scholarly journals The Role of Discounting in Energy Policy Investments

Energies ◽  
2021 ◽  
Vol 14 (19) ◽  
pp. 6055
Author(s):  
Gabriella Maselli ◽  
Antonio Nesticò
Keyword(s):  
Energy Policy ◽  
Discount Rate ◽  
Cash Flows ◽  
Quality Parameter ◽  
Economic Evaluations ◽  
Discount Rates ◽  
Sustainable Investment ◽  
Climate Neutrality ◽  
Over Time

For informing future energy policy decisions, it is essential to choose the correct social discount rate (SDR) for ex-ante economic evaluations. Generally, costs and benefits—both economic and environmental—are weighted through a single constant discount rate. This leads to excessive discounting of the present value of cash flows progressively more distant over time. Evaluating energy projects through constant discount rates would mean underestimating their environmental externalities. This study intends to characterize environmental–economic discounting models calibrated for energy investments, distinguishing between intra- and inter-generational projects. In both cases, the idea is to use two discounting rates: an economic rate to assess financial components and an ecological rate to weight environmental effects. For intra-generational projects, the dual discount rates are assumed to be constant over time. For inter-generational projects, the model is time-declining to give greater weight to environmental damages and benefits in the long-term. Our discounting approaches are based on Ramsey’s growth model and Gollier’s ecological discounting model; the latter is expressed as a function of an index capable of describing the performance of a country’s energy systems. With regards to the models we propose, the novelty lies in the calibration of the “environmental quality” parameter. Regarding the model for long-term projects, another innovation concerns the analysis of risk components linked to economic variables; the growth rate of consumption is modelled as a stochastic variable. The defined models were implemented to determine discount rates for both Italy and China. In both cases, the estimated discount rates are lower than those suggested by governments. This means that the use of dual discounting approaches can guide policymakers towards sustainable investment in line with UN climate neutrality objectives.

scholarly journals Discount rate selection for long-term sequential mineral projects

2017 ◽  
Vol 33 (3) ◽  
pp. 49-70 ◽  
Author(s):  
Piotr W. Saługa
Keyword(s):  
Economic Evaluation ◽  
Cash Flow ◽  
Discount Rate ◽  
Flow Analysis ◽  
Capital Intensity ◽  
Cash Flows ◽  
Time Varying ◽  
Discount Rates ◽  
Capital Costs

AbstractMineral projects depict various specific features that differentiate them from alternative investments in other industries. Among these features, one can specify unique characteristics of mineral deposits such as scarcity, geological setting and structure, resource/reserve uncertainty and depletability. Resource uncertainty results in the sequential nature of operations (exploration, development and production stages). Other specific features of mineral projects include long investment - and production periods, high capital intensity, varying production conditions, unpredictability and high volatility of mineral prices, etc. Specific features of mineral projects are sources of exceptionally high risks. To ensure the payback of high capital costs these significant risks must be addressed in the economic evaluation of a mineral project. In the discounted cash flow analysis, DCF, which is the most commonly used in evaluations of such ventures, all project uncertainties are reflected in a level of the discount rate used for the actualization of future cash flow values. The riskier project has a higher discount rate. Apart from being extremely high risk, mineral projects are both sequential and long-term - the first feature means that the extent of a project risk decreases dramatically over time, and second - that care should be taken when evaluating these projects because cash flows arising in later years of the project lifetime have little value. The paper delivers a proposal to apply the time-varying discount rate to the economic evaluation of a mineral project. The first part introduces a commonly accepted approach to evaluating discount rates along with conceptions of adjusting them to risks of individual projects. In the following sections, the article presents the current practice in the setting of discount rates for mineral projects and then a proposed modification of this approach by introducing the time-varying discount rate. In the end, a verification of the proposed suggestion based on a copper project example has been delivered.

A New Look into the Determinants of the Ecological Discount Rate: Disentangling Social Preferences

2012 ◽  
Vol 12 (1) ◽  
Author(s):  
Luciana Echazu ◽  
Diego Nocetti ◽  
William T. Smith
Keyword(s):  
Term Structure ◽  
Discount Rate ◽  
Environmental Quality ◽  
Social Preferences ◽  
Inequality Aversion ◽  
The Social ◽  
Representative Consumer ◽  
Change Mitigation ◽  
Over Time

Abstract How should changes in environmental quality occurring in the future be discounted? To answer this question we consider a model of “ecological discounting”, where the representative consumer has a utility function defined over two attributes, consumption and environmental quality, which evolve stochastically over time. We characterize the determinants of the social discount rate and its behavior over time using a preference structure that disentangles attitudes towards intertemporal inequality, attitudes towards risk, and tastes over consumption and environmental quality. We show that the degree of substitutability between consumption and environmental quality, the degree of risk aversion, the degree of inequality aversion, and the rate at which these attitudes change as natural and man-made resources evolve over time are all important aspects of the ecological discount rate and its term structure. Our analysis suggests that over medium and long term horizons the ecological discount rate should be below the rate of time preference, supporting recent proposals for immediate action towards climate change mitigation.

scholarly journals On discount rates for economic evaluations in global health

2019 ◽  
Author(s):  
Markus Haacker ◽  
Timothy B Hallett ◽  
Rifat Atun
Keyword(s):  
Global Health ◽  
Discount Rate ◽  
Best Practice ◽  
Economic Evaluations ◽  
Systematic Bias ◽  
Discount Rates ◽  
Middle Income ◽  
Middle Income Countries ◽  
The Usa ◽  
The Cost

Abstract Choices on discount rates have important implications for the outcomes of economic evaluations of health interventions and policies. In global health, such evaluations typically apply a discount rate of 3% for health outcomes and costs, mirroring guidance developed for high-income countries, notably the USA. The article investigates the suitability of these guidelines for global health [i.e. with a focus on low- and middle-income countries (LMICs)] and seeks to identify best practice. Our analysis builds on an overview of the academic literature on discounting in health evaluations, existing academic or government-related guidelines on discounting, a review on discount rates applied in economic evaluations in global health, and cross-country macroeconomic data. The social discount rate generally applied in global health of 3% annually is inconsistent with rates of economic growth experienced outside the most advanced economies. For low- and lower-middle-income countries, a discount rate of at least 5% is more appropriate, and one around 4% for upper-middle-income countries. Alternative approaches—e.g. motivated by the returns to alternative investments or by the cost of financing—could usefully be applied, dependent on policy context. The current practise could lead to systematic bias towards over-valuing the future costs and health benefits of interventions. For health economic evaluations in global health, guidelines on discounting need to be adapted to take account of the different economic contexts of LMICs.

Part III UK Derivatives, Money, and Debt Markets, 10 UK Government Debt Management and the Gilt Market

2021 ◽  
Keyword(s):  
Cash Flows ◽  
Debt Management ◽  
Management Policy ◽  
Risk Appetite ◽  
Different Types ◽  
Financing Costs ◽  
The Uk ◽  
Executive Agency ◽  
Over Time

This chapter provides an overview of the UK Debt Management Office (DMO) that was established on 1 April 1998 and was tasked to manage government wholesale sterling debt issuance, which was originally the Bank of England's responsibility. It highlights the DMO's purpose on carrying out the government's debt management policy of minimising financing costs over the long term and minimising cost to offset the government's net cash flows while operating in a risk appetite approved by Ministers. It also points out that the DMO, in institutional terms, is legally and constitutionally part of HM Treasury (HMT) as an executive agency. This chapter discusses the gilt market, which is comprised of two different types of securities: conventional gilts and index—linked gilts. It compares the different types of gilt and shows how the breakdown of the gilt market has changed over time.

scholarly journals Institutional Investors and Infrastructure Investing

2021 ◽  
Author(s):  
Aleksandar Andonov ◽  
Roman Kräussl ◽  
Joshua Rauh
Keyword(s):  
Institutional Investors ◽  
Private Equity ◽  
Cash Flows ◽  
Finite Horizon ◽  
Equity Investments ◽  
Over Time ◽  
Private Equity Investments

Abstract Institutional investors expect infrastructure to deliver long-term stable returns but gain exposure to infrastructure predominantly through finite-horizon closed private funds. The cash flows delivered by infrastructure funds display similar volatility and cyclicality as other private equity investments, and their performance similarly depends on quick deal exits. Despite weak risk-adjusted performance and failure to match the supposed characteristics of infrastructure assets, closed funds have received more commitments over time, particularly from public investors. Public institutional investors perform worse than private institutional investors. ESG preferences and regulations explain 25%–40% of their increased allocation to infrastructure and 30% of their underperformance.

scholarly journals The Dilemmas of Public Vs. Private Goods Discounting for Long-Term Investment Appraisal: The Puzzle of Citizen and Consumer Approaches to Valuation

2020 ◽  
Vol 20 (2) ◽  
pp. 114-133
Author(s):  
Monika Foltyn-Zarychta
Keyword(s):  
Discount Rate ◽  
Contingent Valuation Method ◽  
Discount Rates ◽  
Public And Private ◽  
Private Goods ◽  
Explanatory Variables ◽  
Investment Appraisal ◽  
Intertemporal Preferences ◽  
Use Values

Abstract Research background: An investment appraisal applies a single discount rate across all effects. However, this may be insufficient for heterogenous environmental impacts, mixing private and public goods as well as use and non-use values, where individuals may have multiple intertemporal preferences due to their duality to act as consumer or citizen. Purpose: The paper aims at identifying the scope of discrepancies in the level of discount rate for public and private as well as use-and non-use investment gains. Research methodology: The contingent valuation method is used to elicit stated discount rates for 2 hypothetical investments: environmental or financial gains to distinguish between public and private domain accompanied by two time-frames: short (use values) and long (non-use values). Results: The discount rate for the environment is lower than for money. It is also lower for the long-term horizon in comparison with the short-term perspective. The discrepancies are observed also for explanatory variables in respect to a socio-economic profile and attitude characteristics. Novelty: The paper adds to the discussion on valuation discrepancies between self-interested consumers and socially oriented citizens. The scarcity of previous research examining discount rates for public/private goods as well as the short/long-time horizon make the results relevant for public policy dealing with climate change and environmental protection, providing an insight into individual intertemporal preferences.

Project Valuation: Price Forecasts Bound to Discount Rates

2021 ◽  
Author(s):  
Babak Jafarizadeh ◽  
Reidar B. Bratvold
Keyword(s):  
Cash Flows ◽  
Capital Asset Pricing ◽  
Discount Rates ◽  
Capital Asset ◽  
Risk Premiums ◽  
Asset Pricing Model ◽  
Project Valuation ◽  
Hurdle Rate ◽  
Future Cash Flows

For their appraisals, most companies use discount rates that account for timing and riskiness of projects. Yet, especially for commodity projects, discounting future cash flows is generally at odds with the assumptions in a company’s hurdle rate. With a multitude of technical and market uncertainties, inconsistent assessments lead to biased valuations and poor investment decisions. In this paper, we consider price forecasts and discount rates in an integrated framework. We calibrate the risk premiums in a two-factor stochastic price process with a capital asset pricing model-based discount rate. Together with the analysts’ long-term prices forecasts, the suggested method improves consistency in valuation and decision making.

Predicting Net Discount Rates: A Comparison of Professional Forecasts, Time-series Forecasts and Traditional Methods

2010 ◽  
Vol 21 (2) ◽  
pp. 147-171 ◽  
Author(s):  
Matthew J. Cushing ◽  
David I. Rosenbaum
Keyword(s):  
Time Series ◽  
Random Walk ◽  
Interest Rate ◽  
Discount Rate ◽  
Discount Rates ◽  
Class Of Estimators ◽  
And Performance ◽  
Two Alternatives ◽  
Better Than

Abstract Previous research proposed two future net discount rate estimators that improved on naïve long-term average and random walk estimators. The proposed estimators were superior in the class of estimators that used only current and past observations on net discount rates. In this paper we consider two extensions. First we examine whether professional forecasts perform significantly better than the two alternatives. Second, we examine the properties and performance of multivariate estimators that account for the potentially differing time-series behaviors of the underlying wage growth and interest rate series.

Post- to Pre-Tax Discount Rates: Not a Simple Conversion

2019 ◽  
Vol 14 (1) ◽  
Author(s):  
Richard Hayler
Keyword(s):  
Financial Markets ◽  
Discount Rate ◽  
Cash Flows ◽  
Iterative Approach ◽  
Discount Rates ◽  
Tax Rate ◽  
Life Project ◽  
Realistic Assumption ◽  
Simple Conversion

Abstract It is widely accepted that financial markets tend to make assessments of value on expectations of post-tax cash flows, since that is what equity investors receive. There is however, from time to time, a need to ascertain and apply a pre-tax discount rate to discount pre-tax cashflows. Examples include (i) the assessment of regulatory returns and (ii) impairment testing of cash generating units. This paper highlights the implicit assumptions inherent in the most commonly applied shorthand method of determining pre-tax discount rates before considering modifications to create a more realistic assumption set. The paper concludes with the derivation of a shorthand formula for finite life project cashflows, which often require a pre-tax discount rate. The author agrees that while all the cash flows should be modelled on a post-tax basis and then back solved, using an iterative approach, to find the actual pre-tax rate, where a shorthand is required the formulae discussed in this paper can be applied, provided the limitations are understood.

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