Discounting Climate Costs
Discounting is a critical component of cost-benefit analysis, especially when the costs and benefits occur at separate and temporally distant points. To be done properly, the discount rate should reflect the best rate of return that could reasonably be expected in capital markets. Over the past two centuries, the stock market in the U.S. has generated a return of more than 7 percent (after adjusting for the portion paid in taxes). Therefore, the 7 percent discount rate stipulated by the Office of Management and Budget for benefit-cost analysis seems very appropriate for use in analysis of climate policies.