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Today’s post looks at social discount rates.

Social discount rates

Social discount rates (SDRs) are used to value costs and benefits in the future in order to make policy today.

  • They are a hot topic right now because of climate change.

The SDR is one of the most important inputs to a long-term cost-benefit analysis (CBA), because a small change in the SDR can produce a bug swing in the current value (the NPV).

With a low SDR, impacts in the distant future have a high price today.

  • With a high SDR, you can pretty much ignore them.

So which SDR should we use?

Consumption vs investment

CBA uses two discount rates, one for consumption and one for investment.