The Social Discount Rate for Canada Based on Future Growth in Consumption

Abstract

Recent interim guidelines of the Treasury Board Secretariat (2007) recommend a social discount rate (SDR) of 8 percent. This paper argues that this value is based on an inappropriate methodology and is too high. Using a consumption rate of interest and drawing on a growth model, we suggest that if a project is intragenerational (less than 50 years) and there is no crowding out of private investment, then analysts should use an SDR of 3.5 percent. Impacts on investment should first be converted to consumption equivalents using a shadow price of capital of 1.26. If the project has intergenerational impacts (beyond 50 years), such as those affecting climate change, we recommend a schedule of time-declining SDRs.