The Price of Everything - Eduardo Porter [104]
One can transport this rationale to environmental issues. A forest in which 100 trees will produce 7 new ones next year has a 7 percent discount rate. Saving 100 trees from loggers this year has the same value as saving 107 trees next year.
Thinking in these terms, Stern’s approach amounts to using an extremely low discount rate. The idea that averting a dollar’s worth of damage in the future is worth spending a dollar today would amount to choosing a discount rate of zero. Stern chooses a slightly higher one, just a smidgen above the rate at which people’s income is growing.
William Nordhaus of Yale University, one of the most prominent American economists working on climate-change models, disagrees pretty radically with Stern. Like Stern, he argues we must reduce emissions of greenhouse gases to try to get a grip on climate change. But he puts a much higher bar on how much we should be willing to invest in the endeavor. He points out that more than half the damages forecast by the Stern Review are expected to occur after the year 2800. Why, he asks, should we sacrifice a substantial share of our current welfare to avert costs that are so far off in the future?
Nordhaus argues that in estimating future damages we should use a rate that reflects the productivity of long-term investments. He argues it would be dumb to use present-day money to undertake an investment to tackle warming if it produced a lower return. That’s because we could achieve a higher profit investing it in something else. We could use the returns of our investment to tackle warming in the future and we would still have money left over. “The discount rate is high to reflect the fact that investments in reducing future climate damages to corn and trees and other areas should compete with investments in better seed, improved rotation, and many other high-yield investments,” Nordhaus writes in his book A Question of Balance, about options to combat climate change.
Future generations will take advantage too of the fecundity of these investments. Millions of poor farmers on Bangladesh’s vast alluvial plains would surely welcome investments to stop the sea level from rising and swallowing their farms. But the Bangladeshis of the future, like those of the present, might be better served if the money were allocated instead to develop their economy so they could get a better job outside agriculture farther up the hill.
Using Nordhaus’s discount rate, which he estimates at 4 percent per year, leads to a radically different view from Stern’s about the merits of expensive interventions to save the future earth. Say we are deciding how much to spend to avoid a climate shock that would generate damages amounting to 13.8 percent of the world’s gross domestic product in the year 2200—which happens to be the estimate for that year in the Stern Review’s bad scenario. If economic growth over the next 190 years replicates the seventy-five-fold jump of the past 190 years, the damages would amount to about $640 trillion in today’s money. Using a discount rate of just above 1 percent, as Stern suggests, we would be justified to spend up to nearly $80 trillion to save the day 190 years down the road. But at a 4 percent discount rate, as Nordhaus uses, it would make sense to invest in this effort only if we could do it for about $385 billion. If we couldn’t do it for that amount, we would be better off deploying the money on some other, more productive objective.
TORN BETWEEN TWO PRICES
If she is listening to economists, Dasgupta’s hypothetical voter is probably dizzy by now. President Harry Truman famously called for a one-armed economist to get around the profession’s penchant for analysis of the “on the one hand, on the other hand” variety. Nordhaus and Stern fit the bill—each offering up one clear choice. But