Use of the consumption discount rate for public policy over the distant future

Qingran Li and William Pizer

Journal of Environmental Economics and Management, 2021, vol. 107, issue C

Abstract: The choice of discount rate has a significant impact on net benefit estimates when costs today have benefits over long time horizons. Standard U.S. government practice for cost–benefit analysis is to bound such analysis using two alternative rates. These rates are meant to represent the rate of return paid by capital investment and the rate received by consumers. Previous work has shown this approach legitimately bounds the analysis—but only when future benefits accrue directly to consumers either in a two-period model or as a perpetuity. We generalize to consider arbitrary patterns of future benefits, accruing either directly to consumers or indirectly through future investment. We derive an expression for the appropriate discount rate and show that it converges to the consumption rate for benefits increasingly far into the future. More generally, the bounding rates depend on the temporal pattern of the undiscounted dollars. As an application, we estimate the appropriate discount rate for climate change damages from carbon dioxide, finding it lies in a narrow range ( ±0.5 percent) around the consumer rate of interest.

Keywords: Discounting; Climate change; Public finance (search for similar items in EconPapers)
JEL-codes: D61 H43 H50 Q54 (search for similar items in EconPapers)
Date: 2021
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (9)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jeeman:v:107:y:2021:i:c:s0095069621000115

DOI: 10.1016/j.jeem.2021.102428

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