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A Proposal for a New Prescriptive Discounting Scheme: The Intergenerational Discount Rate

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  • Stéphane Hallegatte

    (CIRED)

Abstract

Cost-benefit analyses require comparing costs and benefits that occur at different points in time. Doing so, however, creates conflicts between short-term considerations — a discounting scheme has to be consistent with observed behaviours — and long-term ethical issues — a discounting scheme must not favour the current generation over future ones. To overcome this conflict, the present article proposes a prescriptive consumption discounting scheme that applies different discount rates (i) for various incomes in the lifetime of a unique individual and (ii) for various incomes that affect different individuals. Practically, any income flux is first discounted to the birth date of all individuals using a discount rate with a non-zero pure preference for the present; then these individual discounted values are discounted to the present with a discount rate with no preference for the present and finally summed up. The aim of this prescriptive discount rate is to be consistent with observed individual behaviour (descriptive discount rate) without favouring current generations. Consequences are discussed and compared with the UK Green Book and the Stern Review discounting schemes.

Suggested Citation

  • Stéphane Hallegatte, 2008. "A Proposal for a New Prescriptive Discounting Scheme: The Intergenerational Discount Rate," Working Papers 2008.47, Fondazione Eni Enrico Mattei.
  • Handle: RePEc:fem:femwpa:2008.47
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    References listed on IDEAS

    as
    1. Gollier, Christian, 2002. "Time Horizon and the Discount Rate," Journal of Economic Theory, Elsevier, vol. 107(2), pages 463-473, December.
    2. Harvey, Charles M., 1994. "The reasonableness of non-constant discounting," Journal of Public Economics, Elsevier, vol. 53(1), pages 31-51, January.
    3. Martin L. Weitzman, 2007. "A Review of the Stern Review on the Economics of Climate Change," Journal of Economic Literature, American Economic Association, vol. 45(3), pages 703-724, September.
    4. Stern,Nicholas, 2007. "The Economics of Climate Change," Cambridge Books, Cambridge University Press, number 9780521700801, October.
    5. Heal, Geoffrey, 2005. "Intertemporal Welfare Economics and the Environment," Handbook of Environmental Economics, in: K. G. Mäler & J. R. Vincent (ed.), Handbook of Environmental Economics, edition 1, volume 3, chapter 21, pages 1105-1145, Elsevier.
    6. William D. Nordhaus, 2007. "A Review of the Stern Review on the Economics of Climate Change," Journal of Economic Literature, American Economic Association, vol. 45(3), pages 686-702, September.
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    Cited by:

    1. Olivier Godard, 2009. "Time discounting and long-run issues: the controversy raised by the Stern Review of the economics of climate change," OPEC Energy Review, Organization of the Petroleum Exporting Countries, vol. 33(1), pages 1-22, March.

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    More about this item

    Keywords

    Discount Rate; Intergenerational Equity;

    JEL classification:

    • H4 - Public Economics - - Publicly Provided Goods

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