The government is debating whether to spend $100 billion to reduce global warmin

Question

The government is debating whether to spend $100 billion to reduce global warming damage 100 years from now on. It is estimated that $ 800 billion of damage will be averted. A critic of the expenditure says that it would be far better to take the $100 billion, invest it in the stock market, earning an average return of 6 percent per year, and use the proceeds of the investment in 100 years to repair the damage. Should the project be undertaken?

The government is debating whether to spend $100 billion to reduce global warming damage 100 years from now on. It is estimated that $ 800 billion of damage will be averted. A critic of the expenditure says that it would be far better to take the $100 billion, invest it in the stock market, earning an average return of 6 percent per year, and use the proceeds of the investment in 100 years to repair the damage. Should the project be undertaken?

Explanation / Answer

At 6% return/year, the total investment will be as follows:

$100,000,000,000 x (1.06)^100

After 100 years, the total will be $33.93 trillion, yielding a "profit" of $33.83 trillion, considerably more than the "profit" (or damage averted) by spending the money on reducing global warming. The project should not be undertaken, from a financial standpoint.

Please note: This answer does not take into account any damage suffered from global warming during the 100 year period, should the project not be undertaken. Because we cannot account for this (given the simple scenario outlined here, this answer should only be considered from a financial standpoint).

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