Debate Over the Appropriate Intergenerational Discount Rate

The Stern Review on the Economics of Climate Change (2006)

A policymaker is evaluating a long-term environmental protection project. The project requires a significant investment today but is projected to yield substantial benefits for society 100 years from now. The policymaker argues that the value of these future benefits should be 'discounted' when compared to the present-day costs. Which of the following statements provides the most economically and ethically sound justification for this type of discounting in a public policy context?

Evaluating Climate Policy Proposals

Justification for Discounting

When economists recommend applying a discount rate to the future benefits of a climate change mitigation policy, the primary justification is that people are inherently impatient and prefer to receive benefits sooner rather than later.

Critique of a Proposed Intergenerational Discount Rate

The social discount rate used in evaluating long-term environmental policies is often broken down into distinct components. Match each component or related concept to its correct justification.

When policymakers evaluate the costs and benefits of long-term environmental projects, the social discount rate they use is based on factors like expected future prosperity and existential risks. This approach is fundamentally distinct from the concept of __________, which refers to an individual's personal preference for consuming goods now rather than later.

A policymaker is establishing a framework for evaluating long-term environmental projects. Arrange the following steps in the logical order that one would follow to justify and determine the social discount rate for benefits accruing to future generations.

A government is deciding whether to invest in a major project to build sea walls to protect coastal cities from sea-level rise expected in 100 years. The project has very high upfront costs but provides massive benefits in the distant future. If the government uses a very high discount rate in its cost-benefit analysis, what will be the most likely outcome of their evaluation and why?

Analyzing Economic Arguments on Climate Policy