In the economic analysis of environmental issues like climate change, the concept of discounting is applied differently than in personal finance. The focus is not on how an individual values their own future consumption versus their present consumption (subjective discounting). Instead, intergenerational discounting is the process of determining the value the current generation places on the consumption and wellbeing of future generations. This distinction is crucial because the justifications for intergenerational discounting are based on social and ethical considerations, entirely separate from an individual's intrinsic impatience. The specific rate used for this purpose is a central point of debate in environmental economics.

Intergenerational Discounting in Environmental Economics

From the perspective of a neutral policymaker, a fundamental question arises when evaluating climate policies: are there justifiable reasons to value the future benefits for subsequent generations less than the costs and benefits experienced by the current population? This query sets the stage for considering arguments for and against discounting the future.

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The intergenerational nature of climate change creates a fundamental policy problem regarding the distribution of costs and benefits. Economic activities today impose costs, in the form of environmental damage, on future generations. Conversely, policies to mitigate these effects require the current generation to bear the costs, while the benefits are primarily received by those in the future.

Intergenerational Distribution of Costs and Benefits in Climate Change Policy

To cite the ebook, use The CORE Econ Team 2023 The Economy 2.0: Microeconomics Open access e-text https://core-econ.org/the-economy/.

To cite a unit, use The CORE Econ Team 2023 The Economy 2.0: Microeconomics Open access e-text https://core-econ.org/the-economy/ Unit [unit number] (url).

CORE Econ - The Economy 2.0: Microeconomics

A significant challenge in addressing climate change is that future generations, who will bear the burden of decisions made today, have no voice or representation in the current policymaking process.

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