Global Warming: Discounting is Not the Issue, But Substitutability Is

Abstract

The neoclassical approach towards global warming is best represented by the study of Nordhaus (1994). He found that no substantial cuts in greenhosue gas emission are warranted. Most of his critics have focussed on the issue of discounting and have called for a lower discount rate to be used. These criticisms first miss the point and second lead to ethically dubious, inconsistent conclusions and inefficient policy choices. They miss the point as the implicit underlying assumption of perfect substitutability between natural and other forms of capital is the real problem of Nordhaus's methodology. If this assumption is valid, then lowering the rate of discount is inconsistent with current savings behaviour, is ethically dubious as future generations will be by far richer than the current generation, and is inefficient as scarce finance goes into emissions abatement that exhibits rates of return far inferior to alternative public investments. Any call for aggressive emission abatement must address the perfect substitutability assumption. The real disagreement is whether or not the environmental degradation caused by global warming can be compensated with consumption growth. Discounting is not the issue, but substitutability is.

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