The egregious buffoon Richard Murphy also chimes in:
There’s actually a serious point here. These campaigns about divesting from fossil fuel companies because their reserves aren’t going to be worth anything. The proponents of this idea seem to be entirely ignorant of the very basic economics of climate change. Which is, as we all know, really about discount rates.
Think about that for a moment.
What Stern did was draw this out over the climate change question. Entirely correctly, he pointed out that if we use market interest rates to value things over a century or two (and of course market interest rates are simply the aggregate opinion of us all as to that value of stuff in the future rather than the here and now) then the net present value of vast damages in 2150 are spit now. So, we’ll do nothing to avert those vast damages in 2150 which is something the people of 2150 won’t thank us for.
The book value of reserves and resources which may be exploited in the future we can calculate – just as with the damages from climate change – by applying a discount rate to them. And of course we do apply a discount rate to them: we apply the market interest rate to them. The net present value of a share is the net present value of all future income (ie, dividends) from that share and of course we are discounting that at market interest rates.
D’ye see where this is gannin’ yet? Quite: the net present value of reserves that may or may not be exploited in 50 years’ time is pretty much nothing. Because discounting these large sums at 8 or 10 per cent market interest rates means that the net present value is piss.