The social discount rate is a parameter that measures the importance of the welfare of future generations relative to the present. It is calculated in percent per year, like an interest rate, but refers to the discount in future "utility" or welfare, not future goods or dollars. A zero social discount rate means that future generations into the indefinite future are treated equally with present generations; a positive social discount rate means that the welfares of future generations are reduced or "discounted" compared to nearer generations.Nordhaus advocates a more gradual ramping up of climate change policies, while Stern's numbers lead one to conclude that strong, immediate measures such as a carbon tax are appropriate. Whoever is correct, our ancestors will be hot, hot, hot if we sell them short.
Wednesday, February 21, 2007
Posted by Evan O'Neil
How much are our grandchildren worth? This question of economics and intergenerational ethics is fueling a debate over the best way to douse global warming before it's too late. At the heart of the controversy are Sir Nicholas Stern's calculations in the climate change report he prepared for the UK Treasury. Yale economist William Nordhaus believes that Sir Nicholas set his discount rate for future generations too low, thus overstating the urgency with which we should act: