The Long-Run Discount Rate Controversy

Posted: 8 Oct 2014

See all articles by Christian Gollier

Christian Gollier

University of Toulouse 1 - Industrial Economic Institute (IDEI); CESifo (Center for Economic Studies and Ifo Institute)

James K. Hammitt

Harvard University

Date Written: November 2014

Abstract

The choice of the rate at which one should discount the long-term benefits of mitigating climate change is highly controversial. Both the level and the slope of the term structure of discount rates have been discussed intensively in relation to the determination of the social cost of carbon. Although some of the parameters of the problem are ethical and outside the scope of economic analysis, we claim that there are converging and convincing arguments in favor of using an annual real risk-free discount rate going from approximately 4% to approximately 1% for maturities going from zero to infinity. Investing in climate mitigation yields highly uncertain future benefits. Such uncertainty should also be taken into account in the selection of the discount rate, although the appropriate approach is highly controversial.

Suggested Citation

Gollier, Christian and Hammitt, James K., The Long-Run Discount Rate Controversy (November 2014). Annual Review of Resource Economics, Vol. 6, Issue 1, pp. 273-295, 2014. Available at SSRN: https://ssrn.com/abstract=2507236 or http://dx.doi.org/10.1146/annurev-resource-100913-012516

Christian Gollier (Contact Author)

University of Toulouse 1 - Industrial Economic Institute (IDEI) ( email )

Manufacture des Tabacs
21 Allee de Brienne bat. F
Toulouse Cedex, F-31000
France
+33 61 12 86 30 (Phone)
+33 61 12 86 37 (Fax)

CESifo (Center for Economic Studies and Ifo Institute) ( email )

Poschinger Str. 5
Munich, DE-81679
Germany

James K. Hammitt

Harvard University ( email )

718 Huntington Avenue
Boston, MA 02115
United States
617-432-4343 (Phone)
617-432-0190 (Fax)

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