Wednesday, February 20, 2013

Discounting for future generations: the consensus?

I have discussed a few times the difficulty of figuring out what the proper discount rate should be when evaluating the impact of environmental policy, and in particular how small changes in that rate can have a huge impact on outcomes. See posts I, II, III, IV. And if there is so much disagreement and this matters so much, why not convene all the arguers and get them to agree on a common document?

This is what the US Environmental Protection Agency did , and the resulting document is co-signed by Kenneth Arrow, Maureen Cropper, Christian Gollier, Ben Groom, Geoffrey Heal, Richard Newell, William Nordhaus, Robert Pindyck, William Pizer, Paul Portney, Thomas Sterner, Richard Tol and Martin Weitzman (no Nicholas Stern, I note). They agree that the proper tool to determine the discount rate is the Ramsey formula. No big surprise here. They agree that a crucial component of this formula is the expected future growth rate of the economy, and that this is very difficult to obtain. And this is as far as they got. No magic number, after all they are economists. I wonder whether biologists could now be convinced that we actually need a discount rate.

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