The Role of Discounting in Energy Policy Investments

Gabriella Maselli and Antonio Nesticò
Additional contact information
Gabriella Maselli: Department of Civil Engineering, University of Salerno, Via Giovanni Paolo II, 132, 84084 Fisciano, Italy
Antonio Nesticò: Department of Civil Engineering, University of Salerno, Via Giovanni Paolo II, 132, 84084 Fisciano, Italy

Energies, 2021, vol. 14, issue 19, 1-18

Abstract: For informing future energy policy decisions, it is essential to choose the correct social discount rate (SDR) for ex-ante economic evaluations. Generally, costs and benefits—both economic and environmental—are weighted through a single constant discount rate. This leads to excessive discounting of the present value of cash flows progressively more distant over time. Evaluating energy projects through constant discount rates would mean underestimating their environmental externalities. This study intends to characterize environmental–economic discounting models calibrated for energy investments, distinguishing between intra- and inter-generational projects. In both cases, the idea is to use two discounting rates: an economic rate to assess financial components and an ecological rate to weight environmental effects. For intra-generational projects, the dual discount rates are assumed to be constant over time. For inter-generational projects, the model is time-declining to give greater weight to environmental damages and benefits in the long-term. Our discounting approaches are based on Ramsey’s growth model and Gollier’s ecological discounting model; the latter is expressed as a function of an index capable of describing the performance of a country’s energy systems. With regards to the models we propose, the novelty lies in the calibration of the “environmental quality” parameter. Regarding the model for long-term projects, another innovation concerns the analysis of risk components linked to economic variables; the growth rate of consumption is modelled as a stochastic variable. The defined models were implemented to determine discount rates for both Italy and China. In both cases, the estimated discount rates are lower than those suggested by governments. This means that the use of dual discounting approaches can guide policymakers towards sustainable investment in line with UN climate neutrality objectives.

Keywords: energy policy investments; cost-benefit analysis; social discount rate; dual discounting; energy transition index (search for similar items in EconPapers)
JEL-codes: Q Q0 Q4 Q40 Q41 Q42 Q43 Q47 Q48 Q49 (search for similar items in EconPapers)
Date: 2021
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

Downloads: (external link)
https://www.mdpi.com/1996-1073/14/19/6055/pdf (application/pdf)
https://www.mdpi.com/1996-1073/14/19/6055/ (text/html)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:gam:jeners:v:14:y:2021:i:19:p:6055-:d:641186

Access Statistics for this article

Energies is currently edited by Ms. Agatha Cao

More articles in Energies from MDPI
Bibliographic data for series maintained by MDPI Indexing Manager ().