Development, the environment, and the social rate of discount

Abstract

This article examines the role of the discount rate in making decisions that will have significant implications for the environment. The authors begin by providing a rationale for discounting in general and by describing the main factors that determine the discount rate. These factors-the private and social rates of time preference, the opportunity cost of capital, risk and uncertainty, and the interests of future generations-all have an environmental dimension. The article goes on to examine that dimension and to explore the connections between the choice of the discount rate and environmental concerns, such as excessive exploitation of natural resources, inadequate investment in conservation, and insufficient attention to the irreversible loss of certain environmental resources.The authors conclude that, in general, environmental concerns are not best addressed by lowering the discount rate-an action that might have both benefits and costs for the environment. A more promising course would be to incorporate a criterion of sustainability into certain aspects of decisionmaking. How such a criterion could be made operational is touched upon but not developed in this article. © 1991 The International Bank for Reconstruction and Development/The World Bank.