Social Discount Rate - Importance in Global Climate Changes

Importance in Global Climate Changes

This topic has recently been very controversial and highly debated. Since there is such a strong probability that the world will suffer significantly in the future due to global change in temperature, finding the correct social discount rate for the benefits of reducing CO₂ emissions and other harmful greenhouse gases is very important.

"The choice of an appropriate social time discount rate has long been debated. Some very intelligent people have argued that giving future generations less weight than the current generation is 'ethically indefensible.' Other equally intelligent people have argued that weighting generations equally leads to paradoxical and even nonsensical results."

The range in the social discount rate for a cost-benefit analysis in this issue range from zero to over 3%. Some argue that the only reason for discounting future generations is that these generations might cease to exist in the future. Thus the rate should equal zero since the probability for such a catastrophic event is so low (assumed to be 0.01% per year). This infers that there is equal weight given to all generations. The Stern Review on the Economics of Climate Change is one such report that argues for zero discounting of future generations. While William D. Nordhaus of Yale

"examines a model of climate change that is similar to the one used in the Stern Review but with a 3 percent social discount rate that slowly declines to 1 percent in 300 years rather than the 0.1 percent discount rate used in the Stern Review. In his model, the welfare of future generations is given less weight than the current generation’s welfare. He finds that preventive measures like a tax on carbon emissions are certainly required. But they are of a much smaller magnitude than those recommended in the report."