If the human species stopped consuming and producing today, how long would it take to reverse our impacts on climate change? This scenario is not exactly plausible today in today’s world but it spawns a question regarding our future of when do we need to shift our mindset from total consumption to environmentally conscious consumption? Most economists tend to agree that this shift is necessary at some point, but there is a balance between heavily investing now or kicking the can down the road and letting future humans figure it out with assumed future riches. The difference between the two extremes lies within an assumption of the discount rate of the economic modeler. Discounting is the process of determining the present value of a payment or payments that is to be received in the future (Cook lecture 18/11/2020). Nordhaus (2007) further explains that there are two concepts involved in discounting. There are real returns, which are easily quantifiable based on historical data; and the social discount rate, which is subjective based on the modeler. The social discount rate aims to capture the economic welfare of different households or generations over time (Nordhaus 2007). A social discount rate of zero assumes that future generations are treated the same as present-day generations, while a positive value means that future welfare is reduced or discounted when compared to current generations (Nordhaus 2007). Economists have not agreed on an acceptable social discount rate to consider for climate change, which leads to differing opinions on how and when it implement policies to best deal with the crisis. This paper will review the impacts of social discount rates on deciding whether we should sacrifice consumption now or delay the change of mindset to a later date.
Before discussing when we should reduce our societal consumption, it may be beneficial to define what encompasses the word. As humans, we consume everyday through a variety of mediums – from our workplace to our households; we purchase products, eat, drink, travel to work, and generally utilize the earth’s resources to make our lives easier and more convenient. Plainly put, we overconsume as humans and the impacts of this negatively affect the world in which we live by polluting the atmosphere with greenhouse gas emissions and destroying ways for the environment to naturally process carbon. While government regulations, technology, and personal choice can reduce our consumption habits, the ability to overconsume remains largely available (Gibson et. al 2010). Gibson et. al’s (2010) research found that urging households to behave responsibility within the spectrum of consumption has its limits and ‘responsible’ behavior is developed within social practices, rather than acting upon a bigger cause. Household consumption most often remains unchanged because it falls within a household’s definition of ethical (Gibson et. al 2010). Tactics to change behavior such as promoting public awareness of global risks are ineffective as well as is treating and defining people plainly as ‘consumers’ rather than human beings (Gibson et. al 2010). Overall, people may accept climate change science, but acting on it may be unthinkable within the confines of everyday life (Gibson et. al 2010). Gibson et. al (2010) notes that the best way to reduce your environmental impact may be to be poor, since economic activity is strongly paired with fossil fuel use. Even though the rich may be the strongest advocates of ‘green’ practices, they pollute more through high levels of car and air travel, more and larger houses, more food wastage, and generally more consumption (Gibson et. al 2010).
Impacts of Social Discount Rates
It has been debated between economists on how to apply social discount rates in the field of climate change (Nordhaus 2007). Caney (2014) detailed three types of social discount rates and their impacts to climate change policy which are summarized below in Table 1.
Table 1: Implications of Discount Rates on Climate Change Policy
|#||Type of Discount Rate||Implication to Climate Change Policy|
|1||Pure Time Discounting||No reason to delay action|
|2||Opportunity Cost Discounting||Limited justification for delaying action|
|3||Growth Discounting||Pass on costs to future generations|
Source: Caney 2014
As shown the outcomes of the assumed type of social discount rate results in a range of implications on when to take action with climate change policy. Caney (2014) further details that there are two arguments for assuming a pure time discount rate – the moral equity argument and the best use argument. The moral equity argument states that “a person’s place in time is not, in itself, the right kind of feature of a person to affect his/her entitlements” (Caney 2014). It is moral to accept our responsibility now and to penalize someone solely because they were born later would disadvantage them through no fault of their own (Caney 2014). The best use argument states that the use of a resource is influenced by the proximity in time of the enjoyment of the resource which results in a suboptimal use of resources (Caney 2014). These two arguments support that there is no reason to delay climate change policy.
Opposers of a zero pure time discount rate note that it is wrong for economists to propose their value judgement on the subject and that a descriptive rate should be applied (Caney 2014). Opposers say that current generations would need to make large sacrifices for future generations and that the only way to mitigate this is to accept a positive pure time discount rate to ensure that excessive demands are not imposed on current generations (Caney 2014). Caney (2014) argues back against the opposition that a zero pure time discount rate cannot result in any particular demands of future generations.
There are two other types of social discount rates that economists propose to besides a pure time discount rate. One is growth discounting which assumes that people will have more economic wealth in the future and it is wrong to make the poorer current generations pay rather than the richer future generations (Stern 2008). When this social discount rate is utilized in analyses, the result is to pass on the costs of climate change to future generations (Caney 2014). Growth discounting raises levels of uncertainty of when will future generations be more well-off than current generations (Caney 2014)? What happens in the near-term if a major global event occurs such as a global pandemic like the one we are experiencing now? The world is certainly not richer now than it was before COVID-19 in early 2020. There is also much uncertainty if the assumption turns out to be wrong and future generations are not richer than we are now, causing even poorer generations with a deteriorating planet to pay for previous generations mistakes, which is similar to what we are experiencing now when climate change work should have begun decades ago. When will we stop kicking the can down the road?
The last social discount rate that some economists use is opportunity cost discounting which attempts to justify delayed action of policy (Caney 2014). It argues that it is better to delay mitigation and invest in technology innovation now which will generate greater benefits in the future (Caney 2014). This social discount rate also has similar problems as a growth discount rate, in which it assumes that wealth can enable adaption to climate change (Caney 2014). It assumes that by delaying now, we will develop technology in the future that will be more cost effective than investing in it now. Mitchell (2012) is quick to note that innovations that reduce carbon intensity will be more difficult to achieve if we take the easy approaches first and face more challenging technological hurdles later. Again, opportunity cost discounting becomes a question of when will we stop kicking the can down the road? Mitchell (2012) calls for policies that proactively constrain population, affluence, and consumption while respecting other human values. If we fail to do so, we will be forced to constrain these factors by the impacts of climate change (Mitchell 2012).
The analysis presented justifies that a zero pure time discount rate should be used for climate change economics and we need to take action on climate change now. The review presented here reinforces the idea that we, as society, cannot wait till we have passed the point of no return in regards to climate change affects. Consumption and other factors linked to accelerating climate change must be cut down at a household level through appropriate policies. Overconsumption is still too accessible for humans and we continue to exploit our natural resources in a way that is damaging our planet to a level that will no longer make it livable. We cannot continue to put the burden on future generations on the assumptions of better technology and more wealth.
Caney, S. (2014). Climate change, intergenerational equity and the social discount rate. Politics, Philosophy & Economics, 13(4), 320–342. https://doi.org/10.1177/1470594×14542566
Gibson, C., Head, L., Gill, N., & Waitt, G. (2010). Climate change and household dynamics: beyond consumption, unbounding sustainability. Transactions of the Institute of British Geographers, 36(1), 3–8. https://doi.org/10.1111/j.1475-5661.2010.00403.x
Mitchell, R. B. (2012). Technology Is Not Enough. The Journal of Environment & Development, 21(1), 24–27. https://doi.org/10.1177/1070496511435670
Nordhaus, W. (2006). The “Stern Review” on the Economics of Climate Change. https://doi.org/10.3386/w12741
Stern, N. (2007). The Economics of Climate Change. https://doi.org/10.1017/cbo9780511817434