A low discount rate means that the present cost is not much smaller than the future cost of something, so the large damages that are expected in the future from CO2 have a large cost today. That in turn means that investing a lot now in slowing down climate change is the optimal path.
A slow-growing economy means that future people won’t have much more money than now, and concern about future generations means that giving them big problems bothers us. Both of those mean that the present value of a future problem is not discounted much from the future value of that problem, which means a small discount rate.
People generally will prefer having something now to having it far in the future. This is the pure rate of time preference. When we apply this to future generations, it bothers many people.
The economic models we are discussing don’t tell us what we should do but instead are based on what we actually do. The pure rate of time preference does describe certain aspects of our behavior.
A ship that sees an iceberg far ahead can avoid a collision by starting to turn slowly, and then continuing to turn. The economy can avoid disaster from climate change if we start slowly and then steadily increase our actions to reduce CO2.
Whether to work now to reduce CO2 so we don’t hurt future generations is, in integrated assessment models, primarily controlled by the discount rate—a high discount rate means that damages far in the future aren’t very important now, so an economically optimal path doesn’t do much now to avoid them, whereas a low discount rate means that damages in the future are important now, so an economically optimal path works now to avoid them.
Most of the damages from fossil-fuel CO2 are in the future. Discounting in integrated-assessment models allows economists to estimate the present value of those damages, and this is usually called the social cost of carbon. (But, you probably will get bad looks from your friends if you come to a party with oil-stained clothes!)
Many damages of emitting CO2 are not yet estimated, or “monetized”—we are confident that many people will be unhappy if climate change causes extinctions, but these are not included in most estimates of the social cost of carbon. So, the cost is probably higher than indicated in the text, motivating more action now to be economically efficient in addressing climate change.
Many of the valuable resources we use have accumulated on the Earth over a long time, and we are using them over a short time, so that the amount of the resource available on the planet is decreasing. A larger planet would be required to make these resources as rapidly as we are using them. So, the “ecological footprint” of humanity is larger than the Earth, and we will need to find new and better ways to reach a sustainable future.
Most models assume that limits to growth will have little or no impact on future economic growth. Economic growth rate is part of the discount rate, and a higher growth rate gives a higher discount rate, which means that the economically optimal or efficient path involves fewer actions now to slow down global warming. If the future growth is slower than expected in our models because of limits imposed by the size of the planet as we fill up all the available space and use the available resources, then the economically efficient path involves more actions now to slow global warming than indicated by the models, because future generations will not be as rich as the models estimate and so will be hurt more by global warming than the models estimate.
Some Halloween-themed slasher movies are pretty gross, but the Gross Domestic Product is the estimated total market value of the goods and services in the economy of a country or other specified region, over some specified time such as a year. It misses some “good” things, such as the value of raising your own kids, and counts other “bad” things, such as the expenditures to fix a city damaged by storms and sea-level rise. Recent scholarship suggests that the ongoing rise in Gross Domestic Product for most people includes more increase in the “bad” being counted than in the “good” being missed, so that our well-being is increasing more slowly than the growth in Gross Domestic Product would indicate. But, this is not a universally accepted or certain result.
In ordinary use, you may discount prices at a store to encourage purchases, or you may discount the statements of some people by not paying attention to them. An economist calculates interest to learn how much an investment will be worth in the future, and discounts from the future to get the present value of something, so to an economist, discounting is calculating the present value of future events.