Reference no: EM131008140

Future costs as well as future payments have present values. For example, some researchers say that global warming could cost $1 trillion per year in 100 years. Using the present value formula and an interest rate r = 5%, one researcher (William Nordhaus) argues that we should be willing to pay about $7.6 billion per year today to avoid that cost (PV = $1 trillion x 1/[1+.05]^100). A second person says that because we are uncertain about the future cost we should give it a higher interest rate, say r=15%, which indicates that we’d be willing to pay about $850,000 today to avoid the cost. A third person says that none of us will be alive in 100 years, so we should not be willing to pay anything today to avoid a cost that will fall on people 100 years from now (r = ∞). A fourth person (Nicholas Stern) says that any interest rate above zero indicates that we value our grandchildren less than ourselves and our children, so we should be willing to pay the full $1 trillion today to avoid the $1 Trillion cost 100 years from now (r = 0).

Nordhaus replies to Stern, “The argument is not how we value our grandchildren, it’s primarily about the return on capital. My view is that the return on capital is high, so that the threshold is pretty high if we are going to compete with other uses of our investment dollars.” Assuming for the sake of argument that the $1 trillion cost is a realistic estimate, which of the four points of view do you agree with and why? Is present value a useful way to address the question of our responsibility to future generations?