The surprising (and somewhat perverse) result of modeling by some economists is that the market price of carbon need not rise much above $50 a ton (~$14/ton CO2) by 2020. But in this case, a generous discount rate (say 6-7%) must be used to define the transfer of wealth between generations. The price in future years then needs to be significantly higher on the assumption that our children will find it easier to pay for the increased price of carbon (and environmental damage) than us !!
Influence of Discount Rate on the Predicted Price of Carbon
Reproduced and adapted from W. Nordhaus's review of the Stern Review
Other studies such as those undertaken by Stern, propose a much lower discount rate (2-3%) for the inter-generational transfer of wealth which involves paying a much higher price for carbon, typically $300-500 a ton ($80-135/ton CO2) by 2020. For further information and discussion on the complex subject of inter-generational discount rates, consult the following material:
- Chapter 6 of Blueprint for a Green Economy
- Chapter 6 of the Stern Review
- A critique of the Stern Review by William Nordhaus
- Financial Times, Economists Forum - In spite of economic sceptics, it is worth reducing climate risk
Based on this observation, it would be interesting to see what discount rates companies in the energy sector plan to use in their future determination of investment prospects. Will values rise (say to 15%) to compensate for a perceived greater increase in risk or might they fall (say to 6-7%) to take account of future constraints on the availability of resources? Would such rates map to the inter-generational rates of return outlined above?