Social discount rates
Informing decisions in major publicly funded inter-generational projects
“Society as a whole prefers to receive goods and services sooner rather than later.”
For each year expected to pass until the benefits of a project are received, the lower the value placed on it today.
Social discount rates (SDR) are used to calculate how much money should be invested in long-term projects, the benefits of which will be reaped at a much later date.
Our SDR research underpins long-term investment decisions made by public sector bodies worldwide. Its far-ranging applications include the cost-benefit analysis methods prescribed by HM Treasury in its Green Book (2020) and by other national and sub-national agencies.
Public sector cost-benefit analysis
- We provided the discounting recommendations adopted in HM Treasury’s Green Book (2018) and supported its 2020 edition.
- Similar backing was provided to the Netherlands government’s equivalent of the Green Book.
- We have given advice to a range of other bodies including the Home Office, the Department for Transport and the Bill & Melinda Gates Foundation.
- Our work has also been cited in reports by the Organisation for Economic Co-operation and Development (OECD) as well as the US, New Zealand and Rwandan governments.
- We led two Office for National Statistics commissioned projects, including a 2016 valuation of long-lived environmental assets.
Valuing environmental assets
- Our report for the International Seabed Authority offers guidance on discounting contractual payments for the extraction of seabed mineral assets in international waters.
- The New York State government has also adopted the discounting recommendations of Freeman and colleagues in its mandatory guidance to State agencies in calculating the social cost of carbon.
Many challenges we face – including climate change mitigation – have very long-term consequences. The choice of SDR is important and impacts public responses to decisions made.
We have resolved a long-standing inconsistency in the calculation of declining discount rates (DDR – the application of lower discount rates to longer-lived assets) – uniquely applying DDRs in a full cost accounting framework to the valuation of environmental assets.
Professor Freeman’s work is now accepted as the key analysis of expert opinion on intergenerational SDRs.
By describing the range of views held by experts and, crucially, highlighting why they disagree so strongly, he has provided a framework for reconciling differences in opinion and reaching consensus SDRs so that projects can be valued.
- Professor Ben Groom – University of Exeter
Meet the experts
Currently, Dean of The University of York Management School