Discounting

Authored by: Ben Groom

Routledge Handbook of the Economics of Climate Change Adaptation

Print publication date:  January  2014
Online publication date:  January  2014

Print ISBN: 9780415633116
eBook ISBN: 9780203095201
Adobe ISBN: 9781136212123

10.4324/9780203095201.ch7

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Abstract

This thorny issue of social discounting generates a great deal of heated debate within economics. One need only scan through the numerous articles written on the subject in the aftermath of the Stern Review (Stern, 2007; Nordhaus, 2007) to gain some insight into just how different opinions can be. The reason for the heat generated on this topic is obvious. By necessity, governments and other public bodies now have to consider longer time horizons than they did in the past. An entire intergenerational policy arena encompassing biodiversity, nuclear power, public health and a range of other long-term policies has emerged over the past few decades. The outcome of traditional Cost Benefit Analysis (CBA) in such cases is highly sensitive to the level of the discount rate deployed, and policy recommendations can differ radically on the basis of the discounting assumptions. At the centre of disagreement on social discounting is the apparently paradoxical observation that high discount rates, such as those typically deployed for medium-term projects, imply that virtually no weight is placed on the costs and benefits that accrue to currently unborn future generations. Standard discounting approaches appear to ‘tyrannise’ future generations. Introspection on this issue often leads to the conclusion that, in the words of Weitzman (1999), ‘… something is wrong somewhere …’ with the usual economic logic behind discounting.

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