Discounting and climate change

Discounting is one of the most disputed issues in environmental economics. Discounting gives a present value to future financial flows. It is indispensable to the cost-benefit analysis of projects. For public investment, a single discount rates allows to select projects that have the highest social benefits. However, discounting seems to give outrageously low values to distant damages, at the expense of future generations. But lowering discount rates would imply increasing the sacrifices of the present generation for the benefit of future generations, which may be richer. May be… or maybe not, and this will depend in part on the state of the environment, the preservation of biodiversity and the (un-)stability of the climate. Moreover, environmental damages cannot be fully compensated by our economic activities. This limited substitutability justifies, even in a deterministic world, an increase of the relative prices of the ecosystem services, which would largely counteract the effects of discounting. The uncertainty on the future state of the world similarly justifies the use of declining discount rates that would correspond to the poorest possible future.