ON THE ENVIRONMENTAL DISCOUNT RATE

In this paper I show that ''environmentalism'' itself can provide a ri gorous foundation for the low and declining discount rates that enviro nmentalists seem to favor in long-term cost-benefit calculations. If i ndeed it is a stylized fact that we are moving toward a world where en vironmental spending is increasingly important, that scenario per se m ay significantly lower the social rate of return. A formula is derived for the ratio of social to private discount rates as a simple functio n of two operational environmental parameters. The formula is used to explain why the social rate of return ought to be lower than the priva te rate and why this gap-called ''environmental drag'' when measured i n terms of equivalent evaporation of national income-may be expected t o increase over time. (C) 1994 Academic Press, Inc.