First, a disclaimer: I understand that Jacobin was not on the suggested list of policy news sites for the class, and that it reveals my identity as a raving leftist. (Although now that the Trump administration just put out a report against socialism, maybe the #resistance folks will get on board!)
The latest rage and despair inducing climate news comes to us courtesy of the United Nations Intergovernmental Panel on Climate Change (IPCC), and the overarching message is consistent with what we’ve been hearing for a while now. Generally, we’re in deep, deep trouble, and specifically (according to the IPCC), we have 12 years left to prevent catastrophic climate consequences.
The climate will be in ruins, and it will only take Trump four terms to get us there, can you believe it?
Climate change (an externality), planning policy for the future (generational accounting), and cost benefit analysis are all topics we’ve recently covered in class, so I was fascinated when I saw that one of the contentious topics in the economics of climate planning was the discount rate.
The economist William Nordhaus won the Riksbank Prize in Economic Sciences (Economics Nobel Prize) this year for his work on climate change in which he uses a high discount rate. On the other hand, rival economist Nicholas Stern argues for a low discount rate. The discount rate, we know, is used to measure the opportunity cost, or the next best use of funds to be invested, but in this debate, the interpretation changes slightly. Here, the discount rate is used to value the relative price of present and future action. A high discount rate implicitly advocates for upfront benefits and future costs and a low discount rate suggests that future benefits are more valuable, and more worthy of the upfront costs. The discount rate values the future!
Using a relatively high discount rate, as Nordhaus does, prioritizes economic growth, which supposedly leads to improved ability to deal with climate change because we’re richer in the future because we invested in economic growth over dramatic immediate climate action. However, the science is and was clear – immediate and drastic action is required to stop the warming already taking place from causing catastrophic consequences for the planet. There’s no time to wait.