Page 167 - Environment: The Science Behind the Stories

THE SCIEnCE BEHInD THE SToRy

Ethics in Economics: other considered whether the future

Discounting and should be discounted simply because
it is the future. This latter discount
Global Climate factor (called a pure time discount
Change factor) is essentially an ethical issue
because it assigns explicit values to
How much will it cost our society if the welfare of future versus current
we do nothing about global climate Sir Nicholas Stern, head of the generations.
change? To address this question government Economic Service, united The Stern Review used a pure
and to help decide how to respond to Kingdom time discount rate of 0.1%. This means
climate change, the British government that an impact occurring next year is
commissioned economist Nicholas (GDP) of 5–20% by the year 2200 judged 99.9% as important as one
Stern to lead a team to assess the (FIguRE 1). occurring this year. It means that the
economic costs that a changing climate Stern’s team also calculated that welfare of a person born 100 years
may impose on society. But once by paying just 1% of GDP annually from now is valued at 90% of one born
Stern’s report was published in 2006, a starting now, our society could stabilize today. This discount rate treats current
debate ensued that had as much to do atmospheric greenhouse gas con- and future generations nearly equally.
with ethics as with economics. The dis- centrations and prevent most of these Future generations are down-weighted
pute centered on discounting (p. 165), future economic losses. The bottom only because of the (very small) pos-
an economic practice heavy with ethical line: Spending a relatively small amount sibility that our species could go extinct
implications. of money now will save us much larger (in which case, there would be no
To produce the Stern Review on expenses in the future. This conclusion future generations to be concerned
the Economics of Climate Change, caught the attention of governments about).
Stern’s research team surveyed the worldwide; for the first time, leading Some economists viewed this
burgeoning scientific literature on economists were advancing a strong discount rate as too low. Yale University
the impacts of rising temperatures, economic argument for tackling climate economist William Nordhaus proposed
changing rainfall patterns, rising sea change immediately. a discount rate starting at 3% and fall-
level, and increasing storminess (see The Stern Review’s conclusions ing to 1% in 300 years. He maintained
Chapter 18). It then estimated the eco- depend partly on how one chooses to that such numbers are more objective
nomic consequences of these climatic weigh future impacts versus current because they reflect how people value
changes and tried to put a price tag on impacts. Stern used two discount fac- things, as revealed by prices we pay in
the global cost. The report concluded tors. One accounted for the likelihood the marketplace. Indeed, when econo-
that without action to forestall it, that people in the future will be richer mists assess capital investments or
climate change would cause losses in than we are today and thus better construction projects (say, development
annual global gross domestic product able to handle economic costs. The of a railroad, dam, or highway) they

ran simulation models to predict how our economies would As resources become scarce, prices rise, and individuals and
fare in the future. Model runs that used data matching our firms gain incentive to turn to different resources, shift to
society’s current consumption patterns consistently predicted different products, or reuse and recycle. All of these actions
economic collapse as resources become scarce (FIguRE 6.13a). will alleviate pressure on the resource. As Simon put it:
The team experimented to see what parameters would produce
model runs predicting a sustainable civilization (FIguRE 6.13b). The natural world allows, and the developed world pro-
They used these results to make recommendations for achiev- motes through the marketplace, responses to human needs
ing sustainability. and shortages. . . . The main fuel to speed our progress is
Cornucopians, such as the economist Julian Simon and our stock of knowledge, and the brake is our lack of imagi-
the statistician Bjorn Lomborg, counter that Cassandras under- nation. The ultimate resource is people—skilled, spirited,
estimate the human capacity to innovate and the degree to and hopeful people who will exert their wills and imagina-
which technologies can increase our access to resources. They tions for their own benefit, and so, inevitably, for the ben-
166 also argue that market forces help us avoid resource depletion. efit of us all.

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