Discounting the Climate Future: Social Discount Rate for India's Climate Policy

27 Nov 2020
Ms Saumya Malhotra

Climate change, from an economic perspective, can be understood as a market failure. The associated risks with this changing climate, as well as impacts on socio-economic systems in form of health, livelihood, food and water security, are projected to be higher with increasing global warming.

Climate Future

The policy interventions required to address the impacts of climate change, need to be assessed and evaluated, from a socio-economic perspective, through tools like Social cost-benefit analysis (CBA). From an inter-generational perspective, discounting forms an important part of this CBA, which can be developed as Social Discount Rate (SDR). Applying an efficient SDR for public policies and projects is important as it shows the risk-adjusted opportunity cost, the competitive advantage of the project/policy being chosen, and the perceived marginal social opportunity cost of the resources being used.

In the Indian context, however, major gaps exist in the SDR scenario, which need to be addressed to allow the adoption of this policy evaluation tool, especially when evaluating the climate projects being developed in the country.

The key recommendations of the policy brief are:

  • The Indian policy landscape should ensure the adoption of SDR for public projects, especially those directly linked with climate action, and this should be consequently followed by a discussion on the theoretical basis of choosing an efficient SDR.
  • The market interests rates, should not be used as a substitute to SDR for policy evaluation, as the uncertainty and risk associated with climate change and uncertainty around the economic growth needs to be reflected in the discount rate.
  • The SDR developed should allow a holistic analysis of the intervention, and hence from a public project and policy perspective, a range of constant SDRs should be developed, to not only ensure standardization of project appraisal throughout the country, but also integrate the requirements of in the different sectors and projects into the larger national level targets.