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Implications of declining discount rates: Climate Change Policy in the UK

  • Groom, Ben
  • Hepburn, Cameron
  • Koundouri, Phoebe
  • Pearce, David

Discussions about applied Cost Benefit Analysis are incomplete without the thorny issue of discounting emerging at some point. Indeed, since the calculation of Net Present Values (NPV), and hence the efficiency of a project or policy, hinges so crucially upon the level of the discount rate applied across time, the analysis of time preference and discounting has become an active area of research in its own right. Nowhere is this debate more hotly contended that when CBA is used to evaluate projects with impacts that extend into the far distant future such as biodiversity conservation, nuclear power and, of course, climate change. This chapter aims to review some of the more recent contributions to this debate and in particular, the theory that underpins recent calls for the use of declining discount rates (DDRs). We then discuss how a schedule of DDRs can be estimated and illustrate their impact upon two topical policy questions: climate change and nuclear power.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 38428.

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Date of creation: 2007
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Handle: RePEc:pra:mprapa:38428
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  1. Loewenstein, George & Prelec, Drazen, 1992. "Anomalies in Intertemporal Choice: Evidence and an Interpretation," The Quarterly Journal of Economics, MIT Press, vol. 107(2), pages 573-97, May.
  2. Li, Chuan-Zhong & Lofgren, Karl-Gustaf, 2000. "Renewable Resources and Economic Sustainability: A Dynamic Analysis with Heterogeneous Time Preferences," Journal of Environmental Economics and Management, Elsevier, vol. 40(3), pages 236-250, November.
  3. Ben Groom & Cameron Hepburn & Phoebe Koundouri & David Pearce, 2005. "Declining Discount Rates: The Long and the Short of it," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 32(4), pages 445-493, December.
  4. Graciela Chichilnisky & Geoffrey Heal, 1997. "Social choice with infinite populations: construction of a rule and impossibility results," Social Choice and Welfare, Springer, vol. 14(2), pages 303-318.
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  9. Chichilnisky, Graciela, 1995. "An axiomatic approach to sustainable development," MPRA Paper 8609, University Library of Munich, Germany.
  10. Cameron Hepburn, 2003. "Hyperbolic Discounting and Resource Collapse," Economics Series Working Papers 159, University of Oxford, Department of Economics.
  11. David I. Laibson & Andrea Repetto & Jeremy Tobacman, 1998. "Self-Control and Saving for Retirement," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 29(1), pages 91-196.
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  13. Gollier, Christian, 2002. "Discounting an uncertain future," Journal of Public Economics, Elsevier, vol. 85(2), pages 149-166, August.
  14. Gollier, Christian, 2004. "Maximizing the expected net future value as an alternative strategy to gamma discounting," Finance Research Letters, Elsevier, vol. 1(2), pages 85-89, June.
  15. Weitzman Martin L., 1994. "On the Environmental Discount Rate," Journal of Environmental Economics and Management, Elsevier, vol. 26(2), pages 200-209, March.
  16. Norman Henderson & Ian Bateman, 1995. "Empirical and public choice evidence for hyperbolic social discount rates and the implications for intergenerational discounting," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 5(4), pages 413-423, June.
  17. Weitzman, Martin L., 1998. "Why the Far-Distant Future Should Be Discounted at Its Lowest Possible Rate," Journal of Environmental Economics and Management, Elsevier, vol. 36(3), pages 201-208, November.
  18. Gollier, Christian, 2002. "Time Horizon and the Discount Rate," Journal of Economic Theory, Elsevier, vol. 107(2), pages 463-473, December.
  19. Graciela Chichilnisky, 1997. "What Is Sustainable Development?," Land Economics, University of Wisconsin Press, vol. 73(4), pages 467-491.
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