Arrow, K., Dropper, M., Gollier, C., Groom, B., Heal, G., Newell, R., Norhaus, W., Pindyck, R., Pizer, W., Portney, P., Sterner, T., Tol, R. S. J. and Weitzman, M. (2013) Science, 341, 6144
Abstract: In economic project analysis, the rate at which future benefits and costs are discounted relative to current values often determines whether a project passes the benefit-cost test. This is especially true of projects with long time horizons, such as those to reduce greenhouse gas (GHG) emissions. Whether the benefits of climate policies, which can last for centuries, outweigh the costs, many of which are borne today, is especially sensitive to the rate at which future benefits are discounted. This is also true of other policies, e.g., affecting nuclear waste disposal or the construction of long-lived infrastructure.
A declining discount rate (DDR) schedule, as used by the governments of France and the United Kingdom (1, 2), means that all benefits and costs occurring in a given year are discounted at the same rate, but this rate declines over time. In contrast, the United States and other countries use discount rates that are constant over time; a lower constant discount rate is sometimes used to evaluate projects that affect future generations. We summarize the arguments in favor of using a DDR schedule and discuss the problems in using different constant discount rates to evaluate inter- and intragenerational benefits. The use of a DDR schedule would avoid these problems.
