The debate on discounting: Reconciling positivists and ethicists

Abstract

Using a simple arbitrage argument, positivists claim that the interest rate provides the right basis to fix the discount rate to evaluate green investment projects. The real interest rate observed in the U.S. during the XXth century has been around 1% and 2%. On the contrary, ethicists estimate the discount rate by the marginal rate of substitution between current and future consumption. From classical estimations of intertemporal inequality aversion and prudence, they recommend a discount rate around 3% and 4%. Ethicists are less prone to investing for the future than positivists. I claim that the positivist approach is right if green investment projects are financed by a reallocation of resources from productive capital in the economy. Ethicists are right if they are financed by a reduction of consumption. I also claim that ethicists should use a rate between 1% and 2% to discount benefits occurring in the distant future. This provides two roads to reconcile the two approaches. A specific risk premium should be added to the discount rate that is proportional to the socio-economic beta of the investment project.

Replaced by

Christian Gollier, “The debate on discounting: Reconciling positivists and ethicists”, The Chicago Journal of International Law, vol. 13, n. 2, 2012, pp. 551–566.

Reference

Christian Gollier, The debate on discounting: Reconciling positivists and ethicists, May 2012.