Discounting Behavior and Environmental Decisions

Discounting plays a major role in the life cycle of environmental and natural resource policies. Evaluating centuries-scale problems like climate change with standard discount rates yields results that many find ethically unacceptable. Paradoxes abound. Low discount rates are urged for determining the net benefits of climate change, while households fail to undertake energy conservation actions that have payback periods of only a few years. Efforts to uncover discount rates from revealed and stated preferences suggest that a variety of confounding factors may be simultaneously in play. Common property resources provide an example of how market failures can lead to behavior consistent with extreme discounting that can be addressed through effective policy. Finally, politicians who make ultimate policy decisions may have incentives to act in accordance with discount rates not socially optimal.