Stern Report
8
jan/073
jan/073
Economists’ Free exhange in his latest posts reports: “every time I sit down with an economist today, the Stern Report on global warming comes up”.
Stern report argues that we should use 0% discount rate when discounting future costs of carbon dioxide emissions. A lot of economists disagree, one of the most prominent critics is W. Nordhous (co-author of Samuelsons book of Economics).
The use 0% discount rate also raises new questions, Free exhange is applying it to abortions and concludes that abortions can only make sense when the discount rate for utility is >0.
Correction by Valuethinker: “Stern actually uses a 0.1% discount rate.”
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11:29 dopoldne on januar 23rd, 2007
Stern actually uses a 0.1% discount rate.
He basically states that ethically, for a major policy decision about the future shape of the planet, it is OK to discount the fact that we don’t have future generations (eg a major asteroid impact) but that otherwise we ought to treat future lives as equivalent in value to our own lives.
http://www.hm-treasury.gov.uk/media/3DD/35/Postscript.pdf
http://www.hm-treasury.gov.uk/media/3DD/43/Technical_annex_to_postscript.pdf
8:10 popoldne on januar 25th, 2007
It’s not fair to say that Stern uses a .1% discount rate, though.
He uses a 0.1% rate of pure time preference, and then uses this and other assumptions to produce an expected consumption growth, he then uses log utility off expected future vs. present global consumption (eta=1) to discount the costs.
IOW, he’s trading off 1% of GDP today vs. 1% (or rather slightly more than 1% of GDP, due to the 0.1% rate or pure time preference) in 100 years.
Which is very different than simply using a 0.1% discount rate in the typical financial sense. It’s more like using a discount rate of roughly the expected real global GDP growth rate. His assumptions put that somewhere between 3 and 4% annually.
Disputes with that are potentially reasonable, but unless you grant that future (existing) generations are inherently worth less, or you really believe that a good central case estimate for future global economy growth is faster than 3.5% annually (the 20th century average was around 1.5%), Stern’s case is pretty good. Characterizing his argument as using a near zero discount rate is missing a key step and plays into the hands of the right wing of anti-pigous.
10:40 popoldne on januar 25th, 2007
Thank you for your correction. I must admit that I haven’t read the report. I read The Economists’ Free Exchange article that has since been corrected to include “pure time discount rate.”
The original explanation was:
“In everyday language, that means that when weighing costs and benefits accruing to those of us alive now, against the costs and benefits to future generations, we get no “extra credit” for being alive closer to this year. A 1% decrease in income today is treated as the exact equivalent of a 1% decrease in income 200 years from today. “