Time and Discounting in Private and Public Decision Making
Edited by David J. Pannell and Steven G.M. Schilizzi
Chapter 10: Discounting the Future
Cédric Philibert SUMMARY Growth of per capita welfare, rooted in the productive nature of the economy, legitimates discounting. Given this rationale for discounting, there seems no reason to ask any generation to allocate its investments for the benefit of future, richer generations. However, there are two caveats. First, uncertainty about future growth means that the discount rate should tend progressively towards the lowest possible growth rate. This is not time inconsistent, for as time passes it reduces uncertainties and legitimates changes in valuations and, therefore, decisions. In addition, if we are considering environmental damages that are so large that they are not marginal, their likely impact on economic growth would further justify a reducing discount rate. Second, I argue that assets that are neither reproducible nor substitutable, such as some environmental assets, should be given a value that grows over time at a rate close to, but slightly lower than, the discount rate. This will lead to some ‘effective discounting’ and avoid the unbearable burden of an unlimited responsibility for current generations that would arise under zero discounting. If these two suggestions are accepted, the present value of distant future environmental damages would not be rendered trivial by discounting. 10.1 INTRODUCTION Discounting is probably one of the most disputed issues in economics. Current human activities may cause immediate and long-term environmental damages. Discounting, the usual procedure to give a present value to financial flows occurring in the future, seems to give outrageously low values to future damages, and thus,...
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