Comparison of Policy Implications: Stern vs. Nordhaus Discount Rates
The divergence between the low discount rate used by Stern and the higher rate favored by critics like Nordhaus leads to substantially different policy recommendations. For example, a $100 benefit occurring 100 years in the future is valued at only $1.48 today using Nordhaus's 4.3% rate, whereas it is valued at $24.90 with Stern's 1.4% rate. Consequently, Nordhaus’s proposals for climate change abatement were less extensive and costly. This is exemplified by their contrasting carbon price recommendations for 2015: Nordhaus proposed $35 per ton, while Stern recommended a price of $360 per ton.
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Comparison of Policy Implications: Stern vs. Nordhaus Discount Rates
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A government is evaluating a climate change policy that requires a substantial immediate investment to prevent an estimated $50 trillion in environmental damages 150 years from now. An economist who agrees with the main criticisms leveled against the 2006 Stern Review's approach to valuing future outcomes is asked for their assessment. Which of the following conclusions is most consistent with that economist's perspective?
An economist argues that when evaluating long-term climate change policies, the well-being of future generations should be valued less than the well-being of the current generation. Based on this ethical stance, this economist would likely conclude that the 2006 Stern Review's recommendations for immediate, large-scale investment in climate mitigation were appropriate.
An economist argues that when evaluating long-term climate change policies, the well-being of future generations should be valued less than the well-being of the current generation. Based on this ethical stance, this economist would likely conclude that the 2006 Stern Review's recommendations for immediate, large-scale investment in climate mitigation were appropriate.
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Match each economic perspective on valuing future climate change impacts with its corresponding characteristic or implication.
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An economist who is highly concerned about the welfare of future generations and believes in taking strong, immediate action on climate change would likely advocate for a high discount rate when evaluating climate policies.
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