As was discussed above, Weitzman (2001, 2007) and Newell & Pizer (2003) both demonstrate that uncertainty about future discount rates implies that the appropriate effective rates decline over long horizons, providing a theoretically grounded way of addressing economic and rate uncertainty over long horizons. Costanza highlights an alternative line of reasoning set out by Azar and Sterner 56 who split the discount rate into a “pure time preference” component and an “economic growth” component. 57 They state that for social policy, the pure time preference should be set to 0% whereas the economic growth component should reflect the underlying growth of the country in question. If growth is indefinitely constant, then static discount rates are applicable; if growth is uncertain, then growth rates should be flat or declining. Weitzman argued that under slower economic growth, climate policies have more value, especially to poorer populations. This is because the vulnerable experience higher marginal utility of consumption, benefit disproportionately from protections against environmental risks and slower growth amplifies inequality and reduces resilience to climate shocks, making policies that mitigate these risks especially valuable. Weitzman put forward that because of this uncertainty, the discount rate should get smaller over time, eventually approaching the lowest possible rate. This ensures we do not undervalue benefits to future generations in worst-case scenarios. Fleurbaey and Zuber (2013) add a second layer of uncertainty, the rate of return on the investment itself. They extend Weitzman’s (1998) to deliver more value in adverse economic conditions, which suggests a lower discount rate. 58 This also feeds into the concept of multivocality; if the increased marginal utility for poorer nations was considered at the time of investment, the perceived value may be higher. Given the points outlined above, we believe the arguments supporting declining discount rates over time are extensive and robust when applied to climate related, long-term investment. However, can we conceive of a zero or even a negative discount rate for certain investments? Critics and practitioners alike may reject this view outright as a zero delta in the NPV is so radical that it becomes a complete outlier vs. other market approaches. However, Fleurbaey and Zuber (2012) 59 argue that climate policies should be evaluated using low, potentially negative discount rates because they primarily benefit poorer future generations who are more vulnerable to climate change. Their analysis highlights that affluent populations in the present are better equipped to bear the costs of mitigation, while future beneficiaries, especially the poorest, are likely to face the worst impacts of climate change. Moreover, uncertainty about economic growth and climate risks strengthens the case for lower or negative discount rates, as these policies are particularly valuable in worst-case scenarios. Such scenarios justify prioritizing climate actions even more when returns on investments are higher during adverse economic condition. Costanza et al. (2021) 60 go on to say that “with the observed increases in marginal values associated with natural capital, it can also be argued that for the use of a negative discount rate for goods/services that rely almost entirely on natural capital’. 61 56 Azar, C. and Sterner, T., 1996. Discounting and distributional considerations in the context of global warming. Ecological Economics, 19(2), pp.169-184. 57 Costanza, R., Kubiszewski, I., Stoeckl, N. & Kompas, T., 2021. Pluralistic discounting recognizing different capital contributions: an example estimating the net present value of global ecosystem services, p. 2. 58 Fleurbaey, M. & Zuber, S., 2013. Climate policies deserve a negative discount rate, Chicago Journal of International Law: Vol. 13: No. 2, Article 14, p, 581. 59 Fleurbaey, M. and Zuber, S., 2012. Climate policies deserve a negative discount rate. Chicago Journal of International Law, 13 , p.565 60 Costanza, R., Kubiszewski, I., Stoeckl, N. and Kompas, T., 2021. Pluralistic discounting recognizing different capital contributions: An example estimating the net present value of global ecosystem services. Ecological Economics , 183 , p.106961. 61 Costanza, R., Kubiszewski, I., Stoeckl, N. & Kompas, T., 2021. Pluralistic discounting recognizing different capital contributions: an example estimating the net present value of global ecosystem services, p. 4.
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