Policy paper

Review of discounting in the Green Book: Terms of Reference

Published 16 December 2025

1. Discounting in the Green Book

The Green Book is the UK government guidance on appraisal, the process of assessing the costs, benefits and risks of different options for achieving government objectives. The Green Book does not set these objectives or make policy decisions. It provides a structured framework for developing evidence-based, objective and impartial advice to decision-makers on the best way of achieving their objectives.  

During the appraisal process, the benefits and costs of shortlisted options are adjusted for the time value of money using the discount rate. The Green Book discount rate is known formally as the Social Time Preference Rate (STPR). The STPR is currently set at 3.5% in real terms for the first 30 years of a proposal. This value of 3.5% is a function of four different parameters: 

STPR= δ+L+ μg

The parameter δ (delta) represents pure time preference, the ‘impatience’ associated with having benefits ‘now’ rather than later. The parameter L represents an allowance for unpredictable risks that are not normally included in appraisal, known as ‘catastrophic’ and ‘systemic’ risk. A high value of L implies that society should consume relatively more in the near-term, given the impending risk of material negative shocks. 

The parameter g is an estimate of the future growth rate of per capita consumption. The parameter μ (mu) represents the elasticity of marginal utility of consumption. Together, these represent the ‘wealth effect’.  

The current estimates set out in the Green Book are that δ is equal to 0.5%, that L is equal to 1%, that μ is equal to 1, and that g is equal to 2%. These combine, in line with the formula above, to yield an STPR of 3.5%. 

The Green Book adopts a ‘declining discount rate’ regime. The STPR is assumed to fall to 3.0% for years 31 to 75, and then 2.5% thereafter. Since 2018, the time horizon of net present value calculations has been limited to 125 years. 

The Green Book adopted a social time preference (STP) approach to discounting in 2003. Prior to this, it utilised an approach based on the social opportunity cost of capital (SOC). This is based on the rate of return that would be expected on funds left in the private sector, rather than raised by government borrowing or taxation.

2. Context for this review

HM Treasury previously reviewed the approach to discounting in the Green Book in the 2010s. This culminated in 2018 with a published report by Ben Groom, Mark Freeman and Michael Spackman. The review examined the four parameters of the STPR. It also considered potential amendments to the Green Book’s discount rate formula.  

Following the Green Book Review in 2020, HM Treasury undertook a further external review to examine the application of the discount rate to environmental impacts. The conclusions were published in 2021.  

HM Treasury undertook a subsequent review of the Green Book in 2025. The review identified concerns from several stakeholders about the Green Book approach to discounting. They argued that the magnitude of the discount rate in the Green Book unfairly undermines the appraisal of long-term transformational schemes that produce benefits well into the future. As a result, HM Treasury has committed to commissioning a new, independent review of the Green Book’s approach to discounting, to be conducted by academic experts.

3. Scope 

The new review will address the following questions: 

• What evidence should the UK government consider for remaining with the current STPR approach or instead changing to an SOC approach? 
• Do the current estimates for the parameters of the STPR (excluding L) remain broadly valid for short-to-medium term risk-free social discounting? What new evidence on these parameter values has emerged since the previous review in 2018? 
• What rate of return should be used for short-to-medium term risk-free social discounting if the UK government chooses to switch to an SOC approach? 
• What evidence should the UK government consider for and against the declining discount rate (DDR) regime currently in use? Does the existing guidance on intergenerational wealth transfers and social discounting remain appropriate?
• Does the L term within the STPR continue to correctly account for ‘catastrophic’ and ‘systemic’ risk? Should the discount rate adjustment for risk depend on whether the government chooses an STPR or SOC approach? 
• What are the main conceptual issues and considerations when using discounting in appraisals involving private finance models? 
• Should the discount rate be adjusted for issues such as place-based objectives and environmental scarcity? 
• Should the social discount rate be adjusted for transformational projects, and if so, how? 

The review should consider the UK context for these questions. The review should also look at international comparisons to better inform judgements on the UK approach.

4. Governance 

The review will be led by two lead authors. These will be: 

• Professor Ben Groom. Dragon Capital Chair in Biodiversity Economics, University of Exeter. 
• Professor Mark Freeman. Professor of Finance, University of York and Deputy Chair of the Financial Conduct Authority’s Cost Benefit Analysis Panel. 

The Chief Secretary to the Treasury has formalised the advisory roles of the two lead authors through direct appointments. The lead authors have been selected based on their track record of research, publishing, and practical experience on discounting in cost-benefit analysis. 

The lead authors will be expected to liaise with the wider academic community on behalf of HM Treasury and fairly reflect the breadth of views in the final report.  

HM Treasury will convene an observer group. The observers will represent organisations across the UK public sector whose decisions involve an understanding of discounting. HM Treasury will convene two meetings of the lead authors and the observer group. The objective of those meetings will be for: 

• The authors to communicate their research and emerging findings to the observers. 
• The observers to ask questions and offer comments on how discounting is used in public sector appraisal. 

HM Treasury will convene monthly progress meetings with the lead authors. The objective of those meetings will be to share interim findings and show progress against the review questions. HM Treasury will not use these meetings to comment on, or influence, findings.

5. Timetable and output 

The authors will provide an interim update to HM Treasury on its emerging findings in March 2026. They will then deliver their final findings to HM Treasury by the start of June 2026 and publish their final findings by the end of June 2026.  

The main output of the review will be a short report, co-authored by the lead authors. This will address the questions that are set out above in ‘Scope’. The report will be published on GOV.UK.  

The observer group will view a draft of the final report and will be invited to comment at that stage.  

The lead authors will have full authority over the contents of the published report. 

HM Treasury will have discretion about whether to accept the recommendations within the report, and about how to incorporate those recommendations into the Green Book where necessary.