Transcript Environmental unsustainability: how much should we discount the

Environmental unsustainability:
how much should we discount
the future?
Donald Hay
Jesus College and Department of
Economics, Oxford
25 June 2008
Environmental unsustainability
Two key processes:
• Biological resources – fish, forests,
animals – over time harvested to
destruction/ extinction
• External effects in production – pollution,
CO2 emissions – over time generate
cumulative costs to others, even globally.
Discounting the future: what
does it mean?
• Investing £100 at 5% gives £105 in a
years time
• A receipt [or cost] of £100 in a year’s time
is worth £95.25 now, if the interest rate is
5%. Present values.
• Over many years, the discounting is
compounded.
Discounting: interest rates and
present values of £1
Interest
rate
0.0
25 years
hence
1.00
50 years
hence
1.00
100 years
hence
1.00
0.5
0.88
0.78
0.61
1.0
0.78
0.61
0.37
3.0
0.48
0.23
0.05
6.0
0.23
0.05
0.003
Implications of discounting
• Consumers’ attitudes to future consumption:
firms’ attitudes to investment. Myopic behaviour?
• Biological resources: if regeneration is less than
the discount rate, then no point in conserving
stock to next period.
• Climate change: identified cost of £1million in 50
years time: present value at 0.5% is £780k, but
only £230k at 3.0%: so investment of £250k to
prevent cost only worth it if interest rate is a bit
less than 3.0%
• Cost of carbon: build up of greenhouse gases
over the long term: current cost much higher if
discount rate is low, so carbon tax should be
higher.
What value for the discount rate?
• Economists disagree – what’s new about
that!
• Stern Review: 2.2% for the current
century, and 1.4% long term
• Nordhaus: 6% is more appropriate
• Why the disagreement?
How much should we discount
the future?
• The role of savings and investment in making
provision for future generations
• The ‘pure rate of time discount’: (a) ‘impatience’;
(b) non zero risk of destruction of the earth
[hazard rate]
• Future generations getting wealthier – so
discount rate depends on: (a) growth in
incomes; and (b) the weight to be given to
higher incomes accruing to our descendants
Why not use market rates?
• Reflects the actual preferences of current
consumers. But future generations lack a
voice in current capital markets, and their
interests need to be protected
• Avoids crowding out investment in projects
other than climate change.
• What is the ‘market rate’?
Alternative approaches
• Insuring the future: investment to avoid
extreme outcomes.
• Choosing what not to discount:
commodities OK, but not the environment
• Preserving human rights in the future
including rights not to suffer dangerous
climate change. Is the appropriate
discount rate for rights zero?
The contribution of Christian moral
reasoning
• Theocentric versus anthropocentric approaches
to environmental issues
• Taking the side of Stern against Nordhaus:
reasons for supporting low discount rates
• Collective insurance is compatible with
‘stewardship’ role for humanity
• Caring about the rights of future generations
• Fallen human nature and the need for policy
interventions