Discounting the Future


Many of the possible effects that climate change poses have a temporal component to them: they will be realized and compounded over time.  Thus, the actions and inactions of today’s generation will have significant effects on those that come afterwards.  This compounding effect has a fair amount of consensus among environmental economists; however, there is not consensus on how much we should take those future effects into account during current decision-making processes for policies that might effect climate change.  This disagreement revolves around the discount rate, defined by the National Oceanic and Atmospheric Administration (NOAA) as the “rate at which society as a whole is willing to trade off present for future benefits.”  Because investment is inherently productive (that is to say, money is interest-bearing), resources on hand today are more valuable than resources available later; the difference in the values placed upon money today and in the future is where the disagreement lies.  

Take, for example, a future benefit of $1000 to be accrued in ten years: how much would I need to put in the bank now in order to have that $1000 at the end of the decade?  At a discount rate of 5%, it would be $613.90; at a discount rate of 8%, it would be lower, at $463.20.  Thus, the higher discount rate signals that society is more focused on present benefits than future benefits.

Let’s look at this in the context of climate change.  As a society, how much are we willing to spend now in order to protect the climate system from further “dangerous anthropogenic interference,” as is the UNFCCC’s stated objective, and to avoid future costs and damages?  At a lower discount rate, we place a higher value upon the maintenance of the climate system and pay a higher premium now in order to protect future generations.  At a higher discount rate, we place a higher value upon the current energy consumption patterns and are not willing to pay as high of a premium.

In Environmental Economics, my “wild-card” elective course for the Mosaic this semester, we discussed the argument that a near-zero discount rate is the most appropriate response to the effects of climate change.  We need to take aggressive action now and invest as much in climate mitigation and adaptation as possible in order to stay below the 2 degree Celsius threshold put forward by the UNFCCC.  If we do not do so, the costs borne upon future generations will be greater, as will the damages and level of disruption to our lifestyle that will occur from climatic change.  A discount that is higher than zero or near-zero could jeopardize the 2 degree threshold, undercut the international negotiations of the UNFCCC, and threaten the generations that will come after us.

The Dollars and Cents of Inaction


Earlier in September, a report was released outlining the United States’ economic risks and vulnerabilities stemming from climate change.  The report was funded and motivated by the Risky Business Project, a group of influential and monetary heavy-hitters in the US, including former New York City major Michael R. Bloomberg, former Secretary of the Treasury Hank Paulson, and Tom Steyer, the former Senior Managing Member of Farallon Capital Management, LLC.  The stated focuses of the report include damage to coastal property and infrastructure from rising sea levels and increased storm surge, climate-driven changes in agricultural production and energy demand, and the impact of higher temperatures on labor productivity and public health.  It provides a thorough, in-depth analysis of US climate risk and the unique possible impacts for each region (Northeast, Southeast, Midwest, Great Plains, Northwest, Southwest, Alaska, and Hawaii) and argues for policy solutions aimed at adaptations in the business, investing, and public sectors specifically.

Although not certain, the economic impacts the United States is vulnerable to from climate change are grave; billions of dollars and the underlying structures and assurances of our economic system are in peril.  The costs of inaction (and thereby the costs of action at a future time) are exponentially higher than the costs of action today, and the possible benefits and stability of our economic way of life can still be preserved.  President Obama understands this, as he outlined the work his administration has done thus far to colloquially “shore up the defenses” and adapt to these risk in a speech to the United Nations Climate Summit this past week.  The President also understands that it is in the nation’s best interests to work towards decisive action on an international scale because of the global scope of the climate dilemma, and urged other nations’ leaders convened at the Summit to do what they can within their own borders to ensure that damage across all borders and all economies is minimized.