Environmental policy under a non-market discount rate

This paper looks al pollution emissions when a non-market discount rate is used to evaluate environmental policy, and policy is subject to continuous review through time. It is shown that a non-market rate leads to time-inconsistent policy: Future regulators will want not to follow the current regulator's optimal plans, even when the current regulator has perfect foresight and there is no uncertainty. Therefore, the discount rate has different effects depending on whether government can commit to future environmental regulation. We then show in a simple linear model that when the ''environmental'' discount rate is below the market rate, pollution is higher under no commitment than under commitment. Even under no commitment, however, a lower discount rate leads to lower emissions. We argue that the debate might be better framed over ''prices'' (i.e., the value of the environment in the future) rather than the discount rate. This treatment removes the inconsistency problem yet ensures that future generations' interests are represented in policy decisions.