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 University Library of Munich, Germany in its series MPRA Paper with number 38278.
Date of creation: 2009
Date of revision:
Sustainability; economics; environment; Cost-benefit analysis; long-run discount rate;
Other versions of this item:
- Phoebe Koundouri & Ben Groom, . "Sustainability and the Economics of the Environment: Cost-Benefit Analysis and the Dynamics of the Long-Run Discount Rate," DEOS Working Papers 0903, Athens University of Economics and Business.
- 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?,"
Discussion Papers, Resources For the Future
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.
- Heal, G., 1998. "Valuing the Future: Economic Theory and Sustainability," Papers, Columbia - Graduate School of Business 98-10, Columbia - Graduate School of Business.
- Gollier, Christian, 2002. "Time Horizon and the Discount Rate," Journal of Economic Theory, Elsevier, Elsevier, vol. 107(2), pages 463-473, December.
- Gray, Stephen F., 1996.
"Modeling the conditional distribution of interest rates as a regime-switching process,"
Journal of Financial Economics, Elsevier,
Elsevier, vol. 42(1), pages 27-62, September.
- Tom Doan, . "RATS programs to replicate Gray's 1996 Regime Switching GARCH paper," Statistical Software Components RTZ00080, Boston College Department of Economics.
- Loewenstein, George & Prelec, Drazen, 1992. "Anomalies in Intertemporal Choice: Evidence and an Interpretation," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 107(2), pages 573-97, May.
- Chichilnisky, Graciela, 1995.
"An axiomatic approach to sustainable development,"
8609, University Library of Munich, Germany.
- Robert J. Barro, 1999. "Ramsey Meets Laibson In The Neoclassical Growth Model," The Quarterly Journal of Economics, MIT Press, 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, World Economics, Economic & Financial Publishing, 1 Ivory Square, Plantation Wharf, London, United Kingdom, SW11 3UE, vol. 4(2), pages 121-141, April.
- Gollier, Christian, 2002. "Discounting an uncertain future," Journal of Public Economics, Elsevier, Elsevier, vol. 85(2), pages 149-166, August.
- Laibson, David I., 1997.
"Golden Eggs and Hyperbolic Discounting,"
4481499, Harvard University Department of Economics.
- 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.
- 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.
- Weitzman Martin L., 1994.
"On the Environmental Discount Rate,"
Journal of Environmental Economics and Management,
Elsevier, vol. 26(2), pages 200-209, March.
- Weitzman, M.L., 1993. "On the 'Environmental' Discount Rate," Harvard Institute of Economic Research Working Papers, Harvard - Institute of Economic Research 1625, Harvard - Institute of Economic Research.
- 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.
- J.K. Horowitz, 2002. "Preferences in the Future," Environmental & Resource Economics, European Association of Environmental and Resource Economists, European Association of Environmental and Resource Economists, vol. 21(3), pages 241-258, March.
- 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.
- Rabl, Ari, 1996. "Discounting of long-term costs: What would future generations prefer us to do?," Ecological Economics, Elsevier, Elsevier, vol. 17(3), pages 137-145, June.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Ekkehart Schlicht).
If references are entirely missing, you can add them using this form.