The Long-Run Discount Rate Controversy

Christian Gollier () and James Hammitt

Annual Review of Resource Economics, 2014, vol. 6, issue 1, 273-295

Abstract: The choice of the rate at which one should discount the long-term benefits of mitigating climate change is highly controversial. Both the level and the slope of the term structure of discount rates have been discussed intensively in relation to the determination of the social cost of carbon. Although some of the parameters of the problem are ethical and outside the scope of economic analysis, we claim that there are converging and convincing arguments in favor of using an annual real risk-free discount rate going from approximately 4% to approximately 1% for maturities going from zero to infinity. Investing in climate mitigation yields highly uncertain future benefits. Such uncertainty should also be taken into account in the selection of the discount rate, although the appropriate approach is highly controversial.

Keywords: climate change; sustainable development; valuation of environmental assets; value of statistical life; VSL (search for similar items in EconPapers)
JEL-codes: D61 D81 D90 G18 H43 Q01 Q54 (search for similar items in EconPapers)
Date: 2014
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Citations: View citations in EconPapers (46)

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