On Nov. 16, am 5:35, "Eli Rabett" <[EMAIL PROTECTED]> wrote:
> Does anyone know of anyplace with an intelligent discussion of the
> discount rate issue.
Excuse me, I do not know where good discussion is available.
But I would like to mention my understanding of why and how discount
rate appears in the climate policy issue.
Almost everyone prefers present profit to the same amount of future
profit, probably because future is uncertain. As a matter of
subjective preference, future profit can be considered equivalent to
present profit multiplied by a factor. It is likely that the factor
decays in an exponential manner depending on the distance in time. The
coefficient of decay is the discount rate. It has a role in the
mathematical formula similar to bank rate which is applied to loans or
savings. Surprinsingly to me, it also has similar numerical value to
bank rate according to mainstream economic theories.
I think it is reasonable that future uncertain profit should be
discounted. But I do not think it reasonable that future uncertain
loss or cost should be discounted in the same way. It seems that
mainstream economists think that profit and loss are the same thing
just with the opposite signs, so they can be added algebraically. It is
against my intuition. But I do not mean that loss or cost should not
be discounted at all, since with this assumption, together with another
one that the lifetime of the whole human society is indefinite, the
present value of future loss would be indefinite.
In an earlier attempt to find optimal path of mitigation and adaptation
to climate change, Klaus Hasselmann (1999), a climate scientist,
constructed an integrated model of climate and economy. He says that
the results are strongly dependent on the ratio between the discount
rates of damage due to climate impact and the discount rate of the
means of mitigation, and that the discont rate of damage should be much
smaller in order to have reasonable (from his ethical viewpoint)
conclusion. Of course it can be said that both parts of his model was
crude.
Reference:
Klaus Hasselmann, 1999:
Cooperative and non-cooperative multi-actor strategies of optimizing
greenhouse gas emissions.
<i>Anthropogenic Climate Change</i> (Hans von Storch & Götz
Fl&omul;ser eds., Springer), 209 - 256.
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