Uncertainty and social discounting for the very long term
Purpose - The purpose of this paper is to examine uncertainty in the social discount rate and explore the conditions favouring the application of higher present value welfare weights in the cost-benefit analysis (CBA) of very long-term social projects. The plausibility, or otherwise, of these conditions is an important matter generally but especially in relation to major environmental concerns associated with climate change. Design/methodology/approach - The uncertainty conditions for a plausible range of discount rate values are examined in relation to the social time preference rate (STPR). This particular discount rate is favoured theoretically and has, in the latest EC guide to CBA for EU member states, been recommended for application in European social project appraisal. Value ranges for the main parameters are determined on the basis of surveys of empirical work and expert opinion. Then simulations based on alternative plausible probability distributions are used to explore the future time paths for discount factors. Findings - Present value welfare weights decline to less than 2 per cent within 200 years if discounting is based on the full STPR. However, important appraisal contexts are identified where only the utility discount rate is relevant and this yields non-trivial discount factors for distant future years. Originality/value - The main new contribution is a direct empirical focus on the STPR and its component parameters under uncertainty. Alternative sets of long-term discount factors are suggested for possible application in CBA. The paper will be of interest to academics specialising in applied welfare economics and also to practitioners involved in social project appraisal.
Volume (Year): 36 (2009)
Issue (Month): 5 (September)
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