Discounting Environmental Benefits for Future Generations

Abstract

The standard approach to evaluating a long-term project is to use the social rate of time preference to discount the benefits and costs of future generations. A difficulty with this approach is that there is no consensus on the values of the required parameters that reflect intergenerational equity concerns. Assuming the existence of a coordinating debt policy, this article establishes a project evaluation rule that identifies Pareto-improving projects and is therefore free of value judgment. This article goes beyond the existing analysis of intergenerational discounting by exploring the implications of tax distortions in the capital market that drive a wedge between the gross (before-tax) and the net (after-tax) rates of return. Our project evaluation criterion is stricter than that recommended in government guidelines, causing fewer environmental projects to be accepted.

Benefit-Cost Analysis of Air Pollution, Energy, and Climate Regulations

“…46 Debt management can also be used to effect intergenerational transfers, for example, accelerating debt retirement to lower future-generation tax liabilities. See Liu et al (2021).…”