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The Discount Rate for Public Policy over the Distant Future

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  • Qingran Li
  • William A. Pizer

Abstract

The choice of discount rate has a significant impact on net benefit estimates when costs today have benefits over long time horizons. Standard U.S. government practice for cost–benefit analysis is to bound such analysis using two alternative rates. These rates are meant to represent the rate of return paid by capital investment and the rate received by consumers. Previous work has shown this approach legitimately bounds the analysis—but only when future benefits accrue directly to consumers either in a two-period model or as a perpetuity. We generalize to consider arbitrary patterns of future benefits, accruing either directly to consumers or indirectly through future investment. We derive an expression for the appropriate discount rate and show that it converges to the consumption rate for benefits increasingly far into the future. More generally, the bounding rates depend on the temporal pattern of the undiscounted dollars. As an application, we estimate the appropriate discount rate for climate change damages from carbon dioxide, finding it lies in a narrow range (+/- 0.5 percent) around the consumer rate of interest.

Suggested Citation

  • Qingran Li & William A. Pizer, 2018. "The Discount Rate for Public Policy over the Distant Future," NBER Working Papers 25413, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:25413
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    Cited by:

    1. 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.

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    More about this item

    JEL classification:

    • D61 - Microeconomics - - Welfare Economics - - - Allocative Efficiency; Cost-Benefit Analysis
    • H43 - Public Economics - - Publicly Provided Goods - - - Project Evaluation; Social Discount Rate
    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming

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