I went to a debate about climate change a few days ago and, uncharacteristically, decided to take notes of my thoughts throughout the talk. In order that they not be wasted I’ve decided to do a series of posts on some of the interesting points that came up in the course of the seminar. Today’s topic is whether it would be less costly to delay doing something about climate change.
The argument is made that, if we delayed doing something for a while, then it would be cheaper to do it. The reason it would be cheaper is twofold: first, technology would be better and, secondly, the discounted cost of starting in the future is lower than the discounted cost of starting now even though reductions will have to be more dramatic if we start later. Obviously uncertain technological change is a risky thing to bank on; however, the key issue I want to address here is the discount rate.
The first thing to recognise is that people don’t discount in an exponential fashion, but rather in a nearly hyperbolic fashion. What that means is that they will suffer from time inconsistency in their decision making: they’ll plan to do something but then, when the time comes, they won’t want to do it any more. This situation is particularly important for climate change policy. If we delay now because the sacrifice isn’t worth it then we need to make greater sacrifices in the future. When we get to the future it is unlikely to seem optimal to act straight away. Absent of any precommitment mechanism it is unlikely that any plan to radically decrease emissions starting in the future will be followed. Unfortunately, governments tend not to have access to such commitment mechanisms.
The second issue with discount rates concerns inter generational equity. By saving money now and letting the environment deteriorate we can compensate the future generations in cash for the loss of environmental services. However, by allowing the environment to deteriorate we haven’t only cost them in terms of environmental services: we’ve also restricted their choice set. It isn’t possible for them to buy back the lost biodiversity or destroyed ecosystems. Those changes are essentially irreversible. So, when making the decision to delay, we need to ensure that we compensate future generations for both the degraded environment and the reduced choice set that they are left with.
I’ll finish by noting that I have omitted to mention the vast issue of animal welfare and the costs that we impose upon them by delaying. That is a topic I’ll leave for another time.