terminal assumptions, 32 in practice financial market practitioners often default to conservative or subjective inputs for g and r , highlighting both the bounded rationality and the scope for bias in such models. The growth rate is usually assumed to be the long-standing GDP growth rate of a given country; however, this too is unrealistic. Economies and industries experience cycles, structural breaks, and technological disruptions, all of which undermine the plausibility of projecting steady growth indefinitely. This reinforces the fragility of terminal-value-driven NPVs with constant assumptions for r and g. Finally, Baumgärtner et al 33 and Marglin 34 proposed that discount rates applied to private or market- based investment decisions tend to be higher than social and environmental discount rates. Private investors rationally demand higher returns, reflecting opportunity costs of capital, liquidity constraints, and risk premiums embedded in measures such as WACC or hurdle rates. However, when these high rates are applied to long-term projects whose benefits materialise only in the distant future, such as climate change mitigation, biodiversity conservation, or early childhood education, the present value of those benefits collapses, resulting in systematic undervaluation. From a societal perspective, where intergenerational equity and sustainability are critical, lower discount rates are more appropriate. Using private market rates in these contexts therefore leads to underinvestment in socially desirable projects and, ultimately, to sub-optimal long-term outcomes.
Monological Discounting
Our second limitation focuses on monological discounting.
Global economies are made up of intricate systems that produce goods and services which, in turn, are the sum product of multiple types of capital. While production processes may be extremely complex, directionally, we are intuitively aware that this is true. Costanza et al. (2021) suggested that ‘discounting the future is essential to inform long-term decisions, but the future of humanity is being put in jeopardy by using the same discount rate for all types of capital.’ 35 If we assume there are only two capitals (built, K ; and natural, N ), only two different consumer goods ( C 1 and C 2 ) that are each produced using K and N in different proportions ( k 1 〉 k 2 ; n 1 < n 2 ), and a Cobb-Douglas production technology 36 . Such production functions can be written as:
k1 N n1 k2 N n2
C 1 = K C 2 = K
If K grows more rapidly than N , then with k 1 > k 2 and n 1 < n 2 , C 1 will grow more rapidly than C 2 . The rates of change in consumption opportunities, and thus in marginal utilities, will thus differ across goods, which justifies the need to use different discount rates 37 .
32 Some models suggest a terminal value of zero for high climate risk investments see Glendon, 2019, More and more assets have a terminal value of zero at https://www.fuw.ch/article/more-and-more-assets-have-a-terminal-value-of-zero. 33 Baumgärtner, S., Klein, A.M., Thiel, D. and Winkler, K., 2015. Ramsey discounting of ecosystem services. Environmental and Resource Economics, 61, pp.273-296. 34 Marglin, S.A., 1963. The social rate of discount and the optimal allocation of resources. Quarterly Journal of Economics, 77(1), pp.95-111. 35 Costanza, R., Kubiszewski, I., Stoeckl, N. & Kompas, T., 2021. Pluralistic discounting recognizing different capital contributions: an example estimating the net present value of global ecosystem services, p. 1. 36 The Cobb-Douglas production technology is a widely used economic model that represents the relationship between inputs (capital and labour) and output in production. 37 Costanza, R., Kubiszewski, I., Stoeckl, N. & Kompas, T., 2021. Pluralistic discounting recognizing different capital contributions: an example estimating the net present value of global ecosystem services, p. 3.
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