Equity and Discounting in Climate-Change Decisions
Author(s)
Lind, Robert C.; Schuler, Richard E.
Abstract
Climate change mitigation policies typically call for very long-term investments, with current costs justified largely by the benefits to future generations. When evaluating such policies, economists use the techniques of cost-benefit analysis, including discounting of future costs and benefits. This essay reviews the standard economic approach to discounting as it applies to climate change, arguing that because there is no simple way to justify the choice of a discount rate for investments whose benefits and costs span several generations, collapsing those effects into a single number is highly misleading. In the authors’ view, the question of discounting these intergenerational impacts is closely connected to problems of fairness and distribution; cost-benefit analyses frequently rest on hidden and controversial assumptions about equity. The answer is to use the most sophisticated methods of economic analysis that display the distribution of costs and benefits both between nations and between generations.
