Gollier, Christian (2012) The debate on discounting: Reconciling positivists and ethicists. Chicago Journal of International Law, 13 (2). pp. 551-566.

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Abstract

Using a simple arbitrage argument, positivists claim that the interest rate provides the
right basis to fix the discount rate to evaluate green investment projects. The real interest rate
observed in the U.S. during the XXth century has been around 1% and 2%. On the contrary,
ethicists estimate the discount rate by the marginal rate of substitution between current and
future consumption. From classical estimations of intertemporal inequality aversion and
prudence, they recommend a discount rate around 3% and 4%. Ethicists are less prone to
investing for the future than positivists. I claim that the positivist approach is right if green
investment projects are financed by a reallocation of resources from productive capital in the
economy. Ethicists are right if they are financed by a reduction of consumption. I also claim that
ethicists should use a rate between 1% and 2% to discount benefits occurring in the distant
future. This provides two roads to reconcile the two approaches. A specific risk premium should
be added to the discount rate that is proportional to the socio-economic beta of the investment
project.