Reference

Christian Gollier, and James K. Hammitt, The Long-Run Discount Rate Controversy, The Annual Review of Resource Economics, vol. 6, October 2014, pp. 273–295.

Abstract

The choice of the rate at which one should discount the long-term benefits of mitigating climate change is highly controversial. Both the level and the slope of the term structure of discount rates have been discussed intensively in relation to the determination of the social cost of carbon. Although some of the parameters of the problem are ethical and outside the scope of economic analysis, we claim that there are converging and convincing arguments in favor of using an annual real risk-free discount rate going from around 4% to around 1% for maturities going from 0 to infinity. Investing in climate mitigation yields highly uncertain future benefits. This should also be taken into account in the selection of the discount rate, though the appropriate approach is highly controversial.

Keywords

Climate change; sustainable development; valuation of environmental assets; value of statistical life;

JEL codes

  • D61: Allocative Efficiency • Cost–Benefit Analysis
  • D81: Criteria for Decision-Making under Risk and Uncertainty
  • D90: General
  • G18: Government Policy and Regulation
  • H43: Project Evaluation • Social Discount Rate
  • Q01: Sustainable Development
  • Q54: Climate • Natural Disasters • Global Warming

Research partnerships

Électricité de France (EDF)
Scor Chair