Discount Rates and Climate Change
Posted in Environment by George
I think it would be a really interesting idea to have someone do a study on what discount rates people are using in assessing future damages caused by climate change. For those of you who don’t understand the discount rate, it’s basically a way to find the present value of something in the future. For instance, a dollar today is worth a lot more than a dollar in five years, because you could invest that dollar today and have more in five years.
I just read (ok, skimmed) the Stern Review on Climate Change (it’s very long), and a few of its criticisms. One of the most common criticisms is that the discount rate used by the Stern review is very low compared to reality (meaning, it overestimates the present value of future climate change damages). That may or may not be true, depending on how individuals value the future, but that’s a tricky issue and I’m not going to go into that.
But, I think it would be very useful to do a study where every report written about future climate change damages were compiled, and their assumed discount rates were noted. Then, someone could check to see if there is any statistically significant difference in the discount rates due to the fact that a paper advocates action on climate change or does not.
This could be a very useful way to tease out “forced” outcomes by either side of the climate change debate.
What do you all think?
March 8th, 2007 at 8:51 am
Check it out.
Stickers suitable for your textbooks.
March 8th, 2007 at 10:00 am
I understand the point you’re trying to make, Shaniqua, but in a policy realm, I feel that I’ve been able to think beyond the textbook (maybe not in my very early articles, but I feel my blogging style has evolved a bit). But maybe not, that’s for the readers to decide.
In this article I’m applying the concept of the discount rate to the real world in a way that isn’t like I’m reading out of a textbook, I don’t think at least. I’m saying that we should take a look at the assumed discount rates in various papers to see if we can tease out any bias. Regardless of whether one buys the discount rate or not, knowing that someone is inflating/deflating it on purpose to prove a point can be useful.
On another note, that is a pretty funny sticker.