Implications of declining discount rates: Climate Change Policy in the UK

Discussions about applied Cost Benefit Analysis are incomplete without the thorny issue of discounting emerging at some point. Indeed, since the calculation of Net Present Values (NPV), and hence the efficiency of a project or policy, hinges so crucially upon the level of the discount rate applied across time, the analysis of time preference and discounting has become an active area of research in its own right. Nowhere is this debate more hotly contended that when CBA is used to evaluate projects with impacts that extend into the far distant future such as biodiversity conservation, nuclear power and, of course, climate change. This chapter aims to review some of the more recent contributions to this debate and in particular, the theory that underpins recent calls for the use of declining discount rates (DDRs). We then discuss how a schedule of DDRs can be estimated and illustrate their impact upon two topical policy questions: climate change and nuclear power.