Edited by Giles Atkinson, Simon Dietz, Eric Neumayer and Matthew Agarwala
Chapter 9: Evaluating impacts in the distant future: cost–benefit analysis, discounting and the alternatives
The challenges of infrastructure investment and renewal, climate change, biodiversity protection, declining fish stocks and nuclear waste management put pressure on policymakers to take important decisions now with impacts decades, even centuries, into the future. The value we place on outcomes in the future is crucial in determining what action to take in response to such challenges. Whenever economists think about intertemporal decisions – whether concerning trade-offs between today and tomorrow or between the present generation and our distant descendants – we reach almost instinctively for a discount rate. This instinct is not without good reason: the practice of social discounting, embedded in social cost–benefit analysis, has served extremely well in formulating policy over the short to medium term. For longer-term decisions, however, results from this otherwise trusty tool can appear surprising, contrary to common sense notions of intergenerational fairness and sustainable development. In response, some have advocated jettisoning the tool altogether and turning to alternative methods of valuing the future. Others take the view that these long-term challenges bring trade-offs between intergenerational efficiency and equity into sharp focus and it is no surprise that social cost–benefit analysis, which generally ignores distributional considerations, supports efficient but unsustainable projects. They conclude that the tool is functioning properly, and that a separate framework can be employed to support intergenerational equity.
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