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2014-09-30 | video

Environmental Policy Lecture 8 part 1

Environmental Policy Lecture 8 part 1

In lecture 8 Professor Sterner speaks about discounting, an exiting topic as he calls the discount rate "the value of the future". In spite of all uncertainties there are about impacts of Climate Change the biggest uncertainty considering its future costs seems to come from the discount rate.

In part 1 Sterner discusses the different concepts. He compares and explains the differences between discount rate and growth, and explains why it is impossible to have a steady high growth rate. He gives an example of the first contact he had with discount rates in the 70s in a discussion about the costs of dealing with nuclear waste. The opponents had by estimating a high discount rate argued that the future cost would be so low that it would not be a problem for future generation. This is the same logic, as Sterner shows, that Professor William Nordhaus uses in his calculations for the future costs of Climate Change, and also the main point which differs Nordhaus calculations from Professor Nicholas Stern.

When estimating future values one has to be careful when assuming discount rate, Sterner calculates and shows how extremely different the outcomes are with just small differences in discount rate.

"What does it mean to become 100 times richer?" A hundred years ago 10% of New York’s population had maids, now basically no one has a maid. The relative prices have gone up. Sterner further shows the importance of considering relative prices by illustrating with the market of agriculture which today is about 24% of world GDP . If agriculture would collapse and we would loose 95% it would not be the same as loosing about 23% of GDP since the still existing 5% of agriculture would basically become the entire GDP.

So why do we discount?