Please help me with this question for ECON 201!

The choice of the discount rate bears heavily on whether an investment should be undertaken or not!

Article: Choosing an Appropriate discount rate

Suppose that regulation of greenhouse gas emissions from power plants would produce large benefits in 30 years -- but only modest benefits today. Suppose at the same time that these same regulations require businesses to make a series of increasingly costly changes to their operations over the next several decades.

Since 1981, both Republican and Democratic presidents have required government agencies to calculate the cost and benefits of proposed regulations and to proceed only if the benefits justify the costs. To the surprise of many observers, President Joe Biden recently embraced those requirements, which means that cost-benefit analysis is likely to play a central role in his presidency.

When costs and benefits unfold over many years, as they often do, regulators have to choose an all-important number: the discount rate. That number determines the value today of regulatory costs and regulatory benefits that arrive in the future. The intuition is that benefits enjoyed today are worth more than those that occur in 2030, while we would rather incur costs in 2030 than today. Within the federal government, future costs and benefits are now "discounted" at an annual rate of 3% -- a figure used under the presidencies of both Barack Obama and Donald Trump.

But that number has become exceptionally hard to defend. In some cases, the 3% figure will support indefensibly costly regulations. In other cases, it will support indefensibly weak ones.

Profound changes in international capital markets over the last several decades mean that the Biden administration should conduct a transparent and inclusive review of discounting, which we expect would lead to reducing the discount rate to 2% or possibly less. Doing so would produce immediate, substantial changes in the projected costs and benefits of countless regulations.

The reason for this change has nothing to do with politics. It is required by widely accepted economic principles and federal precedent. And though it may sound like a narrow technical issue, it has an enormous impact. Every year, the federal government makes hundreds of decisions that impose costs on the private sector in exchange for expected benefits. Sometimes both costs and benefits will occur in the near future. But sometimes the major costs will be faced in the coming decades, and sometimes the benefits will be delayed.

For example, the Occupational Safety and Health Administration regulates guardrails in workplaces. The installation of guardrails requires upfront costs and ongoing maintenance costs, which may become significantly higher over the years. In exchange, the regulation is meant to reduce fatality rates over many years. The discount rate provides a way to turn the many years of expenses, and greater safety, into a measure of the costs and benefits that can be compared.

The release of greenhouse gas emissions today affects the climate for more than a century, so the discount rate is central to assessing the impacts of climate change policies. Ultimately, the rate provides a way to weigh the interests of current and future generations.

A lot of people object to discounting the future at all, but there is nothing unusual about doing that. You would probably prefer $1,000 today to $1,000 in 2030 if only because you could invest any money you get today and watch it grow. Regulators, too, would prefer to save $100 million today to $100 million in 2030. And when the government issues debt, we are deciding that we are willing to pay $1 billion, plus interest, in the future to spend $1 billion today.

But what's the right discount rate? Ever since 2003, an obscure document is known as Office of Management and Budget Circular A-4 has served as a kind of constitution for assessing the costs and benefits of regulations. It calls for a 3% rate when trading off social costs, a figure meant to reflect the long-term risk-neutral rate of interest. But what is sometimes missed is that 3% wasn't set in any statute, nor is it a law of nature. Rather, it was chosen because in 2003 it was the three-decade average yield on 10-year Treasury securities, after accounting for inflation.

But 2003 was a long time ago, and the same criteria make it indefensible, even a bit crazy, to continue to use 3% as the discount rate. Repeating Circular A-4's calculation today yields a discount rate of 2%. Calculations using other interest rates confirm a comparably large decline. Measuring the long-term real rate of interest is difficult, but the evidence is clear that some value less than 3%, likely 2% or less, is warranted.

The explanations for this persistent reduction in interest rates are several and hotly debated. They include the aging of the workforce and the associated shift toward savings from consumption; increasing demand for safe assets; and the global growth slowdown.

A discount rate of 2% instead of 3% might seem minor, but it would profoundly affect regulatory choices -- sometimes leading to more aggressive measures, sometimes telling regulators to back off.

With a 3% discount rate, for example, the benefits of cutting a ton of carbon emissions are $50 (according to a standard number used by the Obama administration). But with a 2% rate, the number jumps to $125. And with that $125 figure, the argument for more ambitious regulation of greenhouse gas regulations from cars, trucks, and power plants suddenly becomes more compelling.

For some regulations, however, the major costs are imposed next year or next decade, not today. Regulatory burdens, from air pollution or road safety regulations, often ramp up over time and turn out to be especially burdensome in 2030 or 2040. A higher discount rate makes those future costs seem pretty low. That means that for some problems, a lower rate will argue against regulation, not for it.

It is important, especially now, that the decisions of federal officials are, and are seen to be, based on evidence and science. This implies having a robust and transparent process for rethinking cost-benefit calculations. Indeed, President Biden recently issued a presidential memorandum initiating a process for updating Circular A-4 -- a welcome indication that some of the key judgments made in 2003, including the discount rate, are now on the table.

There is an overwhelming case for using a lower discount rate to evaluate policies that provide costs and benefits over many years, even over many decades. This shift will produce less regulation in some areas and more in others. But the numbers don't lie. To protect the interests of the American people, we should listen to what bond markets are saying loud and clear.