Costing and pricing the planet…Mainly drawn from Stern Review report, notably chapters 2A and 6

Scenario (e.g. Business as Usual OR a stabilisation level)

Attribute values to these

Project future levels of economic activity and social benefits

Factor these in ‘present day’ terms = Discounting

Utility today

Total utility

Compare scenarios

Implement best

Conventional (market) discounting

receipts at time into future:

value today (0) ( )i i

i ii

y t

U D t y

0( ') '

Discount factor

( ) constant discount rate

non-constant

equivalently ( ) /

t

rt

r t dt

D t e r

e

r t D D

Standard market-based assertion:

( ) risk free interest rate

(assuming payments net of risk)

r t

assumes there is some larger market against which to trade!

Dis

cou

nt f

acto

r Uncertainty as to discount rate

Take average of discount factor

equivalent todecreasing discount rate with time

Cf UK Treasury ‘green book’

Stern Approach (more proposed than implemented)1. The human race might not survive anyway:

nuclear holocaust, asteroid impact, supervolcanoes ….

%

No other discounting – controversial

3. Results generally expressed as equivalent permanent reduction in GDP

2. Rate future gains/losses relative to the size of future economy

( )( ) ( ) ln ( )

( )t t

dC tdU D t U D t C t

C t

estimates to IPCC2001

estimates to IPCC2001

Stern scenario combinations