Geoscience Reference
In-Depth Information
Table 7.
Illustration of how discounting
changes the present value of $100 million
received 50 years from now.
Present value of $100
million reduction in
damages in 50 years
Discount rate
(% per year, real)
1
60,803,882
4
14,071,262
7
3,394,776
10
851,855
(present value of $3,394,776 minus $10,000,000 cost). But low discount
rates such as 1 percent per year hardly reduce future values at all.
Table 7 suggests that the discount rate may be the single most im-
portant factor in determining the value of a long-term investment. Yet
our intuition usually takes fl ight for calculations over very long time
horizons. To test your intuition, ask how much Columbus would be
worth had he invested $100 at a 6 percent return in 1492 and came back
to collect it today. I tried to do the calculation in my head, but I greatly
underestimated the number. When I used a calculator, I was surprised
to learn that he would collect a sum that is greater than the entire
wealth of the world.
ETHICS AND DISCOUNTING
Many people are worried about placing a small value on future cli-
mate damages. How can we care so little about the future? Are we not
shortchanging future generations?
Discounting future benefi ts does not mean indifference to the fu-
ture. Rather, it refl ects two important interacting forces. We must fi rst
remember that capital is productive. Societies have a vast array of pro-
ductive investments from which to choose. One investment is to slow
climate change. But others will also be valuable. We need to invest in
research and development on new low-carbon energy technologies; in
technologies that enable low-income countries to prosper in a warmer
