Global warming: discounting is not the issue, but substitutability is

The cost-benefit study of Nordhaus (1994) is representative for the neoclas sical approach towards global warming. Nordhaus found that no substantial e mission cuts are warranted. Most of his critics have concentrated on the is sue of discounting and demanded that a lower discount rate should be applie d. These criticisms first miss the point and second lead to ethically dubio us, inconsistent conclusions and inefficient policy choices. They miss the point because the real problem of Nordhaus's methodology is his implicit un derlying assumption of perfect substitutability between natural and other f orms of capital. Given the validity of this assumption, lowering the rate o f discount is inconsistent with current savings behaviour, is ethically dub ious because future generations will be much richer than the current one an yway, and is inefficient because scarce financial resources are channelled into emissions abatement that exhibits rates of return far inferior to alte rnative public investments. Any call for aggressive emission abatement must therefore directly attack the perfect substitutability assumption of neocl assical economics. The real disagreement is about whether consumption growt h can compensate for environmental degradation caused by global warming. Di scounting is not the issue, but substitutability is. (C) 1999 Elsevier Scie nce Ltd. All rights reserved.