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How certain are we about the certainty-equivalent longterm social discount rate?

Freeman, Mark C. and Groom, Ben (2016) How certain are we about the certainty-equivalent longterm social discount rate? Journal of Environmental Economics and Management, 79. pp. 152-168. ISSN 0095-0696

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Identification Number: 10.1016/j.jeem.2016.06.004

Abstract

Theoretical arguments for using a term structure of social discount rates (SDR) that declines with the time horizon have influenced Government guidelines in the US and Europe. The certainty equivalent discount rate that often underpins this guidance embodies uncertainty in the primitives of the SDR, such as growth. For distant time horizons the probability distributions of these primitives are ambiguous and the certainty equivalent itself is uncertain. Yet, if a limited set of characteristics of the unknown probability distributions can be agreed upon, 'sharp'upper and lower bounds can be defined for the certainty-equivalent SDR. Unfortunately, even with considerable agreement on these features, these bounds are widely spread for horizons beyond 75 years. So while estimates of the present value of intergenerational impacts, including the social cost of carbon, can be bounded in the presence of this ambiguity, they typically remain so imprecise as to provide little practical guidance.

Item Type: Article
Official URL: http://www.journals.elsevier.com/journal-of-enviro...
Additional Information: © 2016 Elsevier B.V
Divisions: Geography & Environment
Subjects: G Geography. Anthropology. Recreation > GE Environmental Sciences
H Social Sciences > HB Economic Theory
JEL classification: H - Public Economics > H4 - Publicly Provided Goods > H43 - Project Evaluation; Social Discount Rate
Q - Agricultural and Natural Resource Economics; Environmental and Ecological Economics > Q5 - Environmental Economics > Q51 - Valuation of Environmental Effects
Sets: Departments > Geography and Environment
Date Deposited: 26 Jul 2016 12:02
Last Modified: 20 Oct 2019 02:28
URI: http://eprints.lse.ac.uk/id/eprint/67258

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