Valuing the Future: Legal and Economic Considerations for Updating Discount Rates

Discount rates reflect the commonly held belief that a dollar today is worth more than a dollar tomorrow. Therefore, consistent with observed human behavior, governments use discount rates to weigh and compare present versus future costs and benefits in their decisions. The choice of discount rates greatly impacts which government regulations are cost-benefit justified, particularly for regulations with long-term benefits, as in the context of climate change. Though the U.S. government has historically revised its recommended discount practices several times, the current recommendations for a 3% consumption rate and a 7% capital rate have been enshrined in federal guidance without revision since 2003, despite significant changes to society, markets, and the economics literature. This article details the compelling economic evidence and legal principles that support revising federal guidance on discounting. In the economics literature, multiple lines of evidence point to a central consumption rate below 2% as appropriate in government decisionmaking—and capital-based rates as largely inappropriate for many policy contexts—particularly in rulemakings with inter-generational implications, like climate change. Legal principles support such revisions. Statutes and executive orders charge agencies to base decisions on the best available data and to consider future generations’ welfare. Though agencies must thoroughly explain their discounting choices, agencies have discretion to lower their discount rates consistent with updated evidence and ethical obligations. Agencies especially must justify any choices to apply different discount rates to different contexts or effects, but a declining discount rate framework can consistently harmonize agency practices and so put agencies on sound legal footing in their approach to valuing the future.

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