What discount rate should we use with climate change?

Posted in: Comment, News and Updates

How's this for a succinct summary of the dilemma of our time:

"Climate change is many problems in one. Developing and deploying zero-carbon technologies is a formidable challenge. So is the politics of co-ordinating disparate groups to achieve the necessary collective action. ...

Behind all this, however, lies an economic problem. Humanity must work out how many resources should be diverted from other, valuable uses—from life-enriching consumer goods to funding for pensions—to the task of limiting global warming. These calculations may look bloodless, but they are built on weighty moral assumptions, namely, how to value other people’s lives. Though it is hard to know what might finally impel humanity to take the threat of climate change seriously, speaking more plainly about its moral costs might help.

The crux of the challenge is straightforward. Modern economic activity generates carbon dioxide, which accumulates in the atmosphere and increases the global temperature via the greenhouse effect. Higher temperatures impose large, growing and long-lasting costs on humanity. The world has already heated up by around 1°C, compared with pre-industrial times. Warming of 3°C relative to that benchmark by the end of this century would be likely to reduce economic output by trillions of dollars and cause tens or hundreds of millions of additional deaths, compared with a rise of just 1.5°C. But limiting global warming to that level would require the use of resources that might otherwise boost current well-being. Taxes might have to rise to pay for investment in zero-carbon electricity generation, for example. Over the past few decades economists have been working to figure out how much it makes sense to forgo today in order to have more jam tomorrow. ..."

This is not my summary, sadly (I'm never so economic with the wordage) but the beginning of a complex set of arguments in the Economist about discount rates: The moral assumptions embedded in economic models of climate change which I heartily recommend to you even though it's a difficult read.

This is helpful because it puts economics centre stage (environmentalists don't always do that; environmental educators hardly even try largely because they are largely ignorant of the dismal science).  And yet in real life and in policy, economics is to the fore as "Climate policy ... determines how much life-threatening environmental harm the current generation will impose on scores of future ones".

Put starkly, how much money should we spend now in order to save lives in, say 100 years time, when it means not spending money on helping people now?  The Economist article ends:

"A shift in our view of future humans might not be enough to persuade humanity to get its act together on climate change.  Moral logic often fails in the face of distance—geographical, cultural and temporal.  But it would still be right to give future humans their due, and adjust economic models accordingly."

Discuss ...

Posted in: Comment, News and Updates


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