Government Discounting Controversies: The Valuation of Social Time Preference

21 November 2011
By Michael Spackman

The conceptual basis and numerical quantification of the time discount rate (or rates) to use for the comparison of policies or projects from a national perspective have been extensively debated for over half a century. Many differences remain, some continuing over many decades and some emerging more recently. Over recent decades the concept of a social time preference rate, derived from estimates of pure time preference (δ) and an elasticity of marginal utility (η), has become fairly well established in practical application, at least in Europe. There has however been much recent debate about the ethical basis of δ and possibly η. In this paper for the Grantham Research Institute on Climate Change and the Environment and the Centre for Climate Change Economics and Policy, NERA Special Advisor Michael Spackman suggests that the arguments made for a zero or near zero value for δ do not stand up well to close investigation, and that the case for any significant ethical element to η is weak. Also discussed are the valuation of marginal utility in developing countries and the application of government discounting to the very long term.