What is a social discount rate?

social discount rate (noun)

An interest rate for public investments and policies that puts a present value on costs and benefits that are expected to occur in the future.

What is the cost to society of a ton of carbon emissions? Is it worthwhile to widen a highway? Should additional drinking water contaminants be regulated?

Governments regularly make investment and regulatory decisions on such issues, with consequences that extend years, decades, or even centuries into the future. These decisions hinge on the social discount rate used by policy analysts to translate estimates of future costs and benefits into present values.

In the U.S., these rules for federal agencies are laid out in two directives. In 2023, for the first time in 20 years, the U.S. Office of Management and Budget proposed major changes to those directives and solicited public comment on the proposals this summer. A group of 11 professors, many affiliated with MIT’s Golub Center for Finance and Policy, signed two comment letters offering suggestions to improve the directives.

A core tenet of their message: There isn’t a single social discount rate, and the principles of financial economics should be applied to public policy. Those principles imply that the discount rate should reflect the cost of the associated risk, which varies considerably across projects and policies.

What is the social discount rate? MIT economists weigh in