A behavioral change for economists - stop discounting our future climate
Sustainable development has created quite a buzz across the world. Countries have even decided to declare Sustainable Development Goals as the follow-up to the Millennium Development Goals. While the principles and ideals behind sustainable development have gained much verbal traction, this does not mean we have sufficiently integrated them into our actual behaviors and reasoning processes.
Nowhere is this more urgently apparent than in our traditional economic reasoning, which could scarcely be more antithetical to both the ideals of sustainable development and the effort to address climate change. This severe inconsistency results from the fact mainstream economic cost-benefit analyses place almost no weight on the long-term impacts of a given policy. In other words, by applying a social discount rate to the future, the numbers make the near-term costs of taking ambitious action to prevent dangerous climate change appear economically unjustified (raising a major barrier). This bias toward activities in the present critically undermines the effort to pursue a development pathway that is truly sustainable.
There is a straightforward solution to this problem; stop discounting the long-term impacts of today's decisions in these economic evaluations of climate change (and development policies more broadly). How we value the future in our calculations is not a simple econometric decision, but a profoundly moral and ethical judgment. Changing just one number - the social discount rate - to reflect the ideals of sustainability would completely reshape our economic discourse, paving the way for us to embark upon the kind of ambition needed to build a sustainable, climate-stable world for the benefit of present and future generations.
Category of the action
Changing public perceptions on climate change
What actions do you propose?
This proposal calls for a straightforward change in the methods used to evaluate the economic suitability of policies addressing development and climate change - lower the social discount rate (SDR) to be consistent with the principles and ideals of sustainable development. Specifically, a percentage value of zero or less is suggested as appropriate. In the context of climate change, this shift would be most relevant when considering how much mitigation activity is economically justified (i.e., the levels of national and global ambition).
To see the significant impact of discounting, consider the graph (below) which compares the % value placed on future costs and benefits (relative to ones in the present) by 4 different Social Discount Rates (SDRs). The Standard SDR of 4% (red) represents a common value economists use, while the SDR of 1.4% (orange) is the value Lord Stern used in his widely-cited 2006 Review of the economics of climate change. The Sustainable Development (blue) SDR of 0% represents a theoretical value that would place an equal weight on the future and present, while the SD+ (green) SDR of –0.25% represents a value consistent with the idea that people today should try to leave the world an even better place for future generations than it was for us. Since the blue and green SDRs give much greater regard to the future impacts of today’s decisions, they align more closely with the goals of Sustainable Development. Figure Source: Damon, 2013—The Ethics and Economics of Climate Change (master’s dissertation, University of East Anglia).
Who will take these actions?
Three main actors have a role to play in implementing this proposal: economists, governments, and citizens. Additionally, some businesses may choose to modify their behavior as a result of this proposal, although this is not required for it to succeed.
As the ones who actually conduct the cost-benefit analyses of climate policies, economists must be the ones to directly implement this proposal into their work. Some may do so willingly, but others are likely to resist. Regardless, the change itself is quite simple for them to adopt.
As the bodies responsible for crafting and implementing policies to address climate change, governments should pass legislation to support this proposal. Specifically, they could mandate that any economic evaluations used to guide their policies be consistent with sustainable development (i.e., not have discounted future impacts). They may either do this proactively, or in direct response to the will of their citizens.
It is the role of citizens to hold their governments accountable to sustainable development. If people genuinely value the future their children and grandchildren will experience, then they must ensure this desire is properly reflected in their government's policies. This may require first educating the public about the basics of discounting and climate economics, thereby enabling them to take an informed position on the subject. Young citizens, in particular, have a special "moral voice" to raise in this area.
Businesses, like governments, very often utilize cost-benefit analysis to guide their decision-making. Since these evaluations are likely to use a discount rate as well, some businesses may choose to alter their behavior in accordance with this proposal. Sustainable development could even become incorporated into the wider idea of corporate social responsibility as a way to express this responsibility over the long-term.
Where will these actions be taken?
This proposal would not be implemented geographically, but rather methodologically wherever models and analyses of climate change and our policy responses are conducted. The specific location is therefore unimportant.
How much will emissions be reduced or sequestered vs. business as usual levels?
This proposal could have a profound impact upon future emissions. Lowering the discount rate would result in economic evaluations supporting much more ambitious mitigation action. Assuming the world acted upon this new information (and it is unlikely the change in discount rate would be implemented in the absence of a will to follow through on its new analysis), then we could expect to reduce our emissions drastically in comparison to BAU level. This proposal would not directly reduce emissions, but would certainly increase our economic motivation for reducing them.
What are other key benefits?
The proposal would have a broad influence on the way society understands and approaches sustainable development and the specific problem of climate change. It would help to align our economic modeling with our desire for development pathways that will provide benefits not only today but far into the future as well.
Bringing about such a significant change in our social awareness would certainly generate a positive ripple for many other efforts. As a specific example, it would help people to see the value of projects which generate long-term benefits, while better exposing any long-term consequences of a short-sighted proposal. This will greatly improve the quality of our decision-making overall.
What are the proposal’s costs?
This proposal does not entail any direct costs for implementation, as it is calling for a shift in policy rather than a specific program, project, or initiative. Those economists who favor the use of a positive discount rate may argue this proposal would result in society pursuing a level of ambition which is too burdensome for people today, but this would only serve to illustrate the significance of the role discounting plays in our calculations. They would really be expressing disagreement with the value judgment behind this proposal to use a lower discount rate (based on their own value judgment that we should discount the future), rather than demonstrating an actual flaw or adverse impact in this proposal.
The proposal could be implemented without delay, even in time to inform the UNFCCC's 2015 treaty. It does not require any new tools or models - just the use of a different value for one variable in calculations economists already make on a regular basis.
The proposal would, however, have an effect on the suggested timelines for other projects, most notably mitigation activities. Instead of starting with a slow response to climate change and steadily increasing our ambition over time (as in the "policy ramp" described by economist William Nordhaus), we would exercise the kind of immediate ambition called for in the Stern Review. Incidentally, the Stern Review used a lower-than-usual discount rate in reaching its conclusion.
There is the potential for other proposals related to the economic treatment of sustainable development and climate change to be incorporated into this one. Anyone interested in making/combining such a proposal is welcome to contact the author regarding possible collaboration.
This proposal is based heavily upon the author's 2013 masters dissertation, "A Changing Climate for Youth: The Ethics and Economics of an Intergenerational Equity Approach to Climate Change", and his on-going work in this area. Copies are available upon request.
A partial list of notable references utilized in that dissertation include:
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