The Role of Discounting in Energy Policy Investments

Environmental Impact Assessment Review, 2011

Energies

The transition of the energy system in Poland has a long time horizon and demands a substantial investment effort supported by proper economic evaluation. It requires a precise Social Discount Rate (SDR) estimation as discounting makes the present value of long-term effects extremely sensitive to the discount rate level. However, Polish policymakers have little information on SDR: the predominant practice applies a priori fixed 5% discount rate, while studies devoted only to Poland are quite rare. To eliminate this research gap, our paper aims at estimating SDR for Poland, applicable in energy transition policies. We derive SDR for three datasets varying in length, twofold: using market rates via Consumption Rate of Interest (CRI) and Social Opportunity Cost (SOC) of capital, and prescriptive Ramsey and Gollier approaches based on Social Welfare Function (SWF). The results indicate that the rates based on CRI and SOC deviate substantially with changing data timeframes and market con...

The selection of the social discount rate and the consideration of hurdle rates in energy systems opti-misation models affect the creation of sound and comprehensive scenarios useful for energy modellers. Due to the lack of studies about the use of different discounting options in energy optimisation models, the goal of this paper is to fill that gap by establishing the foundations for a debate among energy modellers, policy-makers and stakeholders in this regard. So firstly, we introduced the concept of discount rates both social and technology-specific including a thorough literature review concerning figures, scopes and approaches. Secondly, two models, ETSAP-TIAM and TIMES-Norway, were used to assess the behaviour of the energy systems at different regionalisation levels, Europe and Norway respectively. Thirdly, we analysed the evolution of the electricity production mixes and system costs for both models and considering several values for the discount rates. Finally, results showed that the energy system is strongly affected by changes in the social discount rate. The lower the social discount rate is, the higher the renewable contribution. The social discounting exerts influence on capital intensive investments so it is quite important to look at the energy carriers pathways (fossil-renewable transition). This is what happens in the case of ETSAP-TIAM for Europe. Reversely, in the case of TIMES-Norway, as the electricity system is almost 100% renewable, it is important to take into account the hurdle rates of the technologies to enrich the competition by including their particular risks and barriers. In summary, we recommend using a value not higher than 4–5% for the social discount rate for the European countries as well as to include an exhaustive portfolio of hurdle rates for all the technologies included in the energy optimisation model.

This paper describes an approach towards the rationalized use of energy resources through refined costing methods. Two new paradigms are described for the current purpose, in terms of recently researched, yet hitherto undermined costing parameters; these are namely, distributed environmental damage costs of energy, relating to a predetermined period of future interest, as well as a relatively new energy costing parameter, that is, non-renewability costs of energy, relating to opportunity losses arising out of resource removal of fossilized fuel stocks. Results from developed work show that these two proposed cost parameters, if included within energy tariffs systems, would revolutionize energy usage patterns globally, as the real costs of using energy and particularly that of using fossilized petroleum stocks will then become increasingly clear. Discounting these two energy cost parameters on the other hand for whatever market-oriented motive, will have an adverse impact on energy availability for the unborn. Therefore, from a standpoint of intergenerational equity and welfare of future generations, it is recommended that this costing proposition be topically taken up as a developmental issue and introduced wherever appropriate, into energy tariff restructuring methods. It is also recommended that renewable power generating technologies be promoted on an accelerated pace, both as a replacement and conservation measure for our limited stocks of fossilized energy. 2.0 Introduction From an energy resource standpoint, the welfare of present and future generations will be clearly plagued by two major influences: one relates to the issue of global environmental pollution that results from power plant and other energy use emissions; the other is the issue of resource depletion of fossilized fuels and the non-renewability costs of energy that associates it. As far as environmental pollution of energy use is concerned, there are serious limitations in the costing methods used to value emissions in power generation. This is likely to result in excessive discounting of energy costs. Once costs are discounted, wasteful energy consumption invariably occurs. Most costing methods are confined along the life times of power plants concerned. As most obnoxious emissions that cause irreversible environmental damage are likely to occupy life spans longer than the lives of typical power plants, the overall emission loads are likely to remain in the atmosphere for much longer periods, thus endangering not only the lives of present generations, but also that of the unborn. While this is the case, there appears to be no records in literature on quantitative cost assessments of environmental damage imparted on humankind, on the young and particularly on the future generations, by the current costing methods for energy. The availability of quantitative techniques to determine environmental damage costs imparted on the unborn is particularly important, and quite so from an inter-generational equity standpoint. The future generations obviously can have no say in the decisions made now; and their interests depend only on how the present generation interprets and defends them (De Zoysa, 1997). On the issue of resource depletion of fossilized fuels, it is common knowledge that non-renewability of such fuels is not factored into the prices of energy that the global market pays for. Nonetheless, there is increasing acceptance that such non-renewability costs should be factored into energy pricing as it is intricately related to the welfare of present and unborn generations. Fossilized fuels embedded under the earth " s crust are only of a limited quantity through processes of formation that

OECD Papers, 2007

The Electricity Journal, 1993

Energies

Energy policy investments are usually evaluated using a cost-benefit analysis (CBA), which requires an estimation of the social discount rate (SDR). The choice of SDR can be crucial for the outcome of the appraisal, as energy-related investments generate long-term impacts affecting climate change. Once discounted, these impacts are highly sensitive to slight changes in the value of the SDR. Some countries (the UK and France) switched from a constant SDR to the declining rate scheme—a solution that limits the impact sensitivity. To our knowledge, none of the CEE countries apply DDR in CBA. While a constant SDR is a relatively well-established approach, declining SDRs are estimated to be used much less frequently, particularly for CEE EU member countries and energy policies. The rationale for the decline can rest on uncertainty over future discount rates, as shown by the approach developed by Weitzman and Gollier, which extends the classical Ramsey model. We applied this approach in o...

This thesis studies the issue of time declining discounting in climate change projects evaluation in two different contexts: deterministic and uncertain world. First, an overview of standard discounting is introduced in the second chapter to help explaining why this approach is not appropriate in long term project evaluation. It then comes to the central focus on the concept of time declining discounting, which is sequentially presented in chapter 3 and chapter 4 by investigating current literature relating to the identified topic. In chapter 3, we rationalize the use of time declining discounting in a deterministic world in the light of two main theories developed by Sterner (1994), and Weitzman (1994). Although the two approaches are different from each other, they both consider the environmental aspects as factors making the consumption discount rates declining over time. In chapter 4, we investigate time declining discounting in case of an uncertain world with the focus on uncertain discount rates and uncertain economic growth. Assuming the discount rate is uncertain, we adopt the theory studied by Weitzman (1998), and Newell and Pizer (2003) to explain why discount rates could be declining over time. When the future economic growth is unknown from today"s perspective, we employ Gollier"s (2002) theory about precautionary effect to legitimate the decline of consumption discount rates over time. Chapter 5 presents the application of time declining discounting in climate change policy and its implications. Chapter 6 concludes.

environmental science & policy, 2006

Journal of Policy Analysis and Management, 1994

We compare two alternative methods to discount the costs and benefits of environmental projects. These are (1) the shadow price of capital, which can be practically expressed by using the cost of capital and thus the discount rate on government bonds, and (2) the two-stage discounting procedure advocated by Kolb and Scheraga. W e suggest that the two-stage approach is in many cases inconsistent with the shadow price of capital approach and will therefore lead to misallocations of resources. We further argue that the use of the cost of capital as the discount rate will be easier than the two-stage procedure, will yield results that are consistent with the shadow price of capital approach, and will be justified by the potential Pareto criterion. Finally, use of the shadow price of capital approach has a potextial for achieving considerable consensus in practice as well as in theory, a result that could considerably enhance project evaluation. INTRODUCllON Appropriate procedure for discounting benefits and costs of government projects has been the subject of controversy. Recently in this journal, Kolb and Scheraga [ 19901 proposed a two-stage procedure for discounting, with the laudable goal of providing an intuitive and easily implemented approach. We believe, regrettably, that the Kolb-Scheraga approach is inappropriate except under very special circumstances. Furthermore, and contrary to their assertion, the two-stage approach may undervalue environmental projects. This is because their approach, in most circumstances, overestimates the extent to which investment funds displace private capital and underestimates the extent to which environmental benefits may stimulate private investment. We explain these conclusions below. Four approaches to calculating an appropriate discount rate for government projects have appeared in the literature. These are the shadow price of capital (SPC) [see, e.g.