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Environment: Which Way Now?

Sathiendrakumar, R. (1993) Environment: Which Way Now? Murdoch University, Murdoch Univesity, Perth, Western Australia.


At the Rio de Janeiro Earth Summit in 1992 more than 150 countries signed a convention aimed at stabilising the greenhouses gasses. Increase in greenhouse gasses such as carbon dioxide (C02) and methane are thought to give rise to global warming. This in turn is expected to have ecological and economic ramifications. The magnitude of this is not quite certain. The pessimists will claim it to be major whereas the optimists who believe in the Gaia hypothesis may claim it to be minor. The Gaia hypothesis states that "the earth is a living organism with a complete feedback system that seeks an optimal physical and chemical environment. Deviations from the optimal environment, trigger natural non-human response mechanisms which restore the balance" (Tietenberg, 1992, p.8).

Cline (1992) using a time frame of 300 years in his analysis advocates the use of some discount rate to correct this problem of global warming. 'The discount rate has an unusually powerful influence because of the extremely long time horizons of global warming and because abatement costs occur early, whereas greenhouse damages avoided show up only after several decades" (Cline, 1993 p.3). Based on this Cline argues that the appropriate discount rate for abating greenhouse gas emissions to be about 2 percent a year in real terms.

The choice of an appropriate discount rate for evaluating public sector projects using cost-benefit analysis has been a controversial and difficult issue to handle (see Anderson and Settle (1977) and Sugden and Williams (1986). Discounting can create further problems when applied to environmental issues. The rationale for 'discounting is because people value the present more than the future; the weight we attach to the future becomes less and less as we move further and further into the future. Therefore any catastrophe that may occur in the future will have relatively lower importance at the present time. Likewise any future benefits that may arise from a particular project will also have a lower present value.

Item Type: Working Paper
Murdoch Affiliation(s): School of Commerce
Series Name: Department of Economics Working Papers
Publisher: Murdoch University
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