Environmental and Resource Economics

, Volume 32, Issue 4, pp 445–493 | Cite as

Declining Discount Rates: The Long and the Short of it

  • Ben GroomEmail author
  • Cameron Hepburn
  • Phoebe Koundouri
  • David Pearce


The last few years have witnessed important advances in our understanding of time preference and social discounting. In particular, several rationales for the use of time-varying social discount rates have emerged. These rationales range from the ad hoc to the formal, with some founded solely in economic theory while others reflect principles of intergenerational equity. While these advances are to be applauded, the practitioner is left with a confusing array of rationales and the sense that almost any discount rate can be justified. This paper draws together these different strands and provides a critical review of past and present contributions to this literature. In addition to this we highlight some of the problems with employing DDRs in the decision-making process, the most pressing of which may be time inconsistency. We clarify their practical implications, and potential pitfalls, of the more credible rationales and argue that some approaches popular in environmental economics literature are ill-conceived. Finally, we illustrate the impact of different approaches by examining global warming and nuclear power investment. This includes an application and extension of Newell and Pizer [‘Discounting the benefits of climate change mitigation : how much do uncertain rates increase valuations?’ Journal of Environmental Economics and Management 46 (2003) 52] to UK interest rate data.


global warming intergenerational equity social cost benefit analysis time inconsistency uncertainty time varying discount rates 


Unable to display preview. Download preview PDF.

Unable to display preview. Download preview PDF.


  1. Ainslie, G. 1992PiconomicsCambridge University PressNew YorkGoogle Scholar
  2. Akerlof, G.A. 1991‘Procrastination and Obedience’American Economic Review811Google Scholar
  3. Arrow K.J. (1966), ‘Discounting and Public Investment Criteria’, in A. V. Kneese and S. C. Smith, eds., Water Research, Baltimore.Google Scholar
  4. Arrow K., Cline W., Maler K.-G., Munasinghe M., Squitieri R., Stiglitz J (1995). In: Bruce J.P., Lee H., Haites E (eds). Intertemporal Equity, Discounting and Economic efficiency’. Cambridge University Press, Cambridge, pp. 128–144Google Scholar
  5. Asheim, G.B., Buchholz, W. 2003‘The Malleability of Undiscounted Utilitarianism as a Criterion of Intergenerational JusticeEconomics70405422Google Scholar
  6. Asheim, G.B., Buchholz, W., Tungodden, B. 2001‘Justifying Sustainability’Journal of Environmental Economics and Management41252268CrossRefGoogle Scholar
  7. Atkinson, G., Dubourg, R., Hamilton, K., Munasinghe, M., Pearce, D.W., Young, C. 1997‘Measuring Sustainable Development: Macroeconomics and the Environment’Edward ElgarCheltenhamGoogle Scholar
  8. Azfar, O. 1999‘Rationalizing Hyperbolic Discounting’Journal of Economic Behavior & Organization38245252CrossRefGoogle Scholar
  9. Barro, R.J. 1999‘Ramsey Meets Laibson in the Neoclassical Growth Model’Quarterly Journal of Economics11411251152CrossRefGoogle Scholar
  10. Barro, R.J., King, R.G. 1984‘Time Separable Preferences and Intertemporal-Substitution Models of Business Cycles’. Quarterly Journal of Economics99817839Google Scholar
  11. Barrett, S., Dasgupta, P., Mäler, K.-G. 1999‘Intergenerational Equity, Social Discount Rates, and Global Warming’Portney, P.R.Weyant, J.P eds. Discounting and Intergenerational Equity.Resources for the FutureWashington, D.C.5178Google Scholar
  12. Baumol, W.J. 1968‘On the Social Rate of Discount’American Economic Review57788802Google Scholar
  13. Benabou, R. and J. Tirole (2000), Willpower and Personal Rules. Mimeo.Google Scholar
  14. Benhabib, J., A. Bisin and A. Schotter (2004), Hyperbolic Discounting and Self-control: An Experimental Analysis. Mimeo.Google Scholar
  15. Bradford, D.F. 1999‘On the Uses of Benefit-Cost Reasoning in Choosing Policy toward Global Climate Change’ Chapter 5Portney, P.Weyant, J eds. Discounting and Intergenerational Equity.Resources for the FutureWashington DCGoogle Scholar
  16. Brock, W.A. 1977‘A Polluted Golden Age’Smith, V eds. Economics of Natural and Environmental Resources.Gordan and BreachNew YorkGoogle Scholar
  17. Broome, J. 1992Counting the Cost of Global WarmingWhite Horse PressCambridgeGoogle Scholar
  18. Chichilnisky, G. 1996‘An Axiomatic Approach to Sustainable Development’Social Choice and Welfare13231257Google Scholar
  19. Chichilnisky, G. 1997‘What is Sustainable Development’?Land Economics73467491Google Scholar
  20. Chichilnisky, G., Heal, G. 1997‘Social Choice with Infinite Populations: Construction of a Rule and Impossibility Results’Social Choice and Welfare14303319Google Scholar
  21. Clarkson, R. and K. Deyes (2002), Estimating the Social Cost of Carbon Emission, Government Economic Service Working Paper 140, London, HM Treasury, February. Available at work and welfare/taxation and the environment.Google Scholar
  22. Cowell, F. A. and K. Gardiner (1999), Welfare Weights, STICERD, London School of Economics, Research Paper 20, August.Google Scholar
  23. Cropper, M. and D. Laibson (1999), ‘The Implications of Hyperbolic Discounting for Project Evaluation’, in Discounting and Intergenerational Equity, Resources for the Future, (pp. 163–172).Google Scholar
  24. Cropper, M.L., Ayded, S.K., Portney, P.R. 1994‘Preferences for Life Saving Programs: How the Public Discounts Time and Age’Journal of Risk and Uncertainty8243265CrossRefGoogle Scholar
  25. Dasgupta, P. 2001Human Wellbeing and the Natural EnvironmentUniversity PressOxfordGoogle Scholar
  26. Dasgupta, P. and E. Maskin (2002), Uncertainty, Waiting Costs and Hyperbolic Discounting. Beijer Institute discussion paper no 158.Google Scholar
  27. Diamond, P. and B. Koszegi (1998), Hyperbolic Discounting and Retirement, mimeo.Google Scholar
  28. Dybvig, P., Ingersoll, J., Ross, S. 1996‘Long Forward and Zero-Coupon Rates Can Never Fall’Journal of Business69125CrossRefGoogle Scholar
  29. Fisher, , Krutilla,  1975‘Resource Conservation, Environmental Preservation, and the Rate of Discount’Quarterly Journal of Economics89358370Google Scholar
  30. Feldstein, M.S. 1964‘The Social Time Preference Discount Rate in Cost Benefit Analysis’Economic Journal74360379Google Scholar
  31. Frederick, S., Loewenstein, G., O’Donoghue, T. 2002‘Time Discounting and Time Preference: A Critical Review’Journal of Economic LiteratureXL351401Google Scholar
  32. Gollier, C. 2001The Economics of Risk and TimeMIT PressCambridge, MAGoogle Scholar
  33. Gollier, C. 2002a‘Time Horizon and the Discount Rate’Journal of Economic Theory107463473CrossRefGoogle Scholar
  34. Gollier, C. 2002b‘Discounting an Uncertain Future’Journal of Public Economics85149166CrossRefGoogle Scholar
  35. Gollier, C. 2004a‘Maximizing the Expected Net Future Value as an Alternative Strategy to Gamma Discounting’Finance Research Letters18589CrossRefGoogle Scholar
  36. Gollier. C (2004b), The Consumption Based Determinants of the Discount Rate. LERNA working paper #04.20.157.Google Scholar
  37. Gollier, C. and R. Zeckhauser (2003), Collective Investment Decision Making with Heterogeneous Time Preference. CESifo working paper No. 915.Google Scholar
  38. Gravelle H. and D. Smith (2000), ‘Discounting for Health Effects in Cost Benefit and Cost Effectiveness Analysis’, Centre for Health Economics Technical Paper Series 20. University of York.Google Scholar
  39. Groom, B., P. Koundouri, K. Panopoulou and T. Pantelides (2004), ‘Model Selection in Discounting the Distant Future’, Department of Economics, University College London Discussion paper 04/02.Google Scholar
  40. Gruber, J., Koszegi, B. 2001‘Is Addiction Rational? Theory and Evidence’Quarterly Journal of Economics11612611305CrossRefGoogle Scholar
  41. Harris, C., Laibson, D. 2001‘Dynamic Choices of Hyperbolic Consumers’Econometrica69935957CrossRefGoogle Scholar
  42. Harris, C., Laibson, D. 2003‘Hyperbolic Discounting and Consumption’In: Advances in Economics and Econometrics: Volume 1.Cambridge University PressCambridge258297Google Scholar
  43. Harsanyi, J.C. 1955‘Cardinal Welfare, Individual Ethics and Interpersonal Comparisons of Welfare’Journal of Political Economy63309321Google Scholar
  44. Haveman, R.H. 1969‘The Opportunity Cost of Displaced Private Spending and The Social Discount Rate’Water Resources Research5252277CrossRefGoogle Scholar
  45. Heal, G. 1998Valuing the Future: Economic Theory and SustainabilityColumbia University PressNew YorkGoogle Scholar
  46. Henderson, N., Bateman, I. 1995‘Empirical and Public Choice Evidence for Hyperbolic Social Discount Rates and The Implications for Intergenerational Discounting’Environmental and Resource Economics5413423CrossRefGoogle Scholar
  47. Hepburn, C. (2003), ‘Hyperbolic Discounting and Resource Collapse’, Oxford University Department of Economics, Working Paper 159.Google Scholar
  48. Hepburn, C. (2005), ‘Concerning the Future: Declining Discount Rates and Intergenerational Equity’, Oxford University DPhil Thesis.Google Scholar
  49. Hepburn, C., Groom, B. 2004Declining Discount Rates and the Evaluation DateOxford University Department of EconomicsMimeoGoogle Scholar
  50. HM Treasury.2003The Green Book: Appraisal and Evaluation in Central GovernmentHM TreasuryLondonGoogle Scholar
  51. Horowitz, J. 2002‘Preferences in the Future’Environmental and Resource Economics21241259CrossRefGoogle Scholar
  52. Johannesson, M., Johansson, P-O. 1996‘To be or not to be, That is the question: an empirical study of the WTP for an increased life expectancy at an advanced age’Journal of Risk and Uncertainty13163174CrossRefGoogle Scholar
  53. Kimball, M.S. 1990‘Precautionary Saving in the Small and in the Large’Econometrica585373Google Scholar
  54. Kirby, K.N. 1997‘Bidding on the Future: Evidence Against Normative Discounting of Delayed Rewards’Journal of Experimental Psychology1265470Google Scholar
  55. Koopmans, T. C. (1960), ‘Stationary Ordinal Utility and Impatience’, Econometrica 28(2).Google Scholar
  56. Koopmans, T.C. 1965‘On the Concept of Optimal Economic Growth’Pontificae Academiae Scientiarum Scripta Varia28225300Google Scholar
  57. Krutilla, J., Fisher, A.C. 1975The Economics of Natural EnvironmentsJohns Hopkins University PressBaltimoreGoogle Scholar
  58. Kydland, F., Prescott, E.P. 1977‘Rules Rather Than Discretion: The Inconsistency of Optimal Plan’Journal of Political Economy85473492Google Scholar
  59. Laibson, D. 1997‘Golden Eggs and Hyperbolic Discounting’Quarterly Journal of Economics112443477CrossRefGoogle Scholar
  60. Laibson, D.I. 1994Self-Control and SavingsMITCambridge MAPh.D ThesisGoogle Scholar
  61. Laibson, D.I., Repetto, A., Tobacman, J. 1998‘Self-Control and Saving for Retirement’Brookings Papers on Economic Activity191196Google Scholar
  62. Li, C.Z., Löfgren, K.G. 2000‘Renewable Resources and Economic Sustainability: A Dynamic Analysis with Heterogeneous Time Preferences’Journal of Environmental Economics and Management40236250CrossRefGoogle Scholar
  63. Lind R. (1982). ‘A Primer on the Major Issues Relating to the Discount Rate for Evaluating National Energy Options’. In: Lind R (eds). Discounting for Time and Risk in Energy Policy, (pp. 21–114). Washington, Resources for the Future.Google Scholar
  64. Loewenstein, G., Prelec, D. 1992‘Anomalies in Intertemporal Choice: Evidence and an Interpretation’Quarterly Journal of Economics107573597Google Scholar
  65. Lucas, R.E. 1978‘Asset Prices in an Exchange Economy’Econometrica4614291445Google Scholar
  66. Maddison, A. 2001The World Economy: A Millennial PerspectiveOrganisation for Economic Cooperation and DevelopmentParisGoogle Scholar
  67. Manne, A.S. 1995‘The Rate of Time Preference: Implications for the Greenhouse Debate’Energy Policy23391394Google Scholar
  68. Mulligan, C.B. 1996A Logical Economist’s Argument Against Hyperbolic DiscountingUniversity of ChicagoMimeoGoogle Scholar
  69. Newell, R and Pizer, W. (2001), ‘Discounting the Benefits of Climate Change Mitigation: How Much do Uncertain Rates Increase Valuations?’ Pew Center on Global Climate Change, Economics – Technical Series, Arlington, VA. Available at Scholar
  70. Newell, R., Pizer, W. 2003‘Discounting the Benefits of Climate Change Mitigation: How Musch do Uncertain Rates Increase Valuations?’Journal of Environmental Economics and Management465271CrossRefGoogle Scholar
  71. Nordhaus, W.D., Boyer, J. 2000Warming the World: Economic Models of Global WarmingMIT PressCambridge MAGoogle Scholar
  72. O’Donoghue, T., Rabin, M. 1999a‘Doing It Now or Later’American Economic Review89103124Google Scholar
  73. O’Donoghue, T., Rabin, M. 1999‘Incentives for Procrastinators’Quarterly Journal of Economics114769816Google Scholar
  74. O’Donoghue, T., Rabin, M. 2003‘Studying Optimal Paternalism, Illustrated by a Model of Sin Taxes’American Economic Review93186191Google Scholar
  75. Olson, M., Bailey, M. 1981‘Positive time Preference’Journal of Political Economy89125Google Scholar
  76. OXERA2002A Social Time Preference Rate for Use in Long-term DiscountingOffice of the Deputy Prime Minister, Department for Environment, Food and Rural Affairs and Department for TransportLondonGoogle Scholar
  77. Pearce, D.W. 2003‘The Social Cost of Carbon and its Policy Implications’Oxford Review of Economic Policy19362384CrossRefGoogle Scholar
  78. Pearce, D.W., Ulph, D. 1999‘A Social Discount Rate for the United Kingdom’Pearce, D.W eds. Environmental Economics: Essays in Ecological Economics and Sustainable Development.Edward ElgarCheltenham268285Google Scholar
  79. Phelps, E.S., Pollak, R.A. 1968‘On Second-Best National Saving and Game- Equilibrium Growth’Review of Economic Studies35185199Google Scholar
  80. Pigou, A. 1932The Economics of Welfare4MacmillanLondonGoogle Scholar
  81. Portney, P.Weyant J, . eds. 1999Discounting and Intergenerational EquityResources for the FutureWashington DCGoogle Scholar
  82. Pratt, J. 1964‘Risk Aversion in the Small and the Large’Econometrica32122136Google Scholar
  83. Rabl, A. 1996‘Discounting of Long-term Costs: What would Future Generations Prefer Us To Do?’Ecological Economics17137145CrossRefGoogle Scholar
  84. Ramsey, F.P. 1928‘A Mathematical Theory of Saving’Economic Journal38543559Google Scholar
  85. Read, D. 2001‘Is Time-Discounting Hyperbolic or Subadditive?’Journal of Risk and Uncertainty23532CrossRefGoogle Scholar
  86. Rubinstein, A. 2003‘Is it ‘Economics and Psychology’?: The Case of Hyperbolic Discounting’International Economic Review4412071216CrossRefGoogle Scholar
  87. Samuelson, P.A. 1965‘Principles of Efficiency: Discussion’American Journal of Economics Proceedings549396Google Scholar
  88. Stephane, G., Muller-Furstenburger, G., Predivoli, P. 1997‘Overlapping Generations or Infinitely Lived Agents’Environmental and Resource Economics102740Google Scholar
  89. Strotz, R. 1956‘Myopia and Inconsistency in Dynamic Utility Maximisation’Review of Economic Studies23165180Google Scholar
  90. Thaler, R.H. 1981‘Some Empirical Evidence on Dynamic Inconsistency’Economic Letters8201207CrossRefGoogle Scholar
  91. Tol, R.S.J. 2003‘On Dual Rate Discounting’Economic Modelling219598Google Scholar
  92. Tol, R.S.J. 1999‘The Marginal Costs Of Climate Change: Towards More Comprehensive Calculations’Energy Journal206181Google Scholar
  93. Tóth, F.L. 2000‘Intergenerational Equity and Discounting’Integrated Assessment1127136Google Scholar
  94. Traeger C. P. (2004), ‘Marginal Utility Propogation, Prices and the Rate of Discount: should environmental goods be discounted hyperbolically?’ Paper presented at the annual European Association of Environment and Resource Economists conference, Budapest June 2004.Google Scholar
  95. Weitzman, M. 1994‘On the ‘Environmental’ Discount Rate’Journal Environmental Economics and Management26200209Google Scholar
  96. Weitzman, M. 1998‘Why the Far Distant Future Should Be Discounted at its Lowest Possible Rate’Journal of Environmental Economics and Management36201208CrossRefGoogle Scholar
  97. Weitzman, M. 1999‘Just keep on discounting, but ldotsPortney, P.Weyant, J eds. Discounting and Intergenerational Equity.Resources for the FutureWashington DC2330Google Scholar
  98. Weitzman, M. 2001‘Gamma Discounting’American Economic Review91261271CrossRefGoogle Scholar
  99. Weitzman, M.L. 2004Statistical Discounting of an Uncertain Distant FutureHarvard UniversitymimeoGoogle Scholar

Copyright information

© Springer 2005

Authors and Affiliations

  • Ben Groom
    • 1
    Email author
  • Cameron Hepburn
    • 2
  • Phoebe Koundouri
    • 3
  • David Pearce
    • 4
  1. 1.Department of EconomicsSchool of Oriental and African StudiesLondonUK
  2. 2.St Hugh’s College, Environmental Change Institute and Department of EconomicsOxford UniversityUK
  3. 3.Department of Business, Department of EconomicsReading UniversityUK
  4. 4.Department of EconomicsUniversity College LondonUK

Personalised recommendations