Geoscience Reference
In-Depth Information
market goods like cars, nonmarket items like home-cooked meals, and
environmental services such as a swim in the ocean. It would properly
correct for defi ciencies in standard measures by subtracting the costs of
pollution and adding the value of public parks.
The major trade-off in climate-change policy involves trading off con-
sumption today for consumption in the future. When we reduce CO
2
emissions today, that requires sacrifi cing current consumption. The re-
turn for our investment is reduced climate-change damages and therefore
higher consumption in the future. If we reduce consumption by taking
fewer airline trips today, thereby reducing CO
2
emissions, this will
help preserve national parks and wildlife for vacations in the future.
Now we see why discounting becomes so important. Suppose that a
climate investment sacrifi cing 100 units of consumption today increases
consumption by 200 units in the future. How can we put these into com-
parable units to determine whether that is a good investment? We do
this by discounting.
PRESCRIPTIVE AND OPPORTUNITY-COST VIEWS
OF DISCOUNTING
The discounting controversy has centered primarily on the ques-
tion of whether the discount rate should be derived from a prescrip-
tive (normative) approach, or whether it should rely upon a descriptive
(opportunity-cost) basis.
2
Begin with the prescriptive approach. This approach was forcefully
advocated by the distinguished British economist Nicholas Stern, in a
major study he led on climate-change policy, the
Stern Review
. Along
with others, Stern argued that it is unethical to discount the welfare of
future generations. They believe that we should therefore apply a very low
discount rate on goods to calculate the present value of future climate
damages. Advocates of the normative view often advocate discount rates
sustainability has been developed by Yale political scientist John Roemer.
While this is an appealing argument, there are important qualifi ca-
tions. In analyzing the issues, we need to distinguish the
discount rate on
goods
, which applies to things like houses or energy spending, from the