Renewable Energy and Electric Transportation Face Issue with “Discount Rate”

A fellow I know has developed an incredible new coating for machinery, and points out that the business case for using this is quite compelling. He writes, “Experts estimate that 25 to 30 percent of all corrosion costs (estimated at $276 billion in the U.S.) could be eliminated through better painting practices.” He laments that the world doesn’t seem to have an appetite for this, even though the numbers are so obvious.

I reply:

What you’ve observed here is that we have a very hard time investing for the future — even when the business case is overwhelmingly strong. And unfortunately, this applies to almost everything we’re doing here in renewable energy and electric transportation. Where the costs of a coal plant are stretched out over a 40-year period, the costs of a wind turbine are concentrated almost entirely at the front, where they cause the most heartburn. Or take the example of the CFO who can retrofit his office buildings or manufacturing plants to save enormous amounts of electricity, but elects to hold onto his cash instead. The case is the same at the consumer level with electric vehicles, where the owner has to make an up-front investment whose value is returned in lower gas costs over the life of the car.

Both at the consumer and business levels, we have extremely high “discount rates.” I.e., benefits that occur in the future are perceived to have considerably less value than those occurring immediately.

This is certainly the main reason we’re having such an issue dealing with global warming. Hell, it will be decades before our major population centers are under water. How much investment do you expect to be made decades before its benefit will be reaped? In the interview I conducted with economist Nate Hagens, he told me that this is particularly true of alcoholics, drug addicts, and certain adolescents — and it tends to be more true of Americans than Europeans.

If you figure out a way to change this, please let me know.