There is a long-running debate among top climate economists about the appropriat

Question

There is a long-running debate among top climate economists about the appropriate social discount rate. William Nordhaus contends that the rate should be around 5.5% while Nicholas Stern argues for a 1.4% social discount rate. Suppose that the initial cost of a climate change policy is $1B and the benefits in 100 years are worth $100B. Calculate the NPV of this policy for both Nordhaus and Stern's discount rates. What can you can conclude about each economist's perspective on this particular policy? How does a higher discount rate affect the weighing of benefits in the future and initial expenses in the present?

Explanation / Answer

NPV with discount rate 5.5%:

NPV = 100,000,000,000/(1.055)100-1,000,000,000 = -527116635

NPV with discount rate 1.4%

NPV = 100,000,000,000/(1.014)100-1,000,000,000 = 23,900,295,455

Higher the discount rate lower will be the NPV.

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