TCS Daily


The Discount for the Future

By Garth W. Paltridge - May 27, 2005 12:00 AM

Even if there is to be a sizeable climate change over the next hundred years, is it worth trying to reduce it? What would be the long-term benefit relative to the short-term cost? One can draw some very broad conclusions on the matter.  

Referring to the upper figure of the diagram, let us imagine a time-line into the future and a scenario where, as a consequence of global warming, human economic productivity is reduced. (It is just as likely to increase, but let us go along with modern philosophy and imagine the worst case). The left-hand box is an idealised graph of the cost every year over a number of years of actions by the nations to reduce the build-up of CO2 in the atmosphere. Let us imagine that the actions are effective in limiting climate change, and thereby are effective in lessening the reduction in human productivity. The right-hand box represents the money saved each and every year after the action is completed. The saving continues way into the future, so that, given sufficient time, the benefit of the action must always exceed its short-term cost -- however large that sum of money may be. Ergo, runs the argument, the action should be taken!

 



Things are not quite that simple. From the point of view of a person of the present, the amount he or she will pay for a 'good' gets less and less as the time for the delivery of that 'good' recedes into the future. Who, for instance, would pay present day prices for a new car to be delivered in 50 years time? We are talking here about what the economists call "discount for the future". For purely economic goods (things like cars and food and annual productivity, to all of which it is relatively easy to assign a value in dollars) the typical discount is of the order of 5 or 10 percent per year. As a consequence, and in the context of these economic things, the value to us now of the annual benefit of limiting greenhouse warming reduces pretty much to nothing within a generation or two -- as is illustrated here in the bottom figure of the diagram. For this reason it is virtually impossible to sustain a purely economic argument for massive action to limit the world's consumption of fossil fuel. From the point of view of the here and now, discount for the future will ensure that the cost will almost certainly exceed the long-term benefit.

So the argument for greenhouse action turns mainly on the long-term benefit to intangible things like the environment, natural diversity, quality of life and so on. Their value too (however one might define it) is also subject to some sort of discount for the future.

Of course there are some who would argue against any future discount of the value of, say, the existing environment. But there must be some such discount. Let's face it, there are probably very few people willing to pay good money today to preserve the present environment simply for the benefit of unknown people a million years into the future -- or even for the benefit of unknown people a thousand years into the future. On the other hand there are surely quite a few people happy to spend money to look after the environment and quality of life for people only a hundred years into the future -- say three or four generations ahead. For such people, their subconscious discount for the future must be something of the order of a percent or two per year.

The question then arises as to how one might value the present environment (or the present natural diversity, quality of life or whatever). Probably the only sensible way is to find out what people might be prepared to pay annually to maintain the status quo. In general one might expect that amount to be a function of national wealth, and in general again one might imagine as a starting point that people would be prepared to pay something of the order of what they currently spend on health insurance. It doesn't really matter to the argument here. The 'present day value' of the environment by this sort of measure is the sum of all the annual payments into the future, where each annual payment is appropriately discounted for the future at the economic rate of, say, 5 or 10 percent per year.

Let us suppose that without remedial action the changing climate would begin seriously to affect the environment two generations hence -- lets say in 50 years. Its discounted value to us (discounted at the lower 'environmental' rate of a percent or two per year) reduces to something pretty small after a further 50 or so years. The bottom line of the argument is that the very maximum benefit one might derive from spending money on climate proofing the present environment for the third and subsequent generations down the line is of the same order as the cost -- this give or take a factor of two or three.

Given all the uncertainties about climate change itself and whether in any event the impact of climate change on the environment would be positive or negative, it is not exactly an open and shut case that one should spend a lot of present-day money on reducing CO2 emissions now. Perhaps it would be better to save one's pennies to pay for adaption to climate change, if indeed active adaption should become necessary a couple of generations down the track.

Emeritus Professor Garth Paltridge is a retired Director of the Institute of Antarctic and Southern Ocean Studies, University of Tasmania, and former Chief Research Scientist of the CSIRO Division of Atmospheric Research. This article is based on a paper given at a Tech Central Station-sponsored conference, "Managing Climate Change -- Practicalities and Realities in a post-Kyoto Future" held in Canberra in April 2005.

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