ABSTRACT
Economists differ widely in their recommendations as to how much effort should be put into reducing greenhouse gas emissions. They differ in their recommended reduction targets and in the corresponding carbon prices to guide policy instruments such as taxes. Among the best-known exponents of opposing views are Nicholas Stern of the London School of Economics and William Nordhaus of Yale University. According to Stern, the social cost of carbon is about $85 per tonne of CO2 (Stern 2007: xvi), while Nordhaus offers a value of $7.40 per tonne of CO2 (Nordhaus 2008). In line with these values, Stern advises radical action now, while Nordhaus advises very modest climate policy. Laymen might easily conclude that this disagreement derives from controversy about human influence on the climatic system, particularly given the disproportionate attention given in the media to ‘climate sceptics’. Although some economists do indeed consider the IPCC’s assessment of the science of climate change ‘too alarmist’ (Tol 2014) or, on the contrary, stress the importance of low-probability catastrophes for climate cost-benefit analysis (CBA) (Weitzman 2009), Stern and Nordhaus hardly disagree on the actual science of climate change. In fact, as the IPCC already noted in 1995 (Arrow et al. 1996), most disagreement among economists originates from their use of different discount rates, the parameter used in CBA to compare future and present gains and losses. A discount rate of 5 per cent, for example, implies that a cost of $100 next year is valued equally to a cost of $95 this year, and that a cost of $100 in two years’ time is valued equally to a cost of about $91 this year. There are two related reasons why the choice of discount rate is of decisive importance in climate economics. First, in the case of climate policy the time spans separating costs and benefits may be very long indeed. Because of the inertia of the climate system, cause (emission or mitigation) and effect (climate damage) may be separated by millennia. Over such a time period a small change in the discount rate applied has huge consequences for the outcome of CBA: at a discount rate of 1 per cent, $1000 in 200 years’ time is valued as $137 today; at a discount rate of 5 per cent, $1000 in 200 years’ time is valued as only $0.06 today. Second, since cause and effect may be separated by millennia, it is future
generations in particular that will be affected by our present choices. This makes the comparison of present and future costs and benefits pre-eminently an issue of ethics, and thus also subject to moral dispute. Although this dispute has a pedigree going back at least to the eighteenth-century writings of Jeremy Bentham and David Hume (Robinson 1990), the debate has intensified over the last decades given its importance for energy and climate policy. The literature shows a wide variety of opinions. See for landmark overviews e.g. Lind et al. (1982), Price (1993), Arrow et al. (1996) and Portney and Weyant (1999). Some authors dispute that the discount rate is a matter of ethics and argue that the discount rate should be deduced from the market interest rate. Others have argued for different discount rates on the basis of different moral theories such as utilitarianism, prioritarianism and deontological approaches. The purpose of this chapter is to provide an introduction and a literature review with respect to the issues involved in the longstanding debate in ethics and economics on whether discounting the future is morally justifiable. Section 1 will first offer a short introduction to Ramsey’s neo-classical model of economic growth. Understanding the basics of Ramsey’s model is pivotal for understanding both the vocabulary of the discounting debate and the complicated relation between ethics and efficiency. Subsequently, Section 2 describes the prescriptive-descriptive debate: the debate between those who argue that the discount rate ought to be based on preferences revealed through actual saving behaviour and those who argue that the discount rate ought to be based on moral principles. A variety of these moral principles is successively discussed in Sections 3 to 7. Section 7 offers some concluding remarks.
