Abstract
Using a simple arbitrage argument, positivists claim that the interest rate provides the right basis to fix the discount rate to evaluate green investment projects. The real interest rate observed in the US during the twentieth century was around 1 percent. On the other band, ethicists estimate the discount rate using the marginal rate of substitution between current and future consumption. From classical estimations of intertemporal inequality aversion and prudence, assuming a 2 percent growth rate of consumption, they recommend a discount rate of around 3.5 percent. Ethicists are therefore less prone to investing for the future than positivists. I provide two roads to reconcile the two approaches. First, I claim that the positivist approach is correct f green investment projects are financed by a reallocation of resources from productive capital in the economy, whereas ethicists are correct if the projects are financed by a reduction in current consumption. Second, I claim that ethicists should use a rate between 1 percent and 2 percent to discount sure benefits that occur in the distant future to take the uncertainty surrounding the future prosperity of the economy into account. Finally, a risk premium should be added to the discount rate that is proportional to the socioeconomic beta of the investment project.
Recommended Citation
Gollier, Christian
(2013)
"The Debate on Discounting: Reconciling Positivists and Ethicists,"
Chicago Journal of International Law:
Vol. 13:
No.
2, Article 13.
Available at:
https://chicagounbound.uchicago.edu/cjil/vol13/iss2/13