A single number—hidden deep in economic models—determines whether we should spend trillions fighting climate change today or leave the problem largely to future generations. This number is the discount rate, and disagreements over its value have sparked one of the most consequential debates in climate economics.

When economist Nicholas Stern argued for aggressive climate action in 2006, critics didn't primarily challenge his climate science. They challenged his discount rate. When William Nordhaus recommended more gradual policies, the dispute centered on the same parameter. Same planet, same physics, vastly different conclusions—all hinging on how we mathematically weigh future welfare against present costs.

Understanding this debate isn't just academic. The discount rate shapes government infrastructure decisions, corporate sustainability investments, and international climate negotiations. It determines whether a dollar of climate damage in 2100 matters almost as much as a dollar today—or barely registers at all. Here's why this technical parameter carries such enormous ethical and practical weight.

At its core, discounting answers a simple question: how much is a benefit or cost occurring in the future worth to us today? If someone offered you $100 now or $100 in ten years, you'd take the money now. You could invest it, use it, or simply avoid the uncertainty of waiting. This preference gets expressed mathematically through discount rates.

In climate economics, these rates work with staggering leverage. At a 1% annual discount rate, $1 million in climate damages occurring in 100 years has a present value of roughly $370,000. At a 5% discount rate, that same future damage is worth only about $7,600 today. The rate doesn't just adjust values—it transforms our entire calculus of responsibility.

Climate damages compound this effect because they're concentrated far in the future. Most severe impacts—coastal flooding, agricultural collapse, ecosystem breakdown—accelerate in the latter half of this century and beyond. Higher discount rates mathematically shrink these distant harms until they nearly vanish from cost-benefit analyses, while lower rates keep them prominently in view.

This isn't manipulation or bias—it's the mechanical consequence of how exponential discounting works over long time horizons. But recognizing the mechanism reveals why the choice of rate isn't merely technical. It's a decision about how much the future counts.

Takeaway

When evaluating any long-term climate analysis, immediately look for the discount rate used. A difference of just 2-3 percentage points can shift conclusions from 'urgent action required' to 'modest intervention sufficient'—not because the science changed, but because of how future damages are weighted.

The discount rate debate fundamentally splits between two philosophical camps. Descriptive economists argue we should use rates reflecting how people and markets actually behave. Real interest rates, investment returns, and revealed preferences show that humans consistently discount the future at 4-6% annually. Economic models should reflect reality, not impose values.

The Stern Review famously challenged this approach. Nicholas Stern used a near-zero pure time preference rate—the portion of discounting based solely on when something occurs, separate from growth expectations. His reasoning was ethical: a person born in 2100 has the same moral worth as someone alive today. Discounting their welfare simply because they exist later is, in this view, intergenerational discrimination.

William Nordhaus and other critics countered that markets tell us something important. People demonstrably prefer present consumption, and forcing artificially low discount rates onto analysis produces recommendations disconnected from how societies actually make decisions. If your model suggests we should sacrifice far more than people will ever accept, perhaps the model—not the people—needs adjustment.

Neither position is obviously wrong. The descriptive view respects revealed preferences and market signals. The prescriptive view insists that economic analysis shouldn't simply ratify existing biases, especially when those biases harm people who can't participate in today's markets—because they haven't been born yet.

Takeaway

Before accepting any climate economic conclusion, identify whether the analysis adopts an ethical stance (future generations deserve equal consideration) or a descriptive one (we should model actual human behavior). Both approaches are legitimate, but they embed fundamentally different assumptions about intergenerational justice.

Discount rate choices cascade directly into real-world decisions. Government infrastructure investments—seawalls, flood barriers, resilient transportation networks—require cost-benefit analyses where the rate determines whether projects appear economically justified. A city deciding whether to spend billions on climate adaptation will reach different conclusions depending on which rate its analysts choose.

Corporate sustainability planning faces the same challenge. When companies calculate the financial materiality of climate risks, discount rates shape whether distant physical risks or transition costs register as significant. A 30-year stranded asset risk looks manageable at 8% discounting; at 2%, it demands immediate strategic response. Investor pressure around climate disclosure has intensified scrutiny of these embedded assumptions.

Perhaps most consequentially, international climate negotiations implicitly battle over discount rates. Developing nations often argue that wealthy countries' historical emissions created future damages that shouldn't be discounted away. Developed nations sometimes emphasize present costs and near-term economic realities. These aren't just technical disagreements—they're conflicts over who bears responsibility for temporally distributed harms.

Some economists now advocate for declining discount rates—starting higher for near-term decisions and decreasing for longer horizons. This approach captures both short-term opportunity costs and the deep uncertainty about conditions centuries ahead. Several governments, including the UK and France, have adopted declining rates for long-term project evaluation.

Takeaway

When assessing climate investments or policies with horizons beyond 30 years, consider requesting sensitivity analyses across multiple discount rates. Understanding how conclusions shift across different rates reveals which decisions are robust and which depend critically on contested assumptions about time preference.

The discount rate debate won't be resolved by better data or smarter models. It reflects a genuine philosophical tension between respecting how humans actually behave and aspiring to treat future generations fairly. Both considerations are legitimate; neither can simply override the other.

For practitioners navigating climate economics, this means embracing transparency rather than seeking false precision. Acknowledge the discount rate, explain its implications, and show how conclusions change under alternative assumptions. Decision-makers deserve to understand that this single parameter—not just climate science—drives much of what models recommend.

The ultimate question isn't mathematical. It's moral: how much do we owe people who don't exist yet? Economic analysis can illuminate trade-offs, but it cannot answer that question for us. That responsibility remains inescapably human.