Abstract
For informing future energy policy decisions, it is essential to choose the correct social discount rate (SDR) for ex-ante economic evaluations. Generally, costs and benefits—both economic and environmental—are weighted through a single constant discount rate. This leads to excessive discounting of the present value of cash flows progressively more distant over time. Evaluating energy projects through constant discount rates would mean underestimating their environmental externalities. This study intends to characterize environmental–economic discounting models calibrated for energy investments, distinguishing between intra- and inter-generational projects. In both cases, the idea is to use two discounting rates: an economic rate to assess financial components and an ecological rate to weight environmental effects. For intra-generational projects, the dual discount rates are assumed to be constant over time. For inter-generational projects, the model is time-declining to give greater weight to environmental damages and benefits in the long-term. Our discounting approaches are based on Ramsey’s growth model and Gollier’s ecological discounting model; the latter is expressed as a function of an index capable of describing the performance of a country’s energy systems. With regards to the models we propose, the novelty lies in the calibration of the “environmental quality” parameter. Regarding the model for long-term projects, another innovation concerns the analysis of risk components linked to economic variables; the growth rate of consumption is modelled as a stochastic variable. The defined models were implemented to determine discount rates for both Italy and China. In both cases, the estimated discount rates are lower than those suggested by governments. This means that the use of dual discounting approaches can guide policymakers towards sustainable investment in line with UN climate neutrality objectives.
Highlights
Nowadays, energy policies are a key governmental instrument for achieving economic, environmental, and social objectives, encouraging sustainable development, providing environmental protection, and containing greenhouse gas emissions (GHG) [1]
Choosing more sustainable investments means making intertemporal decisions. Such choices involve trade-offs between benefits and costs that occur at different times [3]. It follows that a critical issue in environmental and resource economics is the choice of social discount rate (SDR), as it significantly influences the outcome of a cost–benefit tests [4,5]
The SDR allows the costs and benefits that an investment generates over time to be weighted to make them economically comparable
Summary
Energy policies are a key governmental instrument for achieving economic, environmental, and social objectives, encouraging sustainable development, providing environmental protection, and containing greenhouse gas emissions (GHG) [1]. Choosing more sustainable investments means making intertemporal decisions Such choices involve trade-offs between benefits and costs that occur at different times [3]. It follows that a critical issue in environmental and resource economics is the choice of social discount rate (SDR), as it significantly influences the outcome of a cost–benefit tests [4,5]. It is a fundamental parameter for being able to express an opinion on the economic performance of an investment project whenever the analysis is conducted from the point of view of a public operator or of the community [7]
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