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Findings on Environmental Economics Reported by Investigators at Harvard University (Should Governments Use a Declining Discount Rate in Project...

September 12, 2014

Findings on Environmental Economics Reported by Investigators at Harvard University (Should Governments Use a Declining Discount Rate in Project Analysis?)

By a News Reporter-Staff News Editor at Ecology, Environment & Conservation -- Investigators discuss new findings in Environmental Economics. According to news reporting originating in Cambridge, Massachusetts, by VerticalNews journalists, research stated, "Should governments use a discount rate that declines over time when evaluating the future benefits and costs of public projects? The argument for using a declining discount rate (DDR) is simple: if the discount rates that will be applied in the future are uncertain but positively correlated, and if the analyst can assign probabilities to these discount rates, then the result will be a declining schedule of certainty-equivalent discount rates. There is a growing empirical literature that estimates models of long-term interest rates and uses them to forecast the DDR schedule."

The news reporters obtained a quote from the research from Harvard University, "However, this literature has been criticized because it lacks a connection to the theory of project evaluation. In benefit-cost analysis, the net benefits of a project in year t (in consumption units) are discounted to the present at the rate at which society would trade consumption in year t for consumption in the present. With simplifying assumptions, this leads to the Ramsey discounting formula, which results in a declining certainty-equivalent discount rate if the rate of growth in consumption is uncertain and if shocks to consumption are correlated over time."

According to the news reporters, the research concluded: "We conclude that the arguments in favor of a DDR are compelling and thus merit serious consideration by regulatory agencies in the United States."

For more information on this research see: Should Governments Use a Declining Discount Rate in Project Analysis? Review of Environmental Economics and Policy, 2014;8(2):145-163. Review of Environmental Economics and Policy can be contacted at: Oxford Univ Press, Great Clarendon St, Oxford OX2 6DP, England. (Oxford University Press -; Review of Environmental Economics and Policy -

Our news correspondents report that additional information may be obtained by contacting K.J. Arrow, Harvard University, Cambridge, MA 02138, United States. Additional authors for this research include M.L. Cropper, C. Gollier, B. Groom, G.M. Heal, R.G. Newell, W.D. Nordhaus, R.S. Pindyck, W.A. Pizer, P.R. Portney, T. Sterner, R.S.J. Tol and M.L. Weitzman.

Keywords for this news article include: Cambridge, Massachusetts, United States, North and Central America, Environmental Economics

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Source: Ecology, Environment & Conservation

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