The Impacts and Costs of Climate Change Page: 34
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The Impacts and Costs of Climate Change
Social rate of time preference (SRTP) / Pure Rate of Time Preference (PRTP)
Social Time Preference is defined as the value society attaches to present, as opposed to future, consumption.
The Social Rate of Time Preference (SRTP) is a rate used for discounting future benefits and costs, and is based
on comparisons of utility across different points in time or different generations. The UK HM Treasury Green Book
guidance recommends that the SRTP be used as the standard real discount rate.
The STPR has two main elements:
Q The rate at which individuals discount future consumption over present consumption, on the assumption of
an unchanging level of consumption per capita over time. This is the so-called 'pure rate of time
preference' (PRTP). The Green Book suggests a PRTP value of around 1.5 per cent a year for the near
O An additional element, if per capita consumption is expected to grow over time, reflecting the fact that these
circumstances imply future consumption will be plentiful relative to the current position and thus have lower
marginal utility. This effect is represented by the product of the annual growth in per capita consumption (g)
and the elasticity of marginal utility of consumption ( ) with respect to utility. The Green Book indicates
the annual rate of g is 2 per cent per year, and the elasticity of the marginal utility of consumption ( ) is
SRTP is the sum of these two components
SRTP = PRTP + *g
With a pure time preference rate of 1.5%, and values of 2% of g and 1 for , the resulting recommended discount
rate is 3.5%. A similar value is used in European policy appraisal, with a SRTP of 4%.
Source: Green Book HM Treasury.
There has also been a recent shift in the literature towards declining discount rates. For example, the
UK HMT Green Book recommends a discount rate of 3.5% for projects up to 30 years with a
declining schedule thereafter.
Period of years 0-30 31-75 76-125 126-200 201-300 301+
Discount rate 3.5% 3.0% 2.5% 2.0% 1.5% 1.0%
Source: Green Book. HM Treasury.
The main rationale for declining long-term discount rates results from uncertainty about the future. A
declining discount rate increases the values for the costs of climate change, because it reduces the
short-term benefits, and attaches greater weight to long-term impacts.
An example of the effect of discounting is shown below using the FUND model (see later section for
model description), with a sensitivity analysis looking at different PRTP rates and declining discount
schemes, with no equity weighting adjustment (see later section). Note there is no consideration of all
bounded risks, any socially contingent effects or any major events in the model, and we stress that the
figure is simply a sensitivity analysis and carries no implication about values that should be used in
The figure shows very large variation in the impacts arises from this PRTP parameter alone (all other
aspects of the model being constant). With a higher PRTP rate, the aggregate values can be positive.
AEA Technology Environment, August 2005
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Watkiss, Paul; Downing, Tom; Handley, Claire & Butterfield, Ruth. The Impacts and Costs of Climate Change, text, September 2005; Oxford, England. (digital.library.unt.edu/ark:/67531/metadc29337/m1/45/: accessed January 23, 2017), University of North Texas Libraries, Digital Library, digital.library.unt.edu; .