Social discounting and the environment

Abstract

Giving the future less weight than the present when making decisions is known as temporal or time discounting. The practice of discounting is perfectly sensible in private capital investment. However, for public investments, most notably those with long term consequences, many feel uneasy with what is known as social discounting. Because the debate about discounting is very technical and difficult to follow, it is tempting to leave the problem to the experts to sort out. But the choice of discount rate used to evaluate public investments concerns us all. During the late seventies and early eighties a very active debate on social discounting took place in New Zealand. An interesting account can be found in Forbes and Meister (1984). The setting of a 10% real discount rate for all government investment did not resolve the disagreement. In the last few years the ground of the discount rate debate has shifted. Government investment in natural resource development has been largely replaced by private or quasi-private (State Owned Enterprise - SOE) investment. Private companies can, of course, target their own rates of return and SOEs are not bound by the 10% rule. But the choice of discount rate by resource developers is still of interest to a public concerned with the depletion of natural resources. More generally, in "taking account of the needs of future generations" (Environment Act 1986), the public servants charged with this task should not allow such needs to be discounted away to nothing.