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A look back at Figure 13 indicates that slow economic growth would
lead to a very different future compared to standard projections—both
economically and climatically.
People look at the slow growth in the United States and other coun-
tries since 2007 and worry about economic stagnation. However, the
slow growth was caused by inadequate demand, not by declining pro-
ductivity. Moreover, poor countries have performed much better than
rich countries. Per capita GDP in the developing countries of East Asia
grew at 8.5 percent per year over the last decade, and the developing
countries of sub-Saharan Africa grew at 2.5 percent per year during
this period. 7
This is not necessarily a picture of future wine and roses for the
world. But it reminds us that the climate-change problem results from
strong economic growth without adequate climate-change policies—it
is not consistent with a pattern of economic stagnation and slow growth
in living standards. 8
APPLICATION TO CLIMATE-CHANGE INVESTMENTS
I now apply the discounting concepts to climate-change policy. In
this area, I generally compare the cost of emissions reductions today
with the value of reduced damages in the future. So suppose a $10 mil-
lion investment in wind energy today would reduce CO 2 climate-change
damages by $100 million in 50 years. Is this a worthwhile investment
given the available alternatives?
To answer this question, I reduce the $100 million benefi t by the
factor (1
r ) −50 where r is the discount rate. In the specifi c case of the
discount rate of 4 percent per year, this discount factor is (1.04) −50 = 0.141.
The calculation indicates that with a 4 percent discount rate, a future
benefi t of $100 million in 50 years has a present value or benefi t of $14.1
million. Since the present value of the benefi t exceeds the $10 million
cost for wind energy, it is economically justifi able.
Table 7 shows the present value at different discount rates. Note
how much a high discount rate reduces the present value. At the gov-
ernment discount rate of 7 percent, the $100 million investment would
not pass a cost-benefi t test because the net value is minus $6.6 million
+
 
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