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Low discount rates and insignificant environmental values

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  • Price, Colin

Abstract

Difference between the discount rate on consumption and the rate of return on investment is often taken to prevent the former's being used as a social discount rate. Yet techniques have long been known for incorporating both these rates in a shadow price of investment funds. Assumptions about the proportion of investment revenues saved and reinvested are crucial in determining whether a low discount rate favours or discriminates against long-term environmental values. Even a moderate saving rate may make the shadow price of funds indefinitely large. The conceptually correct discount rate then becomes the growth rate of investment funds, and the relative value of environmental effects becomes zero. Stochastic variation in rate of return makes this result more likely. Such an outcome may be avoided by setting reinvestment to zero, or assuming convergence of rates of return and discount, but no firm justification exists for these stratagems. However, various reasonable assumptions about environmental costs - especially, that they embody an investment element, or require adequate compensation to be paid - may make such costs indefinite also, and therefore capable of standing against indefinite values of investible funds.

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  • Price, Colin, 2010. "Low discount rates and insignificant environmental values," Ecological Economics, Elsevier, vol. 69(10), pages 1895-1903, August.
    • Handle: RePEc:eee:ecolec:v:69:y:2010:i:10:p:1895-1903
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