You are a policymaker tasked with tasked with deciding whether to adopt a carbon tax policy today in order to prevent possible future damages from climate change. (Assume for this problem only the policies in your country matter for climate-related economic damages.) Implementing this carbon tax is estimated to cost the economy $10 billion dollars, but the benefit from avoided climate damages is estimated to be $1 trillion dollars in 100 years time.
What would the discount rate have to be to justify this as a sound investment (you can round the discount rate to the nearest tenth of a percent)?
What about if the benefits from avoided climate change arrived in 50 years?
What about if the benefits only arrived in 200 years?
How do each of these discount rates compare to today’s risk-free real interest rate? Why does this matter?