Discounting and environmental quality: When should dual rates be used?

Triggered by concerns about impacts of long-run climatic change the use of dual-rate discounting to evaluate projects and policies has been suggested. Environmental goods should be discounted at a lower rate than conventional consumption goods. We consider the appropriate use of dual-rate discounting for a class of models where environmental amenity values of a stock of resources are built into the utility function. We argue that dual-rate discounting can only be justified either as a pragmatic device for valuation when future prices for environmental goods are unavailable or when consumption goods and environmental goods are not substitutable and relative prices are not well-defined.

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