Question

3. You recently read a New York Times article on the crucial role of the discount rate when considering the benefits and costs of climate change. Policymakers of country X are aware of this and would like to assess whether an emission abatement strategy that would result in a $350 billion reduction in damages 60 years into the future is worth considering. What should be Society X's maximum willingness to pay for this project if the discount rate is 10%? What about 4%? What would justify the choice of a relatively low discount rate?

Answer 1

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3.

Reduction in damages means benefit.

Present value of benefits with 10% discount rate:

$\frac{350}{1.1^{60}}=$1.15$

Maximum Willingness to pay = $1.15

Present value of benefits with 4% discount rate:

$\frac{350}{1.04^{60}}=$33.27$

Maximum Willingness to pay = $33.27

Argument in favor of low discount rate:

• Health of future generations should be taken into account. Placing low discount rate means caring more about utility of future generations which motivates larger abatement of emissions.

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