RECENT APPROACHES TO DISCOUNTING IN COST BENEFIT ANALYSIS

Discounting, a standard tool of economic analysis, is used to compare economic effects occurring at different points in time. The higher the discount rate, the less weight is given to future benefits. Since environmental costs and benefits from current actions often extend over many years or even generations, the discount rate used in economic analysis of environmental goods has significant impacts on the results. The traditional form of discounting in Social Cost Benefit Analysis may fail to account adequately for long-run environmental effects and may promote unsustainable outcomes. This working paper considers the sustainability problems associated with traditional discounting, reviews some suggested approaches to discounting, describes the most recent and theoretical discounting approach, and draws conclusions on the application of the theory to the problem of discounting for sustainable transportation investments. It is issued as background material to the report prepared by the Planning Services Branch: The monetization of environmental impacts of roads.(A)