Declining discount rates: Economic justifications and implications for long-run policy

Should economic policy target immediate problems like malaria and AIDS? Or should it target climate change, which may have even more dramatic life-threatening effects in the very long term? We discuss how the pattern of discount rates over the planning horizon bears on this important issue. A declining pattern of discount rates is theoretically justified by uncertainty about future economic conditions, and its shape and relevance can be estimated from historical data. We analyse empirically long-term interest rate data from nine countries, construct a weighted average representing a possible global discount rate pattern for a very long range of future dates, and assess its implications for the valuation of carbon mitigation policies. — Christian Gollier, Phoebe Koundouri and Theologos Pantelidis