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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.

Suggested Citation

  • Mark C. Freeman & Ben Groom, 2013. "How certain are we about the certainty-equivalent long term social discount rate?," GRI Working Papers 138, Grantham Research Institute on Climate Change and the Environment.
    • Handle: RePEc:lsg:lsgwps:wp138
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    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. 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.
    6. 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).
    7. 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.
    8. 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.
    9. Knoke, Thomas & Paul, Carola & Härtl, Fabian, 2017. "A critical view on benefit-cost analyses of silvicultural management options with declining discount rates," Forest Policy and Economics, Elsevier, vol. 83(C), pages 58-69.
    10. Hann, Veryan, 2020. "Transition to decentralised electricity storage: The complexities of consumer decision-making and cost-benefit analyses," Energy Policy, Elsevier, vol. 147(C).
    11. 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.
    12. Richard S. J. Tol, 2021. "Estimates of the social cost of carbon have increased over time," Papers 2105.03656, arXiv.org, revised Aug 2022.

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    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

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