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

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  • Mark C. Freeman
  • Ben Groom

Abstract

The case for using declining social discount rates when the future is uncertain is now widely accepted in both academic and policy circles. We present sharp upper and lower bounds for this term structure when we have limited knowledge about the nature of our uncertainty. At horizons beyond 75 years, these bounds are widely spread even if there is agreement on the support and first four moments of the relevant underlying probability distribution. Hence, even in the unlikely event that there is consensus between experts on the primitives of the social discount rate, estimates of the present value of intergenerational costs and benefits, such as the Social Cost of Carbon, can potentially lie anywhere within a wide range. This makes it di¢ cult to prescribe crisp policy recommendations for long-term investments.

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Bibliographic Info

Paper provided by Grantham Research Institute on Climate Change and the Environment in its series Grantham Research Institute on Climate Change and the Environment Working Papers with number 138.

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Date of creation: Oct 2013
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Handle: RePEc:lsg:lsgwps:wp138

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  1. Martin L. Weitzman, 1998. "Gamma Discounting," Harvard Institute of Economic Research Working Papers 1843, Harvard - Institute of Economic Research.
  2. Weitzman, Martin L., 2009. "On Modeling and Interpreting the Economics of Catastrophic Climate Change," Scholarly Articles 3693423, Harvard University Department of Economics.
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  5. Gollier, Christian & Weitzman, Martin, 2009. "How Should the Distant Future be Discounted When Discount Rates are Uncertain?," IDEI Working Papers 588, Institut d'Économie Industrielle (IDEI), Toulouse.
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  7. Ekaterini Panopoulou & B. Groom & P. Koundouri & Theologos Pantelidis, 2005. "Discounting the distant future: How much does model selection affect the certainty equivalent rate?," Economics, Finance and Accounting Department Working Paper Series n1480105, Department of Economics, Finance and Accounting, National University of Ireland - Maynooth.
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  10. Jouini, Elyès & Marin, Jean-Michel & Napp, Clotilde, 2010. "Discounting and divergence of opinion," Journal of Economic Theory, Elsevier, vol. 145(2), pages 830-859, March.
  11. Mark C. Freeman & Ben Groom & Ekaterini Panopoulou & Theologos Pantelidis, 2013. "Declining discount rates and the Fisher Effect: Inflated past, discounted future?," Grantham Research Institute on Climate Change and the Environment Working Papers 109, Grantham Research Institute on Climate Change and the Environment.
  12. Hepburn, Cameron & Koundouri, Phoebe & Panopoulou, Ekaterini & Pantelidis, Theologos, 2009. "Social discounting under uncertainty: A cross-country comparison," Journal of Environmental Economics and Management, Elsevier, vol. 57(2), pages 140-150, March.
  13. 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.
  14. Napp, Clotilde & Marin, Jean-Michel & Jouini, Elyès, 2010. "Discounting and Divergence of Opinion," Economics Papers from University Paris Dauphine 123456789/2326, Paris Dauphine University.
  15. Traeger, Christian P., 2012. "What's the rate? Disentangling the Weitzman and the Gollier effect," Department of Agricultural & Resource Economics, UC Berkeley, Working Paper Series qt88x3d1vw, Department of Agricultural & Resource Economics, UC Berkeley.
  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. Arrow, Kenneth J. & Cropper, Maureen L. & Gollier, Christian & Groom, Ben & Heal, Geoffrey M. & Newell, Richard G. & Nordhaus, William D. & Pindyck, Robert S. & Pizer, William A. & Portney, Paul R. & , 2012. "How Should Benefits and Costs Be Discounted in an Intergenerational Context? The Views of an Expert Panel," Discussion Papers dp-12-53, Resources For the Future.
  18. 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.
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