Academic journal article The Future of Children

Weighing the Costs and Benefits of Climate Change to Our Children

Academic journal article The Future of Children

Weighing the Costs and Benefits of Climate Change to Our Children

Article excerpt

Summary

Our efforts to put the brakes on climate change or adapt to a warming climate present a fundamental tradeoff between costs borne today and benefits that accrue to the children and grandchildren of the current generation. In making investments today that affect future generations' prospects, we need to think carefully about how we value their welfare compared to our own.

A common economic formula recommends giving up only 5 cents today for every dollar of benefits 100 years in the future; we call this discounting the future. Underlying this approach is the assumption that future generations will be much better off than our own, just as we are much wealthier than our ancestors were. Would our descendants' agree with this approach? Are there reasons to put more value on future benefits?

William Pizer, Ben Groom, and Simon Dietz discuss three possible reasons that we might put a higher value on future benefits. First, people disagree considerably about the correct discount rate. Other plausible interpretations of society's preferences or observed data could increase the weight we place on future benefits by as much as a factor of five. Second, we may have failed to correctly value future climate change impacts, particularly those related to the loss of environmental amenities that have no close monetary substitutes. Third, we may not be properly valuing the risk that a warming climate could cause sudden and catastrophic changes that would drastically alter the size of the population.

Ultimately, the authors write, many of the choices about how we value future generations' welfare come down to ethical questions, and many of the decisions we must make come down to societal preferences--all of which will be difficult to extract from data or theory.

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Future generations are the current generation's children, grandchildren, and so on. That intergenerational perspective gives rise to extremely thorny questions about how to evaluate and make trade-offs between the wellbeing of current generations and the wellbeing of their descendants. In the context of climate change, we can't avoid intergenerational comparisons because greenhouse gas emissions today produce impacts that will last for hundreds of years. Therefore, we must analyze trade-offs over extremely long time horizons. In short, the payoffs from our own costly mitigation efforts will accrue to our children and their descendants. As will be made plain, to make decisions in the face of such dynamics, we must carefully analyze efficiency and equity. In particular, we can imagine asking whether our children will look back and take issue with how we valued their welfare compared with our own.

The principal economic tool for decision making is cost-benefit analysis (CBA). In a CBA, all current and future costs and benefits, or net benefits, in each period are given a weight and are then summed, with costs entered as negative benefits. Policy options with higher net benefits are generally preferred. Current costs and benefits have a weight of one. The weight placed on future costs and benefits is determined by a number known as the discount rate and, more specifically, in the case of societal rather than private decision making, the social discount rate (SDB). The SDB determines how quickly the weight placed on future costs and benefits diminishes with the time horizon being considered: the higher the SDR, the lower the influence of future costs and benefits on present values. When we consider long time horizons, as we must with climate change, small changes in the SDR can lead to extremely large differences in the weight we place on future costs and benefits.

What determines the SDR depends on how we conceive of social welfare across time and/or generations in the first place. The standard CBA approach is grounded in a welfare framework known as discounted utilitarianism (DU). In DU, welfare in future years and for future generations is added together, with future generations effectively viewed as extensions of ourselves further into the future (a representative-agent approach). …

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