By Shimshon Bichler and Jonathan Nitzan
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In his 2007 ‘Review of the Stern Review on the Economics of Climate Change’, William D. Nordahus mocked Lord Nicolas Stern’s assumption of a low discount rate of 1.4%, suggesting we should instead discount the future by his favourite rate of 6%.
This modest suggestion to leverage the capitalization ritual in the name of profit and glory has helped investors minimize the apparent cost of climate change and Nordhaus win the Nobel Prize as the white knight of . . . ‘sustainable global economic growth’!
The gist of the racket:
The future of humanity
The all-encompassing role of discounting is most vividly illustrated by recent discussion of environmental change. One key issue is the process of global warming/dimming and what humanity should do about it. Supporters of immediate drastic action, such as Nicholas Stern, argue that there is no time to waste. According to The Economics of Climate Change (2007), the report produced by a review panel that he headed for the British Government, the world should invest heavily in trying to limit climate change: the cost of inaction could amount to a permanent 5–20 per cent reduction in global GDP (p. xv). But this conclusion is by no means obvious. Critics such as William Nordhaus (2007) argue against drastic actions. In their view, the overall cost of climate change may end up being negligible and the investment to avert it a colossal blunder.
The interesting thing about this debate – apart from the fact that it may affect the future of humanity – is that both sides base their argument on the very same model: capitalization. Climate change is likely to have multiple effects – some positive, most negative – and the question is how to discount them to their net present value. Part of the disagreement concerns the eventual consequences and how they should be priced relative to each other and in relation to other social outcomes. But the most heated debate rages over the discount rate. At what rate of return should the damage be capitalized?
One thousand dollars’ worth of environmental damage a hundred years from now, when discounted at 1.4 per cent, has a present value of –$249 (negative since we measure cost). This is the discount rate that led Stern to conclude that climate change would be enormously harmful, and that urgent action was needed. But the same one thousand dollars’ worth of damage, discounted at 6 per cent, has a present value of only –$3. This is the long-term discount rate that Nordhaus likes to use in his computations. It implies that the impact of climate change may end up being minimal, and so should the response be, at least for now.”
(Nitzan and Bichler, Capital as Power: A Study of Order and Creorder, 2009, pp. 164-5).