Download Discounting and the Environment

DISCOUNTING AND
CLIMATE CHANGE
FOREST MANAGEMENT AND CERTIFICATION
WEDNESDAY, NOVEMBER 16, 2016
LISBON, PORTUGAL
IF JULIUS CAESAR HAD INVESTED A PENNY IN
49 BC, WHAT WOULD IT BE WORTH TODAY?
• € 3,227,520,550,220,550,000,000,000.00
• € 3,2 × 1024
DISCOUNTING AND CLIMATE CHANGE
• Much of this material is borrowed from:
• “Discount rates: A boring thing you should know about (with otters!)” by David
Roberts (Sep 24, 2012, http://grist.org/article/discount-rates-a-boring-thing-youshould-know-about-with-otters/)
DISCOUNTING AND CLIMATE CHANGE
• A challenge with dealing with climate change is that there is a
substantial time lag between causes (CO2 and other greenhouse
gasses) and effects (rising temperatures, sea level rise, ocean
acidification, disruption of agriculture, loss of biodiversity, etc.)
• Furthermore, there is considerable uncertainty about the effects
• Not in general, but about the specifics
• We usually use a higher discount rate to account for uncertainty
PRICING CARBON POLLUTION
• One way to address the problem of climate change is to put a
price on carbon pollution
• The idea of putting a price on carbon pollution is to “internalize”
the cost of using fossil fuels
• Right now, when I drive my car the price I pay for the gas does not
account for the negative impacts of the carbon pollution that I am
creating
• The carbon price should reflect these impacts
PRICING CARBON POLLUTION
• To find the right price for carbon pollution, we have to answer
two questions:
• How much damage will a ton of carbon pollution do?
• How much is it worth to us (as a society) to avoid that amount of
damage?
• Science can help us answer the first question, but it can’t help us
with the second.
PRICING CARBON POLLUTION
• Let’s assume that the expected negative effects of climate change
are €5 trillion in 2100
• That’s five thousand billion euros (a lot, but likely a conservative number)
• What is the present value of that amount at a 5% discount rate?
• The value is “only” €83 billion today
• For comparison, the US military budget for 2016 is €554 billion
• What is the present value of €5 trillion in 2100 at a 3% discount rate?
• €417 billion, still less than the US military budget, but much more than €83
billion
SIDEBAR: SOCIAL DISTANCE THEORY
• Another reason why we “discount” the impacts of climate change
is “social distance”
• The basic idea is that we care more about people who are socially
close to us (e.g., family, religion, country) than those who are
socially distant (e.g., from another culture or another country)
• Since climate effects are global, a lot of the effects will be felt by
people who are socially quite distant from us
PRICING CARBON POLLUTION
• Getting back to the price of carbon…
• Yale economist William Nordhaus used a discount rate of 3
percent and came up with a price of carbon of $8/ton
• U.K. economist Nicholas Stern used largely the same scientific
data as Nordhaus, but with a discount rate of just 1.4 percent
came up with a price of carbon of $85/ton
• So what is the “right” number?
THE SOCIAL DISCOUNT RATE VS.
THE PRIVATE DISCOUNT RATE
• “Weitzman is surely correct that prevailing interest rates reveal ethically
relevant information. But it is information about how individuals, acting as
individuals and largely in their own interests, weight present versus future wellbeing. However, the social discount rate should reflect explicitly moral, otherregarding judgments about the relative importance of well-being that exists far
into the future. It is by no means clear that individuals’ self-regarding behavior
yields any insight whatsoever about what even those same individuals believe we
owe to future generations.”
• Paul Kelleher, in “Energy Policy and the Social Discount Rate,” responding to an
article by Martin Weitzman
THE SOCIAL DISCOUNT RATE VS.
THE PRIVATE DISCOUNT RATE
• “That is, the ethicists are concerned with distribution and the positivists are
concerned with efficiency. Because we can redistribute across generations not
merely through emissions reductions but in many ways, including simply by
saving more, these two concerns can be separated. The best way for the
current generation to help posterity might be through reducing emissions; but
it might be through other methods, including approaches that make posterity
richer and better able to adapt.”
• Cass Sunstein and David Weisbach, in “Climate Change and Discounting the
Future: A Guide for the Perplexed”
ECONOMICS IS “MONOTHEISTIC” WHEN IT
COMES TO VALUE
• Can all questions be answered by economic analysis?
• What is the price of saving a species from extinction?
• What price would you accept for selling your child into slavery?
• Say you could ask the people of 2100 (some of whom may be
your children or grandchildren), “would you rather inherit $1
trillion in cash or $1 trillion worth of avoided drought, storm, and
famine?” Which do you think they would choose?
PRICING UNCERTAINTY
• As mentioned earlier, economists often use a higher discount rate
for outcomes that are uncertain
• Is this appropriate?
• Should we give more weight to the “worst case scenario?”
WHAT ABOUT EQUITY?
• Economics values a person’s preferences according to their ability
to pay
• If you have no money, you cannot contribute to “demand”
• If “value” equals “price” and if price is determined by the market
(supply and demand) then if you have no money you have no value
• Perhaps we should put more value on the least fortunate, just the
opposite of what economics does
• Question: Will future generations be better off than we are?
WHAT ABOUT OTHER SPECIES?
• Economics values another species only if people (with money)
value that species
• Do species have an “intrinsic” value?
• Is it ethical for humans to cause the extinction of a species?
ECONOMICS AND ENVIRONMENTAL POLICY
• If there are values that economics is blind to, what role should
economics play in determining environmental policy?
PRICING CARBON POLLUTION
• Is there a “right number?”
• At the end of the day, isn’t it a moral judgement?
• If so, who should decide?
HOW MIGHT THESE IDEAS APPLY TO OTHER
NATURAL RESOURCES MANAGEMENT PROBLEMS?
• Pollution
• Species conservation and biodiversity
• Forest management