When would we not discount benefits?

In many instances, it is not necessary to discount the benefits estimates generated by BenMAP.

If the health effect and the monetized value of all the medical expenses, lost earnings, and

suffering occur entirely in the analysis year, then you may not need to discount your benefits. For

example, school loss days occur within the analysis year, and all monetized expenses occur within

Aggregation, Pooling, and Valuation

BenMAP User's Manual 167 October 2012

the analysis year. It is important that you understand the assumptions within the health and

valuation functions before you decide whether you need to discount. (If your analysis year for

your benefits estimates does not match the analysis year for your costs estimates, you may need

to discount in order to compare your benefits with your costs even if you meet the criteria listed

above.)

Which discount rate should I choose?

Selecting a discount rate is challenging and is one of the most contentious methodological issues

encountered in economic analyses of environmental policies. Because environmental regulations

frequently have differing streams of costs and benefits over time, the selected discount rate may

determine whether the benefits of a regulatory action exceed the costs. In addition, selecting a

higher discount rate may result in a smaller benefits estimate because the future benefits are worth

much less than they would be if a lower discount rate was selected. For benefits that occur well

into the future, the issue of intergenerational equity further complicates the selection of the

discount rate. (In the context of environmental policy, intergenerational equity refers to the

fairness of the distribution of the costs and benefits of a long-lived policy when those costs and

benefits are borne by different generations. Most criteria pollutants are not considered to have

intergenerational equity issues, but the issue frequently arises in analyses of climate and mercury.)

There are various economic arguments in support of and in opposition to various discount rates.

(For more details see EPA [1999; 2000] listed in the section on Sources for More Information.)

To comply with OMB and EPA’s recommendations, EPA currently uses discount rates of 3%

and 7% for benefit analyses.

 

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