Question 1Many economists believe that cost-benefit analysis need to use some positive discount rate to every costs and benefits. They also believed that less value need to be placed on benefits received in future than the ones that are being presently received. They preferred incurring costs in future rather than present. Several economists argue that current generations have the ethical duty to protect the future generations’ interest because the future generations are the recipients of benefits and are not yet born. They cannot also express their preferences (Hussen, 2008).
A more hopeful counterargument is that investments created in the economy currently are expected to enhance the future wealth of the descendants, offering them a huge scope of exercising any environmental protection preferences, as long as environmental harm is reversible. The argument therefore follows that zero discount rate ensure intergenerational fairness by preventing the current generations from assuming the long-term environmental and other costs of present-day economic activity. Utilitarian and several other economists have proceeded with this argument one step ahead. They argue that discounting is morally indefensible and is a respectful expression for rapacity.
Proponents of zero discount rate argue that discounting can completely devalue the economic impact of even disastrous environmental events happening outside a 50-year time limit. For instance, the current value of a disastrous event happening fifty years from now can be valued at less than one percent of its future value. The moral argument against discounting are convincing, however, the prevalence of inflation, opportunity cost of capital and time preference proposes that a positive discount rate reflects well societal preferences (Asafu-Adjaye, 2005). Question 2Garnaut review has been criticized for the use of low discount rates.
It has been argued many scholars that the discount rates applied in Garnaut review were unfairly low. The selection of discount rate is essential to judgments created in the review. Any rate that is materially higher than two in the review can cause the results on strong improvement to be less clear-cut. It is therefore important to explore the critique. According to Garnaut (2008), some scholars argues that future generations can be better off and that discount rates that are low can fail to discount for future incomes properly.
They particularly refers to increasing average global per-capita incomes to propose that the values in the future can be much greater and hence need to be more strongly discounted than as it has been done in the review. The treatment of discount rates in Garnet review differs from other approaches, such as stern’s approach in two ways. Garnet did not take into account stern’s selection to be faulty. It rather anticipated the observations of the kind that Porter suggested and demonstrated that applying the rates that accommodate alternative means of looking at an issue does not material influence the results for Australian policy (Smith, 2011).
I do not agree with Garnaut review critics, because, Garneut review examined the sensitivity of the conclusion to a much greater discount rate than the one Stern used. The review went a head and stated a preference for income equality distribution that was far greater than has ever been proposed as a fundamental for useful policy making, for instance, on taxation or advancement assistance. I also do not agree with the critics since the review methodology needed only the choice of a discount rate that is suitable in Australia.
In the context of the review, the international distribution issue can be dealt with by advancement of allocation of emissions entitlements in nations that has sensible possibilities for being accepted by emerging nations. Modified Contraction and convergence offers considerable headroom for emerging-nation growth and hence the capability for poorer-income nations to grow substantially, before facing serious restrictions on emissions (Garnaut, 2011).