Journal of Forest Economics > Vol 31 > Issue 1

Declining discount rate and the social cost of carbon: Forestry consequences

Colin Price, , c.price@bangor.ac.uk
 
Suggested Citation
Colin Price (2018), "Declining discount rate and the social cost of carbon: Forestry consequences", Journal of Forest Economics: Vol. 31: No. 1, pp 39-45. http://dx.doi.org/10.1016/j.jfe.2017.05.003

Published: 0/4/2018
© 0 2018 Colin Price
 
Subjects
 
Keywords
JEL Codes:Q23
Social cost of carbonDeclining discountForestry profitability
 

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In this article:
Introduction
The social cost of carbon and forestry
Climate model: the profile of cost caused by additional CO2
The effect of discounting on social cost of carbon
Declining discount schedules
Effect on social profitability of forestry
Other failures to double-discount
Other causes of changing carbon price through time
Other forms of discounting
Conclusions: discount rate and profitability

Abstract

Many ways of pricing atmospheric CO2 fluxes exist. Among them is valuing social costs resulting from climate change, which have complex time profiles. Long-term cost streams are normally capitalized at the prevailing social discount rate. Controversy attends whether that rate should decline through time. If so, capitalizing the social cost of carbon becomes more laborious. With declining rates, capitalized social cost of carbon fluxes is not only higher initially, compared with the capitalized cost at a fixed rate: the difference also rises through time. Thus in forestry evaluations declining rates have a double effect, raising the social cost of carbon in later time, and discounting this cost and other values less heavily. Discount protocols of the UK, France and Norway significantly alter forests’ profitability. An ordinary Scots pine crop without carbon values is loss-making everywhere, whether constant or declining discount rates are used. This is also so with a constant rate and constant carbon price. Declining rates bring about profitability in the UK and France, even with constant carbon price. Using declining rates to price carbon and discount cash flows brings further increase, doubling profitability with the protocols of the UK and France, and bringing about profitability with the protocol of Norway. Hence full application of declining discount protocols is not just a theoretical refinement, but significant for practical results.

DOI:10.1016/j.jfe.2017.05.003