On the "Environmental" Discount Rate

In this paper I show that "environmentalism" itself can provide a rigorous foundation for the low and declining discount rates that environmentalists seem to favor in long-term cost-benefit calculations. If indeed it is a stylized fact that we are moving toward a world where environmental spending is increasingly important, that scenario per se may significantly lower the social rate of return. A formula is derived for the ratio of social to private discount rates as a simple function of two operational environmental parameters. The formula is used to explain why the social rate of return ought to be lower than the private rate and why this gap-called "environmental drag" when measured in terms of equivalent evaporation of national income-may be expected to increase over time.