Discounting is Magic. Not just for the heaps of wonderful formulas to play with but magic for the polluters: costs of cleanup just disappear from before your eyes! So it can be dangerous too – but all the more reason to understand the tool and use it wisely. The video gives a first introduction – and then the fun part starts: we need to understand what the future will look like in order to really understand discounting. This has been a passion. The interested reader is recommended to read the article with Hoel on why we need different discount rates in different sectors depending on how they will grow in the future. And the “Even Sterner” application where we show that discount rate heterogeneity can be used to explain why we need a much “Sterner” climate policy. (This is a pun intended: Sterner than the policies recommended in the Stern Review). There is a nice explanation for laymen in the “In defence of sensible economics”. Other articles show how we might think of the value of the future if we have uncertainty or if we desire relative consumption (“keeping up with the Jones’s”) rather than just more bread and butter.
In this lecture you will hear Thomas Sterner explain the concept of discounting. (Lecture recorded in May 2015).
- Johansson-Stenman, O., and Sterner, T. (2015). Discounting and Relative Consumption. Journal of Environmental Economics and Management, vol 71, pp.19-33.
- Arrow,K., M L. Cropper, C Gollier, B Groom, G M. Heal, R G. Newell, W D. Nordhaus, R S. Pindyck, W A. Pizer, P Portney, T Sterner, R Tol and M,L. Weitzman (2014) “Should Governments Use a Declining Discount Rate in Project Analysis?“ Review of Environmental Economics and Policy, volume 8, issue 2, pp. 145–163 doi:10.1093/reep/reu008. Arrow et al (2014). Editor’s Choice.
- Arrow,K., M L. Cropper, C Gollier, B Groom, G M. Heal, R G. Newell, W D. Nordhaus, R S. Pindyck, W A. Pizer, P Portney, T Sterner, R Tol and M,L. Weitzman (2013).“Determining Benefits and Costs for Future Generations“, Science, Vol. 341, Issue 6144, pp. 349-350
- T Sterner & E Kyriakopoulou, (2012) “Discounting: Unbalanced Growth, Uncertainty, and Spatial Considerations”, The Annual Review of Resource Economics , vol. 4, no 1, pp. 285-301
- Thomas Sterner and Martin Persson. (2008) “An Even Sterner Review”: Introducing Relative Prices into the Discounting Debate, Review of Environmental Economics and Policy, vol 2, issue 1.
- Sterner, T “In defence of sensible economics”, in Solow,R. & Touffut eds, Changing Climate, Changing Economy, Cournot Centre for Economic Studies, Edward Elgar, 2009. Click to see a video in French from the presentation at the Centre Cournot of the chapter “In Defence of Sensible Economics” December 2008
- Hoel, M. and T. Sterner (2007) ‘Discounting and relative prices”, Climatic Change, vol. 84, pp. 265-280
- Azar, C. and T. Sterner (1996) ‘Discounting and distributional considerations in the context of Global Warming’, Ecological Economics, Vol.19, pp 169-184.
- Sterner, T. (1994) ‘Discounting in a World of Limited Growth’, Environmental and Resource Economics, 4, pp 527-534.