Economic analysis of environmental policy: concerns regarding the use and role of the social discount rate

The analysis of environmental policy and/or regulation involves determining and assessing the impact of costs and benefits which may accrue over many years. There are a number of intertemporal issues related to such decisions including whether and how to state future costs and benefits in today's terms through a technique known as discounting. In practice, economic analysis of environmental issues generally involves discounting future costs and benefits at a rate known as the social discount rate. This paper examines the decision to discount future benefits and/or costs and highlights the rationale for the technique. The more controversial and problematic aspects of this procedure are analyzed so that those assessing environmental investments may make more informed decisions.