Environmental Engineering Reference
In-Depth Information
discount rate (de
ned below), we could in principle
figure out how much to invest now and in the future
to reduce the harm. The Nordhaus camp says that we
should be spending a reasonable amount now, but that
there is no need to panic. The Stern camp in contrast
says that the consequences are so severe as to constitute
a global emergency and that drastic action is called
for immediately. There is no one among the leaders
of the economics profession who says we should do
nothing now.
The surprise to me is that the two groups use eco-
nomic models that are mathematically very sophisti-
cated, seem on the surface to be different, but are
essentially the same. The difference in their conclusions
comes down to one number, what the economists call
the social discount rate. Plug Stern
s social discount rate
into the Nordhaus model and you will get the Stern
result. Plug the Nordhaus value into the Stern model
and you will get the Nordhaus result. I conclude that the
difference is a matter of opinion, subjective rather than
objective, and, further, the more I looked at the analyses
the more I came to wonder if the notion of discount
rates makes any sense when looking hundreds of years
into the future.
A discount rate is used to determine the present value
of some future thing. Look
'
first at the simplest applica-
tion. Suppose I want to have one dollar (or euro or yen)
years from now. If I put money in a bank that pays
compound interest at a rate of
% per year, I need to put
in only
cents today to have my account contain one
dollar
years from now. In economist terms, the dis-
count rate is
% and the present value of that dollar
