Ecological discounting

Which rates should we use to discount costs and benefits of different nature at different time horizons? We answer to this question by considering a representative agent consuming two goods whose availability evolves over time in a stochastic way. We extend the Ramsey rule by taking into account of the degree of substitutability between the two goods and of the uncertainty surrounding the economic and environmental growths. The rate at which environmental impacts should be discounted is in general different from the one at which monetary benefits should be discounted. We provide arguments in favor of an ecological discount rate smaller than the economic discount rate. In particular, we show that, under certainty, the difference between the economic and the ecological discount rates equals the difference between the economic and the ecological growth rates. We also justify a decreasing term structure of the ecological discount rate on the basis of the large parametric uncertainty affecting the evolution of the environmental quality.