Question: You are a policymaker tasked with tasked with deciding whether to adopt a carbon tax policy today in order to prevent possible future damages from climate change. (Assume for this problem only the policies in your country matter for climate-related economic damages.) Implementing this carbon tax is estimated to cost the economy $10 billion dollars, but the benefit from avoided climate damages is estimated to be $1 trillion dollars in 100 years time.
? What would the discount rate have to be to justify this as a sound investment (you can round the discount rate to the nearest tenth of a percent)?
? What about if the benefits from avoided climate change arrived in 50 years?
? What about if the benefits only arrived in 200 years?
? How do each of these discount rates compare to today’s risk-free real interest rate? Why does this matter?