WHAT TOMORROW COSTS

The debate between Nordhaus and Stern shows how economics, ethics and risk determine whether climate action begins now

- KRISHNA GUPTA

Both Nordhaus and Stern have contributed immensely to the study of economics and climate change.

Their approach was also similar: the use of Integrated Assessment Models to incorporate climate variables into macroeconomic models. Where they differed was in the discount factor. Stern uses a far lower discount factor (1.4 per cent) than Nordhaus (4.3 per cent), which means that his models value the future much more than those of Nordhaus. (Though, in a later 2008 paper, Stern clarified that there is a difference between the social discount rate and the pure time or private discount rate. Climate change being a complex issue, with many pathways to cutting emissions, the social discount rate is a more relevant concept. Hence, using a market or private rate of return as a proxy for the social discount rate, as Nordhaus and others have done, is mistaken.)

In other words, Stern believed in intergenerational equity; that is, we have a duty to future generations and should live within our 'environmental' means so that we leave behind a world that is at least as 'good' as it is today. In economic terms, the rate of pure time preference was far higher in Nordhaus' models, since they were based on prevailing market interest rates.