Discounting the Long-Run Future and Sustainable Development
Editor: Phoebe Koundouri, Athens University of Economics and Business
The realization that actions taken today can have long-term consequences, presents a new challenge to decision makers in assessing the desirability of policies and projects, a challenge summarized as the goal of ‘sustainable development’. The use of the classical net present value (NPV) rule to assess the economic efficiency of policies with costs and benefits that accrue in the long term is problematic. The welfare of future generations barely influences the outcome of such a rule when constant socially efficient discount rates are used for all time. The deleterious effects of exponential discounting ensure that projects that benefit generations in the far distant future at the cost of those in the present are less likely to be seen as efficient, even if the benefits are substantial in future value terms. From the perspective of social choice, the present yields a dictatorship over the future. This is illustrated in the conclusion of the Copenhagen Consensus in which different public investment projects have been examined by a panel of prestigious economists. Using standard cost-benefit analysis, they ranked projects with distant benefits (e.g. global warming) at the lowest level of priority compared to programs yielding almost immediate benefits (e.g. fighting malaria and AIDS, and providing sanitation in developing countries).
Many countries (for example, France and the UK) have recently decided to reduce their discount rate, and to use smaller rates to discount costs and benefits occurring in the distant future. This tends to favor the distant future compared to projects with benefits occurring in the shorter term. Moreover, recent economic literature proposes the use of a discount rate which declines with time, according to some predetermined trajectory. In comparison with the use of a constant discount rate, using a declining discount rate raises the weight attached to the welfare of future generations. This special issue answers the following questions. What trajectory of interest rates is consistent with the goal of sustainable development and what are the policy implications of applying this optimal trajectory on climate change policy.
July 16, 2009
Phoebe Koundiri Editor´s Introduction