Discounting

Résumé

This document is a newcomer guide to the economic theory of discounting, with applications to climate change and sustainability. It borrows ingredients from public economics, decision theory, and asset pricing theory, without any prerequisites beyond microeconomics 101. Aiming at sustainability issues, I focus the analysis on the valuation of intergenerational impacts. The starting point is the Ramsey rule, now more than a century old: We discount the future because we are inequality-averse and because we are used to believe that future generations will be wealthier than us. From this trivial but fundamental insight, I explore the role of uncertainty, a key ingredient for any realistic representation of the distant future of humanity on this planet.