IDEAS home Printed from https://ideas.repec.org/p/ehl/lserod/67258.html
   My bibliography  Save this paper

How certain are we about the certainty-equivalent longterm social discount rate?

Author

Listed:
  • Freeman, Mark C.
  • Groom, Ben

Abstract

Theoretical arguments for using a term structure of social discount rates (SDR) that declines with the time horizon have influenced Government guidelines in the US and Europe. The certainty equivalent discount rate that often underpins this guidance embodies uncertainty in the primitives of the SDR, such as growth. For distant time horizons the probability distributions of these primitives are ambiguous and the certainty equivalent itself is uncertain. Yet, if a limited set of characteristics of the unknown probability distributions can be agreed upon, 'sharp'upper and lower bounds can be defined for the certainty-equivalent SDR. Unfortunately, even with considerable agreement on these features, these bounds are widely spread for horizons beyond 75 years. So while estimates of the present value of intergenerational impacts, including the social cost of carbon, can be bounded in the presence of this ambiguity, they typically remain so imprecise as to provide little practical guidance.

Suggested Citation

  • Freeman, Mark C. & Groom, Ben, 2016. "How certain are we about the certainty-equivalent longterm social discount rate?," LSE Research Online Documents on Economics 67258, London School of Economics and Political Science, LSE Library.
  • Handle: RePEc:ehl:lserod:67258
    as

    Download full text from publisher

    File URL: http://eprints.lse.ac.uk/67258/
    File Function: Open access version.
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Christian Gollier & Phoebe Koundouri & Theologos Pantelidis, 2008. "Declining discount rates: Economic justifications and implications for long-run policy [‘Regime switches in interest rates’]," Economic Policy, CEPR, CESifo, Sciences Po;CES;MSH, vol. 23(56), pages 758-795.
    2. Cox, John C & Ingersoll, Jonathan E, Jr & Ross, Stephen A, 1981. "A Re-examination of Traditional Hypotheses about the Term Structure of Interest Rates," Journal of Finance, American Finance Association, vol. 36(4), pages 769-799, September.
    3. Christian Gollier, 2012. "Pricing the Planet's Future: The Economics of Discounting in an Uncertain World," Economics Books, Princeton University Press, edition 1, volume 1, number 9894.
    4. Freeman, Mark C. & Groom, Ben & Panopoulou, Ekaterini & Pantelidis, Theologos, 2015. "Declining discount rates and the Fisher Effect: Inflated past, discounted future?," Journal of Environmental Economics and Management, Elsevier, vol. 73(C), pages 32-49.
    5. Kenneth J. Arrow & Maureen L. Cropper & Christian Gollier & Ben Groom & Geoffrey M. Heal & Richard G. Newell & William D. Nordhaus & Robert S. Pindyck & William A. Pizer & Paul R. Portney & Thomas Ste, 2014. "Editor's Choice Should Governments Use a Declining Discount Rate in Project Analysis?," Review of Environmental Economics and Policy, Association of Environmental and Resource Economists, vol. 8(2), pages 145-163.
    6. Gollier, Christian & Weitzman, Martin L., 2010. "How should the distant future be discounted when discount rates are uncertain?," Economics Letters, Elsevier, vol. 107(3), pages 350-353, June.
    7. Gollier, Christian, 2016. "Gamma discounters are short-termist," Journal of Public Economics, Elsevier, vol. 142(C), pages 83-90.
    8. Partha Dasgupta, 2008. "Discounting climate change," Journal of Risk and Uncertainty, Springer, vol. 37(2), pages 141-169, December.
    9. Sterner, Thomas & Tol, Richard S. J. & Weitzman, Martin L. & Pizer, William A. & Portney, Paul R. & Arrow, Kenneth J. & Cropper, Maureen L. & Gollier, Christian & Groom, Ben & Heal, Geoffrey M. & Newe, 2014. "Should Governments Use a Declining Discount Rate in Project Analysis?," Scholarly Articles 33373349, Harvard University Department of Economics.
    10. Arrow, K. & Cropper, M. & Gollier, C. & Groom, B. & Heal, G. & Newell, R. & Nordhaus, W. & Pindyck, R. & Pizer, W. & Portney, P. & Sterner, T. & Tol, R. S. J. & Weitzman, Martin L., 2013. "Determining Benefits and Costs for Future Generations," Scholarly Articles 12841963, Harvard University Department of Economics.
    11. Gollier, Christian, 2009. "Should we Discount the Far-Distant Future at its Lowest Possible Rate?," Economics - The Open-Access, Open-Assessment E-Journal (2007-2020), Kiel Institute for the World Economy (IfW Kiel), vol. 3, pages 1-14.
    12. Mark C. Freeman & Ben Groom, 2015. "Positively Gamma Discounting: Combining the Opinions of Experts on the Social Discount Rate," Economic Journal, Royal Economic Society, vol. 125(585), pages 1015-1024, June.
    13. Phoebe Koundouri & Theologos Pantelidis & Ben Groom & Ekaterini Panopoulou, 2007. "Discounting the distant future: How much does model selection affect the certainty equivalent rate?," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 22(3), pages 641-656.
    14. Freeman, Mark C., 2010. "Yes, we should discount the far-distant future at its lowest possible rate: A resolution of the Weitzman-Gollier puzzle," Economics - The Open-Access, Open-Assessment E-Journal (2007-2020), Kiel Institute for the World Economy (IfW Kiel), vol. 4, pages 1-21.
    15. Mark C. Freeman & Ben Groom, 2013. "Biodiversity valuation and the discount rate problem," Accounting, Auditing & Accountability Journal, Emerald Group Publishing Limited, vol. 26(5), pages 715-745, June.
    16. Christian Gollier & Richard Zeckhauser, 2005. "Aggregation of Heterogeneous Time Preferences," Journal of Political Economy, University of Chicago Press, vol. 113(4), pages 878-896, August.
    17. Moritz Drupp & Mark Freeman & Ben Groom & Frikk Nesje, 2015. "Discounting disentangled: an expert survey on the determinants of the long-term social discount rate," GRI Working Papers 196a, Grantham Research Institute on Climate Change and the Environment.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Richard S.J. Tol, 2018. "The impact of climate change and the social cost of carbon," Working Paper Series 1318, Department of Economics, University of Sussex Business School.
    2. Claxton, Karl & Asaria, Miqdad & Chansa, Collins & Jamison, Julian & Lomas, James & Ochalek, Jessica & Paulden, Mike, 2019. "Accounting for timing when assessing health-related policies," LSE Research Online Documents on Economics 100038, London School of Economics and Political Science, LSE Library.
    3. Michael D. Bauer & Glenn D. Rudebusch, 2023. "The Rising Cost of Climate Change: Evidence from the Bond Market," The Review of Economics and Statistics, MIT Press, vol. 105(5), pages 1255-1270, September.
    4. Graeme Guthrie, 2021. "Discounting, Disagreement, and the Option to Delay," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 80(1), pages 95-133, September.
    5. Jarisch, Isabelle & Bödeker, Kai & Bingham, Logan Robert & Friedrich, Stefan & Kindu, Mengistie & Knoke, Thomas, 2022. "The influence of discounting ecosystem services in robust multi-objective optimization – An application to a forestry-avocado land-use portfolio," Forest Policy and Economics, Elsevier, vol. 141(C).
    6. Richard S.J. Tol, 2021. "Estimates of the social cost of carbon have not changed over time," Working Paper Series 0821, Department of Economics, University of Sussex Business School.
    7. Claxton, Karl & Asaria, Miqdad & Chansa, Collins & Jamison, Julian & Lomas, James & Ochalek, Jessica & Paulden, Mike, 2019. "Accounting for Timing when Assessing Health-Related Policies," Journal of Benefit-Cost Analysis, Cambridge University Press, vol. 10(S1), pages 73-105, April.
    8. Hann, Veryan, 2020. "Transition to decentralised electricity storage: The complexities of consumer decision-making and cost-benefit analyses," Energy Policy, Elsevier, vol. 147(C).
    9. Lanlan Luo & Shou Chen & Ziran Zou, 2020. "Determining the Generalized Discount Rate for Risky Projects," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 77(1), pages 143-158, September.
    10. Richard S. J. Tol, 2021. "Estimates of the social cost of carbon have increased over time," Papers 2105.03656, arXiv.org, revised Aug 2022.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Freeman, Mark C. & Groom, Ben, 2016. "How certain are we about the certainty-equivalent long term social discount rate?," Journal of Environmental Economics and Management, Elsevier, vol. 79(C), pages 152-168.
    2. Freeman, Mark C. & Groom, Ben & Panopoulou, Ekaterini & Pantelidis, Theologos, 2015. "Declining discount rates and the Fisher Effect: Inflated past, discounted future?," Journal of Environmental Economics and Management, Elsevier, vol. 73(C), pages 32-49.
    3. Gollier, Christian, 2016. "Gamma discounters are short-termist," Journal of Public Economics, Elsevier, vol. 142(C), pages 83-90.
    4. Mark C. Freeman & Ben Groom, 2015. "Positively Gamma Discounting: Combining the Opinions of Experts on the Social Discount Rate," Economic Journal, Royal Economic Society, vol. 125(585), pages 1015-1024, June.
    5. Kollenberg, Sascha & Taschini, Luca, 2016. "Emissions trading systems with cap adjustments," Journal of Environmental Economics and Management, Elsevier, vol. 80(C), pages 20-36.
    6. Moritz Drupp & Mark Freeman & Ben Groom & Frikk Nesje, 2015. "Discounting disentangled: an expert survey on the determinants of the long-term social discount rate," GRI Working Papers 196a, Grantham Research Institute on Climate Change and the Environment.
    7. Lanlan Luo & Shou Chen & Ziran Zou, 2020. "Determining the Generalized Discount Rate for Risky Projects," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 77(1), pages 143-158, September.
    8. Rafał Buła & Monika Foltyn-Zarychta, 2022. "Declining Discount Rates for Energy Policy Investments in CEE EU Member Countries," Energies, MDPI, vol. 16(1), pages 1-27, December.
    9. Katz, Yuri A., 2017. "Value of the distant future: Model-independent results," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 466(C), pages 269-276.
    10. Fesselmeyer, Eric & Liu, Haoming & Salvo, Alberto, 2016. "How Do Households Discount over Centuries? Evidence from Singapore's Private Housing Market," IZA Discussion Papers 9862, Institute of Labor Economics (IZA).
    11. Cropper, Maureen, 2012. "How Should Benefits and Costs Be Discounted in an Intergenerational Context?," RFF Working Paper Series dp-12-42, Resources for the Future.
    12. Eric Fesselmeyer & Haoming Liu & Alberto Salvo, 2022. "Declining discount rates in Singapore's market for privately developed apartments," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 37(2), pages 330-350, March.
    13. Gabriella Maselli & Antonio Nesticò, 2021. "The Role of Discounting in Energy Policy Investments," Energies, MDPI, vol. 14(19), pages 1-18, September.
    14. Hänsel, Martin C. & Quaas, Martin F., 2018. "Intertemporal Distribution, Sufficiency, and the Social Cost of Carbon," Ecological Economics, Elsevier, vol. 146(C), pages 520-535.
    15. J. Doyne Farmer & John Geanakoplos & Matteo G. Richiardi & Miquel Montero & Josep Perelló & Jaume Masoliver, 2024. "Discounting the Distant Future: What Do Historical Bond Prices Imply about the Long-Term Discount Rate?," Mathematics, MDPI, vol. 12(5), pages 1-25, February.
    16. Frederick Ploeg & Armon Rezai, 2019. "Simple Rules for Climate Policy and Integrated Assessment," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 72(1), pages 77-108, January.
    17. Millner, Antony & Healey, Andrew, 2018. "Discounting by committee," LSE Research Online Documents on Economics 90246, London School of Economics and Political Science, LSE Library.
    18. Michael D. Bauer & Glenn D. Rudebusch, 2023. "The Rising Cost of Climate Change: Evidence from the Bond Market," The Review of Economics and Statistics, MIT Press, vol. 105(5), pages 1255-1270, September.
    19. Wolfgang Buchholz, 2014. "Discounting in an Uncertain World - Disentangling the Debate on the Weitzman-Gollier Puzzle," CESifo Working Paper Series 4967, CESifo.
    20. Davidson, Marc D., 2014. "Zero discounting can compensate future generations for climate damage," Ecological Economics, Elsevier, vol. 105(C), pages 40-47.

    More about this item

    Keywords

    Declining discount rates; Distribution uncertainty; Social Cost of Carbon.;
    All these keywords.

    JEL classification:

    • H43 - Public Economics - - Publicly Provided Goods - - - Project Evaluation; Social Discount Rate
    • Q51 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Valuation of Environmental Effects

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:ehl:lserod:67258. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: LSERO Manager (email available below). General contact details of provider: https://edirc.repec.org/data/lsepsuk.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.