Environmental Engineering Reference
In-Depth Information
Table
.
Present values in dollars of
$
for various discount
rates and time periods
Discount rate
Time period (years)
%
%
%
%
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
cents.
The present value
depends on the discount rate, which in this case is equal
to the interest rate. If the bank pays only
years in the future is
% interest,
I need to put in a larger amount,
cents, to make up for
the lower interest rate. In this case, the discount rate is
%
and the present value is
cents. If I can
nd a bank that
will pay
% interest, the discount rate would be
% and
the present value
cents. Since the climate-change
problem is one that requires centuries to get under
control, the time periods are longer and the present
values can be astonishingly small.
Table
.
gives some
examples.
The problem that we confront in climate change is that
as the temperature goes up, we expect that there will be
harm to the global ecosystem, and hence to the global
economy. If we take the present value of the harm and
invest that much to avoid it, we economically break even.
Two problems are immediately apparent: how we
Strictly speaking, the economists would say I am talking about the
productivity of capital, but using interest on a bank account is a more
familiar way to talk about the issues.
