Why the Far-Distant Future Should Be Discounted at Its Lowest Possible Rate

Weitzman, Martin L.

doi:10.1006/jeem.1998.1052

Cited by 768 publications

(552 citation statements)

References 7 publications

(4 reference statements)

Supporting

Mentioning

498

Contrasting

Unclassified

Order By: Relevance

“…As shown by Weitzman [47], a striking corollary of this result is that the effective ''certaintyequivalent'' or forward rate of discount (corresponding to the expected discount factor) will decline over time. And this decline in the effective rate is especially dramatic as t becomes large.…”

Section: Introductionmentioning

confidence: 83%

Discounting the distant future: how much do uncertain rates increase valuations?

Newell

Pizer

2003

Journal of Environmental Economics and Management

333

121

View full text Add to dashboard Cite

We demonstrate that when the future path of the discount rate is uncertain and highly correlated, the distant future should be discounted at significantly lower rates than suggested by the current rate. We then use two centuries of US interest rate data to quantify this effect. Using both random walk and meanreverting models, we compute the ''certainty-equivalent rate'' that summarizes the effect of uncertainty and measures the appropriate forward rate of discount in the future. Under the random walk model we find that the certainty-equivalent rate falls continuously from 4% to 2% after 100 years, 1% after 200 years, and 0.5% after 300 years. At horizons of 400 years, the discounted value increases by a factor of over 40,000 relative to conventional discounting. Applied to climate change mitigation, we find that incorporating discount rate uncertainty almost doubles the expected present value of mitigation benefits. r

show abstract

Section: Introductionmentioning

confidence: 83%

Discounting the distant future: how much do uncertain rates increase valuations?

Newell

Pizer

2003

Journal of Environmental Economics and Management

333

121

View full text Add to dashboard Cite

show abstract

“…However, in assessing climate policy alternatives, addressing the time dimension is important because of the relevance of the temporal distribution of intergenerational impacts and the long-term nature of climate change processes. Although it can be argued that one way of dealing with time is via discount rates, there is strong debate in the literature on what rate to use (Weitzman 1998) to discount future impact and furthermore there could be ethical concerns with discounting some of the impacts such as the health impacts. It is possible to incorporate temporal consideration in a multi-criteria analysis in a number of ways, either by the specification of criteria relevant to different time horizons (which could then be weighted to reflect the relative priorities accorded to these) or by the definition of individual criteria that evaluate the performance of options over a specified time horizon.…”

Section: Methodological Challenges To the Standard Mcda Approachmentioning

confidence: 99%

Advancing methodological thinking and practice for development-compatible climate policy planning

Scrieciu

Belton

Chalabi

et al. 2014

Mitig Adapt Strateg Glob Change

View full text Add to dashboard Cite

This version is available at https://strathprints.strath.ac.uk/45742/ Strathprints is designed to allow users to access the research output of the University of Strathclyde. Unless otherwise explicitly stated on the manuscript, Copyright © and Moral Rights for the papers on this site are retained by the individual authors and/or other copyright owners. Please check the manuscript for details of any other licences that may have been applied. You may not engage in further distribution of the material for any profitmaking activities or any commercial gain. You may freely distribute both the url (https://strathprints.strath.ac.uk/) and the content of this paper for research or private study, educational, or not-for-profit purposes without prior permission or charge.Any correspondence concerning this service should be sent to the Strathprints administrator: strathprints@strath.ac.ukThe Strathprints institutional repository (https://strathprints.strath.ac.uk) is a digital archive of University of Strathclyde research outputs. It has been developed to disseminate open access research outputs, expose data about those outputs, and enable the management and persistent access to Strathclyde's intellectual output. Authors accepted manuscript. Published as:Scriecu, S., Belton, V., Chalabi, Z., Mechler, R., Puig, D. (2014) There are growing calls for identifying climate mitigation and adaptation policypackages that would also support human development objectives at the national and regional levels. The literature on climate policy analysis and impact assessment continues to be driven by standard economics with its body of competitive general equilibrium optimization models and cost-benefit analysis techniques of aggregation and monetization. However, its recommendations for climate action are often based on highly restrictive underlying assumptions, which have been increasingly criticized for being too prescriptive, not adequately capturing salient observed socioeconomic realities, and not acknowledging pluralism in values.The main aim of this paper is to put forward a new methodological approach that seeks to address these deficiencies. A generic but comprehensive framework eliciting mitigationadaptation-development interactions, accounting for institutional barriers, and drawing on a combination of an emerging body of new climate economics and multi-criteria decision analysis is suggested. We purport that, by using this framework, multi-dimensional impacts and multistakeholder interests could be better represented when planning climate policy actions. We also argue that analytical tools drawing on economic thinking which embraces interdisciplinary analysis and deep uncertainty and avoids the fallacy of unique optimal solutions, may deliver more effective strategies for pushing economies onto the transformational pathways required.

show abstract

“…If U (h) denotes the social utility of harvesting and c(x) denotes the unit cost of harvesting, the aim is to find the harvesting rate h(t) that optimizes the than a declining utility discount rate over time, relating to uncertainty. For instance, Sozou (1998) and Weitzman (1998) have shown that when the discount rate is constant but uncertain, the 'certainty-equivalent discount rate' will decline over time to the lowest possible rate. The UK Government Treasury guidelines on the appraisal of investments and policies requires the use of declining discount rates for these reasons (H M Treasury, 2003).…”

Section: Solving the Optimization Problemmentioning

confidence: 99%

Optimal harvesting of fish stocks under a time-varying discount rate

Duncan

Hepburn

Papachristodoulou

2011

Journal of Theoretical Biology

View full text Add to dashboard Cite

Optimal control theory has been extensively used to determine the optimal harvesting policy for renewable resources such as fish stocks. In such optimizations, it is common to maximise the discounted utility of harvesting over time, employing a constant time discount rate. However, evidence from human and animal behaviour suggests that we have evolved to employ discount rates which fall over time, often referred to as "hyperbolic discounting". This increases the weight on benefits in the distant future, which may appear to provide greater protection of resources for future generations, but also creates challenges of time-inconsistent plans. This paper examines harvesting plans when the discount rate declines over time. With a declining discount rate, the planner reduces stock levels in the early stages (when the discount rate is high) and intends to compensate by allowing the stock level to recover later (when the discount rate will be lower). Such a plan may be feasible and optimal, provided that the planner remains committed throughout. However, in practice there is a danger that such plans will be re-optimized and adjusted in the future. It is shown that repeatedly restarting the optimization can drive the stock level down to the point where the optimal policy is to harvest the stock to extinction. In short, a key contribution of this paper is to identify the surprising severity of the consequences flowing from incorporating a rather trivial, and widely prevalent, non-rational aspect of human behaviour into renewable resource management models. These ideas are related to the collapse of the Peruvian anchovy fishery in the 1970's.1

show abstract

Why the Far-Distant Future Should Be Discounted at Its Lowest Possible Rate

Cited by 768 publications

References 7 publications

Discounting the distant future: how much do uncertain rates increase valuations?

Discounting the distant future: how much do uncertain rates increase valuations?

Advancing methodological thinking and practice for development-compatible climate policy planning

Optimal harvesting of fish stocks under a time-varying discount rate

Contact Info

Product

Resources

About