Embedded Discounting

8 Pages Posted: 23 Oct 2023

See all articles by Daniel Møller Sneum

Daniel Møller Sneum

Technical University of Denmark

Emilie Rosenlund Soysal

Potsdam Institute of Climate Impact Research (PIK)

Frikk Nesje

University of Copenhagen - Department of Economics

Mark C. Freeman

University of York

Date Written: 2023

Abstract

The appraisal of public investments is subject to formal guidelines which often require input prices, such as forecasted energy prices. Using Danish guidelines as a case study, we explore the discounting assumptions in these input prices and find rates ranging from 2.97% to 17.5%, markedly different from the headline discount rate of 3.5%. This is not unique to Denmark and discrepancy in embedded discount rates can lead to false rejection of projects. We offer three possible explanations for such differences, based on positions on how the discount rate should be set.

Keywords: discounting, social discount rate, cost-benefit analysis, public guidelines

JEL Classification: D610, H430, L510, Q480

Suggested Citation

Møller Sneum, Daniel and Rosenlund Soysal, Emilie and Nesje, Frikk and Freeman, Mark, Embedded Discounting (2023). CESifo Working Paper No. 10689, Available at SSRN: https://ssrn.com/abstract=4608811 or http://dx.doi.org/10.2139/ssrn.4608811

Daniel Møller Sneum (Contact Author)

Technical University of Denmark ( email )

Anker Engelunds Vej 1
Building 101A
Lyngby, 2800
Denmark

Emilie Rosenlund Soysal

Potsdam Institute of Climate Impact Research (PIK) ( email )

Telegrafenberg 31
Potsdam, Brandenburg 14473
Germany

Frikk Nesje

University of Copenhagen - Department of Economics ( email )

Øster Farimagsgade 5, Bygn 26
Copenhagen, 1353
Denmark

Mark Freeman

University of York ( email )

Heslington
University of York
York, YO10 5DD
United Kingdom

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