Kannan

The Rate at Which We Erase the Future

This essay was my submission to the John Locke Global Essay Competition 2026 and was awarded High Commendation.

The Question Behind the Question

In September 2025, I led a six-member international research team at the New York Academy of Sciences' Junior Academy, tasked with modelling the efficiency of next-generation solar architectures across global climates. We ran Python simulations, integrated real-time weather APIs, and produced projections extending decades into the future. At every step, we confronted the same invisible premise: that a megawatt-hour of clean electricity produced in 2060 is worth less than one produced today. We took that premise for granted. We should not have.

The social discount rate is the most consequential number in environmental economics that most people have never heard of. It determines how much weight we assign to future harms and benefits when evaluating policy today. A single percentage-point change in this rate can alter the social cost of carbon—the monetary value of a tonne of CO₂ emitted—by orders of magnitude. The US EPA's 2023 estimates placed the social cost of carbon at $190 per tonne at a 2% discount rate; reducing that rate by a further 0.5 percentage points pushed the figure to $340 per tonne—an 80% increase from a half-point shift.¹ This sensitivity is not a quirk of the mathematics. It is the mathematics encoding a moral claim: how much do we value the welfare of people not yet born?

My argument is this: no single, constant discount rate is appropriate for long-run environmental policy. The standard economic justifications for discounting—consumption growth, opportunity cost of capital, and pure time preference—each carry different weights across short and long time horizons, and conflating them into a single number produces a structurally defective instrument. Instead, policymakers should adopt a declining discount rate schedule, beginning near 3–3.5% for the near term, and falling to below 1% beyond a century—with the pure time preference component reduced to zero for intergenerational obligations. This is not merely the pragmatic middle ground between Stern and Nordhaus; it is the only framework that is simultaneously defensible on economic efficiency grounds and morally coherent.

Why Any Discount Rate at All?

Before prescribing a rate, we must understand what discounting is doing and why it is justified. The standard formulation is the Ramsey rule:

r=δ+η·g

where r is the social discount rate, δ is the rate of pure time preference (how much we intrinsically prefer the present over the future), η is the elasticity of marginal utility of consumption (how much less utility an additional unit of consumption provides as we grow richer), and g is the per capita consumption growth rate.² Each component has a distinct ethical status.

The ηg term is relatively uncontroversial. If future generations are richer than us—as historical growth trends suggest they likely will be—then a dollar of consumption is worth more to us today than to them. Transferring resources to a wealthier future therefore involves a real efficiency cost. This is the consumption-smoothing rationale for discounting, and it is broadly accepted across the political spectrum in environmental economics.

It is δ—pure time preference—where the argument breaks. Pure time preference asserts that welfare occurring at a later date is intrinsically less valuable, not because future people will be richer, but simply because they are temporally distant. Frank Ramsey himself called this "ethically indefensible" in his original 1928 paper. Philosopher Toby Ord has noted that applying positive pure time preference across generations confuses discounting within a single lifetime (which reflects diminishing marginal utility of anticipation, a real psychological phenomenon) with discounting across different people's lives, which smuggles in the premise that a person born later has a life of lesser moral worth.³ This is not a defensible ethical foundation for public policy.

Nicholas Stern used δ = 0.1% in the 2006 Stern Review, yielding a total social discount rate of approximately 1.4%, and concluded that immediate aggressive climate action was warranted—equivalent to investing 1% of global GDP annually in mitigation.⁴ William Nordhaus used δ = 1.5%, yielding a discount rate of approximately 5.5%, and derived a social cost of carbon nearly ten times lower, recommending only moderate near-term intervention.⁵ These are not merely technical disagreements. They are disagreements about whether future people matter—and if so, how much.

The Case for a Declining Rate: Two Independent Arguments

The debate is often framed as a binary: Stern's low rate versus Nordhaus's high rate. But this framing forecloses the most intellectually honest answer, which emerges from two independent lines of argument that both converge on a declining rate structure.

The uncertainty argument (Weitzman)

Martin Weitzman demonstrated in a landmark 1998 paper that even if every individual economist believes in a constant discount rate, uncertainty across those beliefs produces a social discount rate that declines over time. The mathematical intuition is subtle but powerful: when you average across exponentially discounting agents with heterogeneous rates, the lower rates eventually dominate, because the agents using high rates assign effectively zero weight to the far future while the agents using low rates do not.⁶ Weitzman's gamma discounting framework formalises this: the certainty-equivalent discount rate starts at approximately the mean rate (around 4%) and falls toward the minimum rate as the time horizon extends. The policy implication is stark—for projects with impacts measured in centuries, the effective discount rate approaches the lowest defensible value in the distribution.

This is not a philosophical commitment. It is a consequence of epistemic humility. We do not know what the discount rate should be. Given that uncertainty, the mathematically correct procedure is to discount the far future less than the near future.

The hyperbolic discounting argument (behavioural economics)

The exponential discounting framework, which produces a constant rate, is behaviourally implausible. A consistent finding across psychological experiments is that human beings discount hyperbolically: we heavily downweight the near future relative to the present, but treat payoffs in the far future with roughly similar weights.⁷ Applied to environmental policy, this means that a constant discount rate overweights losses in the near term and underweights catastrophic, long-run damages—the exact error we should most want to avoid in climate policy, where the worst outcomes are delayed by decades.

The policy conclusion from both arguments is the same: a schedule of discount rates that declines over time is not a compromise. It is the theoretically correct answer.

What the Numbers Should Look Like

These arguments are not merely academic. The United Kingdom's HM Treasury Green Book adopted a declining discount rate structure in 2003, on precisely these grounds. The current schedule uses a Social Time Preference Rate of 3.5% for the first 30 years, declining to 3.0% for years 31–75, and 2.5% thereafter.⁸ A 2025 review by HM Treasury opened a formal consultation on whether to further reduce these rates, with expert submissions recommending that the pure time preference component be set to zero.⁹

I propose the following structure for long-run environmental policy specifically:

Time Horizon Discount Rate Rationale
0–30 years 3.0–3.5% Near-market rates; high certainty
31–75 years 2.0–2.5% Uncertainty increases; Weitzman effect
76–200 years 1.0–1.5% δ → 0; intergenerational ethics
200+ years < 1% Minimum defensible rate

The key structural feature is that δ is progressively removed as the time horizon extends beyond a generation. Within a human lifetime, a small positive pure time preference rate is defensible as a proxy for diminishing utility of anticipation. Across generations, it is not, because we are no longer discounting one individual's intertemporal preferences—we are imposing a discount on the moral standing of people not yet born.

To illustrate the stakes concretely: at a constant 3% discount rate, $1 of environmental damage in 100 years is worth only 5.2 pence today. At 1%, that same damage is worth 37 pence—more than seven times as much.¹⁰ This is not a marginal difference in cost-benefit calculations. It is the difference between action and inaction.

The Strongest Objection: Market Rates and Revealed Preference

The most credible objection to this framework comes from economists who argue that the discount rate should be anchored to observable market behaviour—specifically, the real rate of return on capital. If private investors routinely achieve 5–7% real returns, using a 1% social discount rate implies that public environmental spending destroys value that could be created elsewhere. On this view, Nordhaus is not indifferent to the future; he is insisting that the best way to help future generations is to grow the economy now and bequeath them a richer, more technologically capable world to address their own challenges.

This objection has genuine force under two conditions: first, that capital returns accurately reflect social returns (they do not, given externalities including the carbon externality itself); and second, that technological growth will provide substitutes for degraded environmental systems. The second condition is the more fragile. Climate science suggests that certain environmental losses—species extinction, permafrost collapse, ice sheet destabilisation—are irreversible. The economic concept of "sustainability" requires that the total capital stock, including natural capital, not decline across generations. When natural capital is irreversibly destroyed, no amount of financial capital accumulation compensates future generations for the loss.

Moreover, the revealed-preference argument assumes that private market rates already incorporate intergenerational equity preferences. But as Pearce et al. (2006) note, financial markets structurally exclude future generations: they cannot participate in today's transactions, hold no votes, and bear no voice in the institutions that determine the discount rate.¹¹ The argument that markets reveal the "correct" discount rate for intergenerational public goods is circular: markets determine rates for goods traded between present agents; they have no mechanism for pricing obligations to those who do not yet exist.

This is precisely why discounting is not merely an economic question. It is a constitutional one: who counts, across what span of time, and by whose authority.

Why This Matters Beyond the Equation

When I modelled the 15% efficiency boost achievable through our BIPV and floating solar proposal at the Junior Academy, the simulation horizon extended to 2055. Thirty years felt like the limits of reasonable projection. Climate policy, however, must reason across a 200-year horizon—beyond the birth of anyone currently alive.

The discount rate question is therefore not an obscure technical parameter. It is the mechanism by which we decide, in advance, how much our decisions today are permitted to cost the people who will live with them. A discount rate is not a description of the future; it is a claim about who matters.

Applying Weitzman's declining structure, with a pure time preference of zero for the intergenerational component, is not the "green" answer. It is the answer that follows from treating the residents of 2125 as persons of full moral standing rather than as a discounted shadow of a richer future. Any policy framework that cannot justify its discount rate in these terms has not answered the question of environmental economics. It has merely postponed it.

Conclusion

The question asks what discount rate should be applied. I have argued that the correct answer is not a number—it is a structure. Near-market rates of 3–3.5% are appropriate for the near-term components of any policy, where opportunity cost arguments hold and uncertainty is bounded. Beyond a generation, these rates must decline, driven by two independent and convergent arguments: Weitzman's uncertainty theorem, and the moral unacceptability of assigning a positive pure time preference to people who do not yet exist. The floor, for the intergenerational component, is zero.

This is what it would mean to take long-run environmental policy seriously: not merely to model the future, but to count it.

Notes

  1. US Environmental Protection Agency, Report on the Social Cost of Greenhouse Gases, December 2023. Available at: https://www.epa.gov/environmental-economics/epas-report-social-cost-greenhouse-gases.
  2. Frank Ramsey, "A Mathematical Theory of Saving," Economic Journal, 38(152), 1928, pp. 543–559.
  3. Toby Ord, The Precipice: Existential Risk and the Future of Humanity. London: Bloomsbury, 2020.
  4. Nicholas Stern, The Stern Review on the Economics of Climate Change. Cambridge: Cambridge University Press, 2007.
  5. William Nordhaus, A Question of Balance: Weighing the Options on Global Warming Policies. New Haven: Yale University Press, 2008.
  6. Martin Weitzman, "Gamma Discounting," American Economic Review, 91(1), 2001, pp. 260–271. DOI: https://doi.org/10.1257/aer.91.1.260.
  7. Shane Frederick, George Loewenstein, and Ted O'Donoghue, "Time Discounting and Time Preference: A Critical Review," Journal of Economic Literature, 40(2), 2002, pp. 351–401.
  8. HM Treasury, The Green Book: Central Government Guidance on Appraisal and Evaluation, 2022. Available at: https://www.gov.uk/government/publications/the-green-book-appraisal-and-evaluation-in-central-governent.
  9. Centre for Expertise in Taxation and Expenditure (CETEx), "Response to the UK Government Review of Discounting in the Green Book," March 2026. Available at: https://cetex.org/publications/response-to-the-uk-government-review-of-discounting-in-the-green-book/.
  10. Cameron Hepburn, "Implications of Declining Discount Rates for UK Climate Change Policy," London School of Economics Grantham Institute, 2014. Available at: https://www.lse.ac.uk/GranthamInstitute/wp-content/uploads/2014/02/discount-rates-climate-change-policy.pdf.
  11. David Pearce, Ben Groom, Cameron Hepburn, and Phoebe Koundouri, "Valuing the Future: Recent Advances in Social Discounting," World Economics, 4(2), 2003.

Bibliography