‘Discounting’ the future cost of climate change
Economists develop new methods to quantify the trade-off between spending now and spending later
To figure out how much we should spend fighting climate change, economists have some questions for you: How much would you be willing to spend now to make your child $100 richer in the future? What about your grandchild in the farther future, or your great-great-great-great-great-grandchild in the very distant future?
The health of the planet may hinge on the answers. Most economic analyses of climate change have concluded that we should be spending only small amounts to combat climate change now, ramping up slowly over time. This conclusion mystifies most climate scientists, who argue that immediate action is the only way to forestall dreadful consequences. And at the heart of the disagreement are these very questions, about the value of future generations’ welfare in monetary terms.
The worst consequences of climate change are likely to unfold only over decades or centuries — in other words, in our children’s or grandchildren’s or great-great-great-great-great-grandchildren’s lifetimes, not ours. The decision of how much to spend now to avert climate changes hinges on assessing how much it is worth to us now to prevent that future damage. Since most of us would prefer money now over money later, economists typically figure that we’re willing to spend only less than a dollar now to prevent a dollar’s worth of damage in a year, or in a decade. The percentage less is called the “social discount rate.”
The key is figuring out what this percentage should be. In the short term, there’s a straightforward way to do it: use the market rate on loans. After all, if you can get a bank loan at 5 percent, then getting a dollar in a year is essentially equivalent to getting a tad over 95 cents now. That means that, economically, it would make sense to spend 95 cents today if doing so would save you from a problem that would cost you at least a dollar a year from now. In other words, a dollar of future impacts has gotten discounted to 95 cents today.