4 This comprises two elements:
❑ Catastrophe risk (L); and
❑ Pure time preference (δ).
5 The first component, catastrophe risk, is the likelihood that there will be some event so devastating that all returns from policies, programmes or projects are eliminated, or at least radically and unpredictably altered. Examples are technological advancements that lead to premature obsolescence, or natural disasters, major wars etc. The scale of this risk is, by its nature, hard to quantify1
6 The second component, pure time preference, reflects individuals' preference for consumption now, rather than later, with an unchanging level of consumption per capita over time.2
7 The evidence suggests that these two components indicate a value for ρ of around 1.5 per cent a year for the near future.3
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1 Newbery (1992) estimates L as 1.0, Kula (1987) as 1.2, Pearce and Ulph (1995) as 1.2, OXERA (2002) as 1.1 currently and 1 in the near future
2 Scott (1977, 1989) estimates 8 as 05. Other literature suggests it lies between 0.0 and 0.5. However if zero, this implies pure time preference does not exist, which s not regarded as plausible
3 Scott (1977) derives a central estimate value of 1.5 from past long-term returns received by savers in the UK. A later estimate in Scott (1989), updated this estimate to 1.3. However, this was based on United States, as well as UK, evidence. OXERA (2002) estimates ρ to lie between 1.0 and 1.6.