Question

Consider the role of discount rates in problems involving long time horizons such as climate change. Suppose that a particular emissions abatement strategy would result in a $500 billion reduction in damages 50 years into the future. How would the maximum amount spent now to eliminate those damages change if the discount rate is 2 percent, rather than 10 percent?

Answer 1

The maximum amount spent now to eliminate those damages change to $186 billion if the discount rate is 2 percent, from $4.259 billion when the discount rate is 10 percent.

Step-by-step explanation:

the final reduction occurs with a 10% discount rate:

W50 = 1/(1+0.10)^50

= 0.008518*500 billion

= $4.259 billion (value in present time)

if the discount rate is 2% rather than 10%:

W50 = 1/(1+0.02)^50

= 0.3715*500 billion

= $186 billion

Therefore, The maximum amount spent now to eliminate those damages change to $186 billion if the discount rate is 2 percent, from $4.259 billion when the discount rate is 10 percent.