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Environmental Valuation in Developed Countries

Case Studies

Edited by David Pearce

This is the second of two volumes of case studies that illustrate how environmental economists place values on environmental assets and on the flows of goods and services generated by those assets. This important book assembles studies that discuss broad areas of application of economic valuation – from amenity and pollution through to water and health risks, from forestry to green urban space. In this, his last book, the late David Pearce brought together leading European experts, contributors to some two dozen case studies exploring the frontiers of economic valuation of natural resources and environmental amenity in the developed world.
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Chapter 5: Implications of Declining Discount Rates for UK Climate Change Policy

Ben Groom, Cameron Hepburn and Phoebe Koundouri


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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