Discounting: An eye on the future

Decisions made today usually have impacts both now and in the future. But in carrying out policy evaluations to help decision-makers, economic analysts typically discount future impacts. In the environmental realm, many of the future impacts are benefits from policy-induced improvements. Thus, in the environmental-policy context, future benefits (as well as costs) are often discounted.

This is controversial, partly because discounting can seem to give insufficient weight to future benefits and thus to the well-being of future generations. But does it actually shortchange the future? As economists, we have often encountered scepticism about discounting, particularly from non-economists. Some of this scepticism seems valid, yet some reflects misconceptions about the nature and purpose of discounting. By examining here how discounting affects the evaluation of environmental policies, we hope to clarify this concept.