An Anatomy of Discounting in Costbenefit Analysis

Abstract

This paper provides an overview of the standard theory of discounting in cost-benefit analysis. With an application to long-term environmental problems in mind, we begin with the classic issue of discounting and intergenerational equity, which dates back to the seminal work of Frank Ramsey in the 1920s. Then, by reviewing recent developments in the theory of declining discounting rates (DDRs), we show how relatively low and declining discount rates can be justified in the presence of uncertainty. Also, we briefly discuss the practical implications of discounting in the context of climate change.