Against High Interest Rates
In the economics of climate change, the future benefits of greenhouse gas emissions abatement are commonly discounted at a rate equal to the long-run return on corporate stocks, which averaged 6% per year during the 20th century. Since a 6% discount rate implies that one dollar of benefits obtained one century from the present attains a present value of less than one cent, this method implies that only modest steps towards greenhouse gas emissions are economically warranted. This chapter critiques this approach to discounting the future based on three distinct lines of reasoning. First, the use of high discount rates is inconsistent with classical utilitarianism, which holds that equal weight should be attached to the welfare of present and future generations. Second, the approach violates the principle of stewardship, which holds that it is morally unjust for present generations to engage in actions that impose uncompensated environmental costs on posterity. Third, the use of a 6% discount rate is appropriate in the analysis of public policies that have risk characteristics that are similar to those associated with corporate stocks. Economic theory, however, suggests that discount rates of 1% or less should be used to evaluate policies that reduce future risks. Since a main objective of climate change policies is to reduce the risks faced by future society, the use of high discount rates in the analysis of climate change policies is arguably inappropriate.
|Date of creation:||Mar 2004|
|Date of revision:|
|Contact details of provider:|| Web page: http://www.economics.rpi.edu/|
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Bromley, Daniel W., 1989. "Entitlements, missing markets, and environmental uncertainty," Journal of Environmental Economics and Management, Elsevier, vol. 17(2), pages 181-194, September.
- Bryan G. Norton & Michael A. Toman, 1997. "Sustainability: Ecological and Economic Perspectives," Land Economics, University of Wisconsin Press, vol. 73(4), pages 553-568.
- Sandmo, Agnar, 1972. "Discount Rates for Public Investment under Uncertainty," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 13(2), pages 287-302, June.
- Graciela Chichilnisky, 1997. "What Is Sustainable Development?," Land Economics, University of Wisconsin Press, vol. 73(4), pages 467-491.
- Manne, Alan & Mendelsohn, Robert & Richels, Richard, 1995. "MERGE : A model for evaluating regional and global effects of GHG reduction policies," Energy Policy, Elsevier, vol. 23(1), pages 17-34, January.
- Barro, Robert J., 1974.
"Are Government Bonds Net Wealth?,"
3451399, Harvard University Department of Economics.
- Richard Howarth, 1992. "Intergenerational justice and the chain of obligation," Environmental Values, White Horse Press, vol. 1(2), pages 133-140, May.
- William R. Cline, 1992. "Economics of Global Warming, The," Peterson Institute Press: All Books, Peterson Institute for International Economics, number 39.
- Schelling, Thomas C, 1992. "Some Economics of Global Warming," American Economic Review, American Economic Association, vol. 82(1), pages 1-14, March.
- Brown, Peter G., 1998. "Toward an economics of stewardship: the case of climate," Ecological Economics, Elsevier, vol. 26(1), pages 11-21, July.
- Gerlagh, Reyer & Keyzer, Michiel A., 2001. "Sustainability and the intergenerational distribution of natural resource entitlements," Journal of Public Economics, Elsevier, vol. 79(2), pages 315-341, February.
- Rogers, Alan R, 1994. "Evolution of Time Preference by Natural Selection," American Economic Review, American Economic Association, vol. 84(3), pages 460-81, June.
- Richard B. Howarth, 1997. "Sustainability as Opportunity," Land Economics, University of Wisconsin Press, vol. 73(4), pages 569-579.
- Malte Faber & Reiner Manstetten & John L.R. Proops, 1992. "Humankind and the environment: an anatomy of surprise and ignorance," Environmental Values, White Horse Press, vol. 1(3), pages 217-241, August.
- Lind, Robert C, 1995. "Intergenerational equity, discounting, and the role of cost-benefit analysis in evaluating global climate policy," Energy Policy, Elsevier, vol. 23(4-5), pages 379-389.
- Manne, Alan S, 1995. "The rate of time preference : Implications for the greenhouse debate," Energy Policy, Elsevier, vol. 23(4-5), pages 391-394.
- Howarth, Richard B, 1998. " An Overlapping Generations Model of Climate-Economy Interactions," Scandinavian Journal of Economics, Wiley Blackwell, vol. 100(3), pages 575-91, September.
- Hurd, Michael D, 1987. "Savings of the Elderly and Desired Bequests," American Economic Review, American Economic Association, vol. 77(3), pages 298-312, June.
- Richard B. Howarth, 2003. "Discounting and Uncertainty in Climate Change Policy Analysis," Land Economics, University of Wisconsin Press, vol. 79(3), pages 369-381.
When requesting a correction, please mention this item's handle: RePEc:rpi:rpiwpe:0404. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Shawn Kantor)
If references are entirely missing, you can add them using this form.