Geoscience Reference
In-Depth Information
ternative most often used is sometimes called the 'social rate of time
preference.' This simply means the rate at which 'society' discounts fu-
ture consumption fl ows to their present value. If we take the rate that
the average saver uses to discount future consumption as our measure
of the social rate of time preference, then the real rate of return on long-
term government debt may provide a fair approximation. Over the last
thirty years, this rate has averaged around 3 percent in real terms on a
pre-tax basis.”
6
Unfortunately, the OMB discussion is completely confused. The 7
percent rate is a risky rate of profi t on leveraged corporate capital, while
the 3 percent rate is a risk-free borrowing rate by the U.S. federal gov-
ernment. The difference is not the difference between investment and
consumption, or pretax versus posttax. The difference is the risk pre-
mium on leveraged corporate capital (sometimes called the equity pre-
mium). Luckily, even though the analysis is wrong, the numbers are
generally reasonable ones to apply.
DISCOUNTING AND GROWTH
The opportunity-cost approach assumes that the United States and
other economies will continue to grow over the next century in a man-
ner roughly similar to that of the last century. As a result, living stan-
dards are assumed to rise rapidly in the coming decades. Is this really a
good assumption? Or will technological change dry up?
Of course, there is no way to answer these questions defi nitively.
However, most research on long-term economic growth suggests that
continued growth is a good bet. After all, the information and bio-
technology revolutions have just begun. Moreover, other countries can
grow signifi cantly just by catching up with best practices around the
world. The forces of globalization are bringing major productivity gains
to low-income regions.
But remember that, if this projection is wrong, then the economic
projections underlying the climate models' projections are also wrong.
The models projecting rapid warming over the next century also as-
sume rapid growth in living standards and therefore in CO
2
emissions.
