Sustainability and the Economics of the Environment: Cost-Benefit Analysis and the Dynamics of the Long-Run Discount Rate
AbstractThis paper reviews the arguments for and the implications of employing Declining Discount Rates (DDRs) in CBA and in the analysis of economic growth and sustainability. We show that there exist several growth models in which a relationship has been found between the long-run equilibrium under DDRs and that in which a zero discount rate is employed. This can have the effect of pushing the optimum under DDRs away from the conventional utilitarian outcome towards the Green Golden Rule (GGR) level of capita or environmental stocks. Furthermore, in response to worries that the GGR places weight on the future at too great an expense to the present, we highlight the result of Li and Lofgren (2000): DDRs can evoke a solution to resource management problems in which the objective function explicitly takes into account the preferences of present and future generations, such as those posited by. Either zero or conventional discounting does not achieve this solution. It is in these senses that DDRs can be seen to encourage a more equal treatment of generations and promote sustainable outcomes. We also discuss different methodologies for the estimation of a working schedule of DDRs assuming that future discount rates and the past provides information about the future. The policy implications of this are that a correctly specified model of discount rates provides a schedule of DDRs, which values atmospheric carbon reduction 150% higher than conventional exponential discounting, and almost 90% higher than incorrectly specified models. In this sense sustainable outcomes are more likely to emerge from project appraisal with DDRs, but given that the theory of DDRs for CBA reviewed relates to the socially efficient discount rate, such outcomes can also be thought of as efficient.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by Athens University of Economics and Business in its series DEOS Working Papers with number 0903.
Date of creation:
Date of revision:
Publication status: Published in Focus on Ecology Research
Sustainability; economics; environment; Cost-benefit analysis; long-run discount rate;
Other versions of this item:
- Koundouri, Phoebe & Groom, Ben, 2009. "Sustainability and the Economics of the Environment: Cost-Benefit Analysis and the Dynamics of the Long-Run Discount Rate," MPRA Paper 38278, University Library of Munich, Germany.
- Q5 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics
- Q56 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environment and Development; Environment and Trade; Sustainability; Environmental Accounts and Accounting; Environmental Equity; Population Growth
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Pizer, William & Newell, Richard, 2000.
"Discounting the Distant Future: How Much Do Uncertain Rates Increase Valuations?,"
dp-00-45, Resources For the Future.
- Newell, Richard G. & Pizer, William A., 2003. "Discounting the distant future: how much do uncertain rates increase valuations?," Journal of Environmental Economics and Management, Elsevier, vol. 46(1), pages 52-71, July.
- J.K. Horowitz, 2002. "Preferences in the Future," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 21(3), pages 241-258, March.
- Li, Chuan-Zhong & Lofgren, Karl-Gustaf, 2000. "Renewable Resources and Economic Sustainability: A Dynamic Analysis with Heterogeneous Time Preferences," Journal of Environmental Economics and Management, Elsevier, vol. 40(3), pages 236-250, November.
- Gollier, Christian, 2002. "Discounting an uncertain future," Journal of Public Economics, Elsevier, vol. 85(2), pages 149-166, August.
- Robert J. Barro, 1999. "Ramsey Meets Laibson In The Neoclassical Growth Model," The Quarterly Journal of Economics, MIT Press, vol. 114(4), pages 1125-1152, November.
- David Pearce & Ben Groom & Cameron Hepburn & Phoebe Koundouri, 2003. "Valuing the Future," World Economics, World Economics, Economic & Financial Publishing, 1 Ivory Square, Plantation Wharf, London, United Kingdom, SW11 3UE, vol. 4(2), pages 121-141, April.
- Chichilnisky, Graciela, 1995.
"An axiomatic approach to sustainable development,"
8609, University Library of Munich, Germany.
- Hugh Gravelle & Dave Smith, 2001. "Discounting for health effects in cost-benefit and cost-effectiveness analysis," Health Economics, John Wiley & Sons, Ltd., vol. 10(7), pages 587-599.
- Gollier, Christian, 2002. "Time Horizon and the Discount Rate," Journal of Economic Theory, Elsevier, vol. 107(2), pages 463-473, December.
- Weitzman, M.L., 1993.
"On the 'Environmental' Discount Rate,"
Harvard Institute of Economic Research Working Papers
1625, Harvard - Institute of Economic Research.
- Rabl, Ari, 1996. "Discounting of long-term costs: What would future generations prefer us to do?," Ecological Economics, Elsevier, vol. 17(3), pages 137-145, June.
- Weitzman, Martin L., 1998. "Why the Far-Distant Future Should Be Discounted at Its Lowest Possible Rate," Journal of Environmental Economics and Management, Elsevier, vol. 36(3), pages 201-208, November.
- Laibson, David I., 1997.
"Golden Eggs and Hyperbolic Discounting,"
4481499, Harvard University Department of Economics.
- Heal, G., 1998. "Valuing the Future: Economic Theory and Sustainability," Papers 98-10, Columbia - Graduate School of Business.
- Shane Frederick & George Loewenstein & Ted O'Donoghue, 2002. "Time Discounting and Time Preference: A Critical Review," Journal of Economic Literature, American Economic Association, vol. 40(2), pages 351-401, June.
- Loewenstein, George & Prelec, Drazen, 1992. "Anomalies in Intertemporal Choice: Evidence and an Interpretation," The Quarterly Journal of Economics, MIT Press, vol. 107(2), pages 573-97, May.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Ekaterini Glynou).
If references are entirely missing, you can add them using this form.