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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
on goods around 1 percent per year . 3 An alternative approach based on
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
 
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