Environmental economics and cost-benefit analysis: the choice of an appropriate discount rate
by Anthony B. Lumby, Adrian D. Saville
Interdisciplinary Environmental Review (IER), Vol. 1, No. 2, 1999

Abstract: Notwithstanding earlier approbation from economists on the use of the discounting technique, the past twenty or thirty years have witnessed a growing acceptance of the use of this technique in cost-benefit analysis. Nevertheless, there is no general agreement on the type of discount rate to be employed, nor whether it would be more appropriate to employ a (lower) social discount rate, especially in the case of long-term projects or those which are assessed to have significant environmental impacts. Furthermore, in recent years, the earlier debate against the use of the discounting technique has re-emerged in somewhat different form. Against this background, this paper seeks to explain the different types of market discount rates available - namely, the consumption rate of interest, the investment rate of interest and the accounting rate of interest - and explores the argument for employing a (lower) social discount rate. Thereafter, attention is focused on the more recent debate against the use of the discounting technique in general. Finally, an attempt is made to assess alternative approaches to the conventional discounting technique: a zero discount rate, the internal rate of return and the use of so-called quasi-discount rates. The latter is found to offer a more pragmatic approach to the use of the discounting technique, and is considered more appropriate for cost-benefit analysis involving projects which have significant environmental impacts.

Online publication date: Mon, 13-May-2013

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