2008) use of a very low discount rate. Nordhaus (2007) argued that Stern’s model of investment relied on unreasonably low discount rates and that these should be closer to market rates - a stance rebutted by Stern (2015) who argued that market-based discount rates are prone to unreliability and may be misleading for assessing the long-term effects associated with climate change. The controversy illustrates how the choice of discount rate is not purely technical but deeply entwined with ethical judgments about intergenerational equity. In terms of public sector spending choices, Moore et al (2024) 95 proposed that the key issue in determining the ‘real’ social discount rate is deciding the weights society should apply to costs and benefits that occur in future time periods relative to the current period. If it is accepted that society’s choices should reflect the preferences of the individuals making up that society, then the level of public investment should be based on individual preference for present consumption versus future consumption (the marginal rate of time preference), because investment is simply a means of using resources that are potentially available for consumption now to increase consumption later. In their view, an ‘appropriate’ social discount rate may be defined in terms of two issues: • The conceptual choice of the discounting parameter (or discounting method), • The specification of the value of that parameter requires both determining the best available proxy for the parameter and estimating its numerical value in intragenerational and intergenerational setting. However, using individuals’ behaviour as revealed by market interest rates to construct and estimate a social discount rate is somewhat problematic since there is significant research demonstrating that individuals do not behave according to the standard assumptions of microeconomic theory. This weakens the normative argument for basing social choices on market behaviour. 96 Furthermore, when the effects of projects span generations, individuals may not fully consider the effects of their spending and saving behaviour on future generations. Such intergenerational issues are particularly significant in terms of assessing the future value of investments in climate risk mitigation or social issues. In these cases, discounting at a constant discount rate undervalues future effects, and creates the ‘tragedy of the commons’ 97 when rationale inaction (for example, resource depletion) becomes the default investment strategy. In this context, equity weighting becomes critical: benefits accruing to poorer or future cohorts should be weighted accordingly vs. those accruing to wealthier, current generations, enabling international burden- sharing such as developed nations subsidising investments in vulnerable countries. Moore et al (2013) 98 proposed a ‘social time preference’ model based on the idea that the fundamental goal in welfare economics is to maximize the utility (or “happiness”) of society (or of a representative individual), where utility depends on per capita consumption in present and future time periods. Consumption includes all goods and services, both private and public. Thus, it includes non-market goods, such as a hike in a national park, as well as market goods, such as a restaurant meal.
From this perspective, future consumption can be increased at the expense of current consumption, either through savings that lead to investment in human or physical capital, or in the generation of
95 Moore, M. Boardman, A., Vining A., Weimer D., and Greenberg, D., (2004) “Just Give Me a Number!” Practical Values for the Social Discount Rate, Journal of Policy Analysis and Management, Vol. 23, No. 4, 789–812 96 Mazar, N., Amir, O. and Ariely, D. (2008). The Dishonesty of Honest People: A Theory of Self-Concept Maintenance. Journal of Marketing Research, 45(6), pp.633–644. 97 See Ostrom, E. (2008). Tragedy of the Commons. The New Palgrave Dictionary of Economics, pp.1–5. 98 Moore, M., Boardman, A., and Vining, A. (2013) More appropriate discounting: the rate of social time preference and the value of the social discount rate, Journal of Benefit-Cost Analysis 4(1): 1–16
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