Impacts on Future Generations

The Timing of Climate Change Policy

Impacts on Future Generations

Long-term societal problems such as human-induced climate change also raise issues regarding the impacts on future generations from polices enacted (or not enacted) today. Specifically, the use of a technique called “discounting” to value benefits of actions today over the long-term and concerns about binding future generations must be explored.

“Don’t put off until tomorrow what you can do today,” Ben Franklin once counseled. But, for economists, this rule is not absolute. When we spend a dollar to pursue any objective today, we don’t have the use of that dollar for other purposes. So economists try to calculate what is lost and gained by doing something now as opposed to later through the use of discounting.

The discount rate is related to the interest rate. For example, if we say that the discount rate is 5 percent, we mean that a dollar today is worth $1.05 next year, because it can be invested. Alternatively, we might say that a dollar’s worth of benefits next year, such as those gained by ameliorating climate change, is only worth 95 cents today. But if future values are discounted this way, what is the current value of eliminating damages that are 100 or 200 years into the future? Using a standard discount rate, they become so small as to be unimportant — a dollar’s worth of benefits 100 years from now, using a 5 percent discount rate, is worth three-quarters of a cent today. While the standard discount rate makes sense for strictly financial investments, many believe that the rate should be much lower when considering long-term social issues like climate change and the protection of endangered species.

New economic research suggests that standard models of long-term costs and benefits may substantially undervalue climate damages in the distant future for another reason: the inherent uncertainty regarding what future discount rates will be.¹¹ [1] Failing to recognize the implications of uncertain discount rates could lead to underestimating the effects of climate change 400 years into the future — such as a significant rise in sea level — by a factor of tens of thousands. When the entire life-cycle of climate damages is considered over 400 years, incorporating uncertainty into discounting estimates raises the value of those estimates by as much as 95 percent.

The proper treatment of discounting, therefore, puts more weight on the losses future generations will experience. Future generations will also be affected by the decisions we leave to them. Because climate change is such a long-lived problem, it will require consistency and cooperation from decision-makers in many sequential generations: whatever the policy, it will require future decision-makers to play some role. This raises the issue of whether the policies we choose require decisions or actions that future generations will be able to make or implement.

Some economic analyses have suggested that the best way to reach any given GHG concentration in the atmosphere is to continue emitting those gases for several decades until technology improves, and then suddenly and quickly drive emissions down once better technology has been developed. This path means that future decision-makers will have to make dramatic cuts in GHGs regardless of their situation. However, like a Congress that is reticent to repeal a temporary tax cut, future decision-makers may not be able to muster the political will to take the actions that have been assigned to them if the burden is too onerous, regardless of the proximity of the danger.

Another problem related to the “delay” strategy concerns technological progress. The delay strategy relies on dramatic technological breakthroughs during a period when emissions would go unabated. But if there are no restrictions on emissions, there is no obvious reason for firms to perform the necessary research; nor would they have any motivation to engage in the experimentation and learning that drives productivity gains. For all of these reasons, solutions that require future decision-makers to change their behaviors in a particular way cannot be implemented. “The only way to ensure compliance with a commitment to [climate change policy] in the long run,” noted one team of economists, “is to enforce reductions in emission flows in the meantime.”¹² [2]

Thus, acting now on climate change provides the appropriate level of attention to the rights of future generations, and avoids “passing the buck” to them in ways that abrogate our own responsibilities.

NEXT: Technology and Learning by Doing [3]

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