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Social discount rates for the European Union

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  • David J. EVANS

Abstract

In relation to social project appraisal in EU countries, governments should try to agree on a single generally preferred method of discounting. Consistency of approach should result in the application of similar discount rates by countries. Before 2003, the use of different methods resulted in the application of widely divergent rates; for example, 8% in France, 3% in Germany and 6% in Britain. New appraisal guidance by the British Treasury in 2003 saw the official UK rate, now based solely on social time preference, reduced to just 3. 5%. In 2005, France followed suit reducing its rate from 8% to 4%. This paper argues for a standard benchmark European discount rate of around 3%-4% based on social time preference (STPR). This rate is somewhat lower than the 5% rate suggested in the 2002 EC guide to cost-benefit analysis and, as such, its application should result in a more generous allocation of budget funds to longer-term projects. For estimation purposes, the most troublesome component of the STPR formula is the elasticity of marginal utility of consumption (e). This paper reviews recent evidence on e and argues for the application of more thoughtful approaches in order to establish a reliable interval estimate for EU countries

Suggested Citation

  • David J. EVANS, 2006. "Social discount rates for the European Union," Departmental Working Papers 2006-20, Department of Economics, Management and Quantitative Methods at Università degli Studi di Milano.
    • Handle: RePEc:mil:wpdepa:2006-20
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    File URL: http://wp.demm.unimi.it/files/wp/2006/DEMM-2006_020wp.pdf
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    2. Massimo Florio & Silvia Vignetti, 2008. "Building a bridge across CBA traditions: the contribution of EU Regional Policy," Working Papers 200908, CSIL Centre for Industrial Studies.
    3. Presiana Nenkova & Diyana Metalova, 2016. "Analysis Of Costs And Benefits Of Investments In Waste Management Systems In Bulgaria," Annals of Faculty of Economics, University of Oradea, Faculty of Economics, vol. 1(1), pages 625-635, July.
    4. King, Steven & Fraser, Iain, 2013. "Divestment of the English Forestry Estate: An economically sound choice?," Ecological Economics, Elsevier, vol. 88(C), pages 25-31.
    5. Kovacevic, Vujadin & Wesseler, Justus, 2010. "Cost-effectiveness analysis of algae energy production in the EU," Energy Policy, Elsevier, vol. 38(10), pages 5749-5757, October.
    6. Jan Kubíček & Leoš Vítek, 2010. "Hodnocení veřejných projektů z hlediska společenské míry diskontace [Evaluation of Public Projects from the Viewpoint of Social Rate of Discount]," Politická ekonomie, Prague University of Economics and Business, vol. 2010(3), pages 291-304.
    7. Pálinkó, Éva & Szabó, Márta, 2012. "Application of Social Discount Rate in Public Projects," Public Finance Quarterly, Corvinus University of Budapest, vol. 57(2), pages 184-199.
    8. Antonio Nesticò & Gabriella Maselli & Patrizia Ghisellini & Sergio Ulgiati, 2023. "A Dual Probabilistic Discounting Approach to Assess Economic and Environmental Impacts," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 85(1), pages 239-265, May.
    9. Buchholz, Wolfgang & Schumacher, Jan, 2010. "Discounting and welfare analysis over time: Choosing the [eta]," European Journal of Political Economy, Elsevier, vol. 26(3), pages 372-385, September.
    10. Mareike Schad & Jürgen John, 2012. "Towards a social discount rate for the economic evaluation of health technologies in Germany: an exploratory analysis," The European Journal of Health Economics, Springer;Deutsche Gesellschaft für Gesundheitsökonomie (DGGÖ), vol. 13(2), pages 127-144, April.
    11. Feng, Zhenhua & Lien, Jaimie W. & Zheng, Jie, 2020. "Flexible or mandatory retirement? Welfare implications of retirement policies for a population with heterogeneous health conditions," International Review of Economics & Finance, Elsevier, vol. 69(C), pages 1032-1055.
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    More about this item

    Keywords

    Cost-benefit analysis; social discount rate; European Union;
    All these keywords.

    JEL classification:

    • D61 - Microeconomics - - Welfare Economics - - - Allocative Efficiency; Cost-Benefit Analysis
    • H43 - Public Economics - - Publicly Provided Goods - - - Project Evaluation; Social Discount Rate

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