How certain are we about the certainty-equivalent long term social discount rate?
Working Paper 138
The case for using declining social discount rates when the future is uncertain is now widely accepted in both academic and policy circles.
We present sharp upper and lower bounds for this term structure when we have limited knowledge about the nature of our uncertainty.
At horizons beyond 75 years, these bounds are widely spread even if there is agreement on the support and first four moments of the relevant underlying probability distribution. Hence, even in the unlikely event that there is consensus between experts on the primitives of the social discount rate, estimates of the present value of intergenerational costs and benefits, such as the Social Cost of Carbon, can potentially lie anywhere within a wide range. This makes it difficult to prescribe crisp policy recommendations for long-term investments.
Mark C. Freeman and Ben Groom