1. Discounting and Climate Change
Forest Management and Certification
Wednesday, November 16, 2016
Lisbon, Portugal

2. 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

3. 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, should-know-about-with-otters/)

4. 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

5. 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

6. 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.

7. 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

8. 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

9. 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?

10. 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 well- being. However, the social discount rate should reflect explicitly moral, other- regarding 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

11. 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”

12. 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?

13. 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?”

14. 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?

15. 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?

16. Economics and Environmental Policy
If there are values that economics is blind to, what role should economics play in determining environmental policy?

17. 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?

18. How might these Ideas Apply to other Natural Resources Management Problems?
Pollution
Species conservation and biodiversity
Forest management