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Ecological Economics
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Analysis
a r t i c l e
i n f o
Article history:
Received 15 March 2014
Received in revised form 29 April 2014
Accepted 19 May 2014
Available online 13 June 2014
Keywords:
Future generations
Discount rate
Compensation
Climate change
Costbenet analysis
Deontology
a b s t r a c t
In costbenet analysis of climate policy there are two main approaches to discounting, each with implications
conicting with our moral intuitions. Thus, discounted utilitarianism implies that we hardly need to protect
future generations against climate change, while classical utilitarianism implies that we should reduce our
consumption across the board to benet future generations. The insolubility of the debate derives from the
fact that both classical and discounted utilitarianism permit only a single discount rate for all consequences
occurring in the same future year, while our intuitions clearly do distinguish between consequences, depending
on whether we cause adverse effects on other people's interests and violate their rights. Most people share the
moral intuition that we ought to refrain from harming others, and ought to compensate them if we were unable
to prevent harm. To regain a reective equilibrium between such deontological intuitions and economic theory
there is a need to accept different discount rates for different situations: a zero consumption discount rate in the
case of costbenet analysis of measures to prevent wrongful harm to future generations, and standard
discounting in all other cases. Applying a zero consumption discount rate means that future generations are
automatically largely compensated for climate damage that remains unmitigated.
2014 Elsevier B.V. All rights reserved.
1. Introduction
Discounting is the procedure whereby a lower value is assigned to
costs and benets the farther in the future they occur.1 Since the consequences of greenhouse gas emissions extend centuries to millennia into
the future, the choice of discount rate in costbenet analysis of climate
policy is of decisive importance (see e.g. Dasgupta, 2008; Nordhaus,
2007; Stern, 2006). Discounting at a typical constant rate of 6%, for
example, means being willing to spend less than nine dollars today to prevent a million dollars of climate damage two hundred years hence. When
standard discount rates are applied, therefore, there is hardly any climate
change mitigation effort that passes a costbenet test. Many concur
with the observation of Weitzman (1998: 201) that "to think about the distant future in terms of standard discounting is to have an uneasy intuitive
feeling that something is wrong, somewhere". Unfortunately, economists
have to date been unable to reconcile moral intuitions with economic theory. In September 2011 the US Environmental Protection Agency asked
twelve economists central to the discounting debate2 how the benets
and costs of regulations should be discounted for projects that affect future
http://dx.doi.org/10.1016/j.ecolecon.2014.05.018
0921-8009/ 2014 Elsevier B.V. All rights reserved.
generations. In a recent Science article (Arrow et al., 2013) they recommend using declining discount rates as a means of accounting for the uncertainty concerning future discount rates (see e.g. Weitzman, 1998,
2001) and uncertainty in future consumption (see e.g. Gollier, 2012;
Gollier et al., 2008). The proposed rates decline only slowly from around
3.5% to lower values, however. Consequently, the resultant damage estimates remain relatively low, in the order of $10$17/tC (=$4$5/tCO2)
in 1990 U.S. dollars (Freeman et al., 2013), still hardly a spur for stringent
climate policy. Something remains wrong, somewhere.3
When theoretical considerations and moral intuitions conict,
neither is to be trusted. To restore a reective equilibrium we need to
enter into a dialectical process, as a result of which either our intuitions
shift or we adapt our theory, or both (Rawls, 1971). The purpose of this
article is to argue that a reective equilibrium is restored by assuming
that discount rates depend on our specic duties under the circumstances. In other words, it requires incorporating deontological
elements in costbenet analysis (see also Caney, 2008; Davidson,
2006; Howarth, 1995; Padilla, 2002; Sen, 1982a; Spash, 1993,
1994). This shift is rather alien to mainstream economics, however,
which is based on the view that normative properties depend solely on
consequences. Moreover, our moral intuitions may require actual compensation for climate damage (Spash, 1994), while standard costbenet
3
It has been suggested that present damage estimates may be too low given the uncertainty about damages and the possibility of a catastrophe (see e.g., Anthoff and Tol, 2013;
Weitzman, 2009). Higher damage estimates may weaken some people's intuition that
something is wrong with discounting. For others, however, the problem will remain to
lie in the procedure of discounting itself.
41
yK t ct K t
MRRI and CDR also determine the saving rate or marginal propensity
to save (mps): K (t)/y(K(t)). If MRRI N CDR, people will increase their
savings and vice versa. A typical mps is in the order of 20% (see e.g.
Lind, 1982; Moore et al., 2004; Pearce and Ulph, 1999; Stern, 2006: 161).
There are various approaches to estimating practical values for i and
MRRI (see e.g. Nordhaus, 2007). For example, the real return on twentyyear U.S. Treasury securities in Autumn 2013 was about one percent per
year, although the average of the real interest rate on long-term
Treasury securities between 1870 and 2000 is about three percent (US
Department of the Treasury, 2005). The U.S. Ofce of Management and
Budget assumes a real, pretax average return on private investments of
seven percent (OMB, 2003).
t0
uct e
dt
where u(c) is the utility accruing from consumption, c(t) is the consumption at time t, and is the pure rate of time preference. This is also called
the discounted utility model (Samuelson, 1937). Utility (u) is usually a
concave function of consumption (c), for the higher the level of consumption, the less additional consumption offers people additional utility.
Better an additional dollar as a poor student than as a well-paid doctor.
42
4
See Baum (2009) for an extensive discussion on how the descriptive and prescriptive
approaches each comprise both descriptive and prescriptive elements.
5
See for non-welfarist consequentialism e.g., perfectionist consequentialism (Hurka,
1993).
6
Feinberg (1984) denes a wrongful harm as having two components: it must lead to
some kind of adverse effect, or create the danger of such an effect, on its victim's interests;
and it must be inicted wrongfully in violation of the victim's rights, such as rights to personal property and bodily integrity. Wrongful harms to future generations therefore do
not include only irreversible losses of key environmental qualities and natural resources,
but also avoidable damage to reproducible assets.
7
Howarth (1995, 1996) interprets a deontological approach as a sustainability or nondeclining utility constraint, based on a perceived moral duty to ensure that present actions
do not jeopardize the life opportunities available to posterity.
8
In this article, I discuss a deontological ethics as an alternative to welfarist consequentialism to accommodate the moral intuition that we have a strong duty to mitigate climate
change, but no similar duty to improve future generations' wellbeing through increasing
our general saving rate. Note however that non-welfarist forms of consequentialism are
conceivable that assign value to respecting future generations' rights not to be harmed,
for example.
43
44
E y t
t
e e
:
Epre
Epre
Zt
E y
k
k
t1k
1 mps i
mpc i mps
e e
dk:
Epre
cd t mpc
k1
at t 1 :
9
See for sophisticated integrated assessment models: DICE/RICE (Nordhaus, 2008;
Nordhaus and Boyer, 2000), FUND (Tol, 2002a, 2006), MERGE (Manne and Richels,
2004), and PAGE (Hope, 2006, 2011).
10
In the case of CO2 a single removal time does not exist. According to Solomon et al.
(2009) (see also Archer et al., 2009), about half may be removed within a few decades,
but about 20% may still be in the atmosphere after 1000 years.
11
Integrated assessment models generally assume that global damages depend on the
square of temperature increases. Including this nonlinearity in the calculation would make
the term a nonlinear function of E, the concentration of CO2-equivalent greenhouse gasses. Although this correction could alter the numerical outcomes, it has no inuence on the
core of the argument since at the margin damages remain linear with emissions, i.e. with
E.
The rst term represents the direct consumption loss due to climate
change, while the second term represents the stream of consumption
losses due to reduced savings. Eq. (7) can be rewritten as:
cd t mpc
E y t
t
e e
Epre
E y
t1
1 mps i
mpc i mps
Epre
Zt
mps ik
mps ik
dk:
e
e
k1
E y
Epre mps i mps i
t1
1 mps i
Comparing Eqs. (5) and (9) shows that for larger t the consumption effects of mitigation approximate the consumption effects due
45
c ($)
c ($)
$ 28 (= mpc $ 35)
$ 3.20 (= mpc $ 4)
t (years)
t (years)
Fig. 1. Consumption losses (c) due to climate change as a result of the emission of 1 tCO2
(dashed line) and the consumption gains if 35 dollars are not spent on mitigation (solid
line). Gains and losses balance when discounted against 0%.
Fig. 2. Consumption losses (c) due to climate change as a result of the emission of 1 tCO2
(dashed line) and the consumption gains if about 4 dollars are not spent on mitigation
(solid line). Gains and losses balance when discounted against 5%.
losses due to climate change, but future generations are hardly compensated for climate damage.
M=E
:
Epre mps i mps i
10
Given the specic parameters in this simplied example, this happens at mitigation costs of about 35 dollar per tonne of CO2 (=$130/tC).
Fig. 1 shows the consumption gains and losses if 35 dollars are not
spent on mitigation and 1 tCO2 is emitted as a result. The dashed line
shows the consumption losses due to climate change (Eq. (7)); the
solid line shows the consumption gains due to spending 35 dollars for
alternative purposes (Eq. (5)). The consumption gains show a large
consumption pulse at t = 0 when at once 80% of 35 dollars is consumed
(rst line of Eq. (5)).
There are two conclusions to be drawn from Eq. (10) and Fig. 1. First,
that in this simplied example and without discounting (CDR = 0) a
costbenet analysis is positive for any mitigation measure with costs
below $35/tCO2, and negative for any measure with costs above that
value. Eq. (10) therefore offers the criterion for efcient mitigation assuming CDR = 0.12 Note that in cost benet analyses both gains and
losses are discounted against the same rate. Different rates should be
used for different cost benet analyses, depending upon the issue at
hand, not for different terms in the same CBA. And second, that at
mitigation costs above $35/tCO2 the consumption benets of refraining
from mitigation also largely compensate future generations; at mitigation
costs below this gure they do not.
If we assume CDR = 5%, however, costs and benets are balanced at
mitigation costs of about $4/tCO2 (=$16/tC). This is the net present
value of the difference between the two consumption streams, cM(t)
due to refraining from mitigation and cd(t) due to climate change
Z
W
t0
CDR t
cm t cd t e
dt
11
12
Eq. (10) is also obtained by directly discounting climate damage (Eq. (6)) against mps
i. Nordhaus obtains basically the same equation to calculate the present value of CO2
emissions (1991: Eq. (10) and Table 3). The critical parameter in Nordhaus' model is the
difference between the discount rate on goods and the growth rate of the economy,
denoted in his article by the symbols r and h respectively. Note that I assumed that
(rh) = mpsi = 1% and that the fraction of emissions that enter the atmosphere
() is 1. Also note that Nordhaus presents values per ton of carbon instead of CO2.
46
Finally, it should be noted that there will be a poor match between the
compensating stream of consumption and the spatial or intragenerational
distribution of consumption losses due to climate change. The returns on
investment will be reaped mostly by the descendants of those presently
responsible for the highest emissions, while those hardest hit by climate
change may well be the descendants of those presently responsible for
the lowest emissions. Therefore, intergenerational justice will require
more than zero discounting in cost-benet analysis of climate policy.
It will also require the creation and maintenance of a sense of global
and historical justice according to which nations that owe their
prosperity in part to past carbon emissions compensate nations that are
disproportionally hit by climate change (see e.g. Meyer and Roser,
2010; Neumayer, 2000).
Acknowledgments
A grant by the Netherlands Organisation for Scientic Research
(NWO) 276-20-017 within its Innovational Research Incentives Scheme
(VIDI) provided funding to conduct the research for this article. The author is grateful to Thu-Ha Dang Phan, Hans-Peter Weikard and three
anonymous reviewers for very helpful comments on this work, and to
Nigel Harle for brushing up his English.
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