Discounting for Public Cost–Benefit Analysis
This paper discusses the appropriate social discount rate for public cost-benefit analysis under the shadow price of capital approach. We show how to bound the discount rate for a general pattern of benefits over time.
Key Findings
- We find that the appropriate discount rate converges to the consumption rate for benefits in the distant future.
- More generally, the range of rates depends on the temporal pattern of future benefits.
- Applied to climate damages, we estimate the appropriate discount rates of between 2.6 and 3.4 percent.
Abstract
Standard U.S. practice for public cost–benefit analysis is to bound the discount rate with the interest rate paid by capital investment and the rate received by consumers. These bounding cases arise when future benefits accrue to consumers either in a two-period model or as a perpetuity. We generalize to consider benefits paid in any future period. We find that the appropriate discount rate converges to the consumption rate for benefits in the distant future. More generally, the range of rates depends on the temporal pattern. We estimate the appropriate discount rates for CO2 damages as between 2.6 and 3.4 percent.
