declining Discount Rates (DDRs), has received much attention as a useful alternative and the reasons for this attention are numerous. Firstly, the use of conventional constant exponential discounting over long time horizons ensures that the welfare of generations in the distant future is discounted back to a negligible sum. As Weitzman (1998) states, ‘to think about the distant future in terms of standard discounting is to have an uneasy intuitive feeling that something is wrong, somewhere’. Chichilnisky (1996) referred to this as the ‘tyranny’ of exponential discounting, in that it makes the current generation a dictator over future generations. Such unequal treatment of generations caused Ramsey (1928) to label discounting of future utilities as ‘ethically indefensible’. Secondly, not only does this trouble our intuition and sense of fairness, it is also clearly contrary to the widely supported goal of sustainable development. Sustainable development requires that policies and investments now have due regard for the need to...
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