Social discounting of large dams with climate change uncertainty
Abstract
It has long been known that the economic assessment of large projects is sensitive
to assumptions about discounting future costs and benefits. Projects that require
high upfront investments and take years to begin producing economic benefits can be
difficult to justify with the discount rates typically used for project appraisal.
While most economists argue that social discount rates should be below 4%, many international
development banks and government planning agencies responsible for project appraisal
can be found using rates of 7-12% or more. These agencies justify choosing higher
discount rates to account for the opportunity cost of capital. Meanwhile, a new and
robust debate has begun in economics over whether social discount rates of even 3-4%
are too high in the context of climate change. This paper reviews the recent discounting
controversy and examines its implications for the appraisal of an illustrative hydropower
project in Ethiopia. The analysis uses an integrated hydro-economic model that accounts
for how the dam's transboundary impacts vary with climate change. The real value of
the dam is found to be highly sensitive to assumptions about future economic growth.
The argument for investment is weakest under conditions of robust global economic
growth, particularly if these coincide with unfavourable hydrological or development
factors related to the project. If however long-term growth is reduced, the value
of the dam tends to increase. There may also be distributional or local arguments
favouring investment, if growth in the investment region lags behind that of the rest
of the globe. In such circumstances, a large dam can be seen as a form of insurance
that protects future vulnerable generations against the possibility of macroeconomic
instability or climate shocks.
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Journal articlePermalink
https://hdl.handle.net/10161/3763Collections
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Marc A. Jeuland
Associate Professor in the Sanford School of Public Policy
Marc Jeuland is an Associate Professor in the Sanford School of Public Policy, with
a joint appointment in the Duke Global Health Institute. His research interests include
nonmarket valuation, water and sanitation, environmental health, energy poverty and
transitions, trans-boundary water resource planning and management, and the impacts
and economics of climate change. Jeuland's recent research includes work to understand
the economic implications of climate change for water

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