The Price of Everything (34 page)

This approach sounds reasonable when taken at face value. But it has a problem: it places too little value on the people of the present by making the future extremely expensive. That’s because there isn’t just one future generation to save at the present generation’s expense, but many. Say we were justified in protecting future people from the damages of warming as long as the benefits, as a share of their future incomes, were greater than our investment was, as a share of our incomes now. Adding up the bill for the rescue over a large number of future generations would justify humongous spending today.

This kind of counting allows the
Stern Review
to estimate that the future costs of climate change are equivalent to a fifth of the world’s income “now and forever.” He reaches this price tag by adding very small costs in the near future with larger and larger costs in faraway centuries.

 

 

IF WE WERE
to apply the most common economic techniques to value the future, we would not accept this conclusion. Outside the debate over climate change, money today is worth more than the same amount of money tomorrow. That’s not just because of inflation : a businessman will make an investment only if it generates a higher return than putting the money in the bank to earn interest.

The return on corporate investments in the United States, before taxes, has averaged 6.6 percent per year over the past four decades. Government agencies are directed to use a “discount rate” of 7 percent to compare the expected future benefit of some programs with their up-front cost. This choice assumes that, excluding the effects of inflation, a dollar today—if applied productively—will be worth $1.07 next year, $1.145 the year after that, and $752,932 two centuries down the road. It means that to spare damages of $752,932 in two hundred years we should spend no more than $1 today.

One can transport this rationale to environmental issues. A forest in which 100 trees will produce 7 new ones next year has a 7 percent discount rate. Saving 100 trees from loggers this year has the same value as saving 107 trees next year.

Thinking in these terms, Stern’s approach amounts to using an extremely low discount rate. The idea that averting a dollar’s worth of damage in the future is worth spending a dollar today would amount to choosing a discount rate of zero. Stern chooses a slightly higher one, just a smidgen above the rate at which people’s income is growing.

William Nordhaus of Yale University, one of the most prominent American economists working on climate-change models, disagrees pretty radically with Stern. Like Stern, he argues we must reduce emissions of greenhouse gases to try to get a grip on climate change. But he puts a much higher bar on how much we should be willing to invest in the endeavor. He points out that more than half the damages forecast by the
Stern Review
are expected to occur after the year 2800. Why, he asks, should we sacrifice a substantial share of our current welfare to avert costs that are so far off in the future?

Nordhaus argues that in estimating future damages we should use a rate that reflects the productivity of long-term investments. He argues it would be dumb to use present-day money to undertake an investment to tackle warming if it produced a lower return. That’s because we could achieve a higher profit investing it in something else. We could use the returns of our investment to tackle warming in the future and we would still have money left over. “The discount rate is high to reflect the fact that investments in reducing future climate damages to corn and trees and other areas should compete with investments in better seed, improved rotation, and many other high-yield investments,” Nordhaus writes in his book
A Question of Balance,
about options to combat climate change.

Future generations will take advantage too of the fecundity of these investments. Millions of poor farmers on Bangladesh’s vast alluvial plains would surely welcome investments to stop the sea level from rising and swallowing their farms. But the Bangladeshis of the future, like those of the present, might be better served if the money were allocated instead to develop their economy so they could get a better job outside agriculture farther up the hill.

Using Nordhaus’s discount rate, which he estimates at 4 percent per year, leads to a radically different view from Stern’s about the merits of expensive interventions to save the future earth. Say we are deciding how much to spend to avoid a climate shock that would generate damages amounting to 13.8 percent of the world’s gross domestic product in the year 2200—which happens to be the estimate for that year in the
Stern Review
’s bad scenario. If economic growth over the next 190 years replicates the seventy-five-fold jump of the past 190 years, the damages would amount to about $640 trillion in today’s money. Using a discount rate of just above 1 percent, as Stern suggests, we would be justified to spend up to nearly $80 trillion to save the day 190 years down the road. But at a 4 percent discount rate, as Nordhaus uses, it would make sense to invest in this effort only if we could do it for about $385 billion. If we couldn’t do it for that amount, we would be better off deploying the money on some other, more productive objective.

If she is listening to economists, Dasgupta’s hypothetical voter is probably dizzy by now. President Harry Truman famously called for a one-armed economist to get around the profession’s penchant for analysis of the “on the one hand, on the other hand” variety. Nordhaus and Stern fit the bill—each offering up one clear choice. But they do have two hands between them. Stern’s analysis calls for a big immediate investment to combat climate change. He suggests that we start by setting a price of about seventy-five dollars per ton on emissions of carbon dioxide—sixty-eight cents per gallon of gas. He expects people and companies would dash to conserve energy, develop energy-efficient technologies, and switch into alternative, nonfossil fuels. As these technologies got cheaper, the levy on emissions could fall to about twenty-five dollars per ton of CO
₂
by the year 2050.

Using a similar set of climatic facts, Nordhaus advises us to address the problem more gradually. He proposes that the levy on CO
₂
today should start around $10 per ton and rise as the impact of carbon concentrations in the atmosphere increase, to about $200 at the end of this century. To the average American, who consumes 20 tons of CO
₂
annually, the bill would start at around $200 per year.

Nordhaus would tolerate more climate change than Stern. He would allow $17 trillion in climate-related damages to happen simply because he estimates we would need to spend more than that to eliminate them. By 2100, temperatures would be about 2.6 degrees Celsius hotter than in preindustrial times. But though we would suffer more damage, we would get value for money from our investments: avoid $5 trillion in damages at a cost of $2 trillion. In Nordhaus’s analysis, which does not contemplate the fast technological progress assumed by Stern, the cost of Stern’s strategy to cap warming at 1.5 degrees could balloon to nearly $30 trillion in present value, and prevent only $12.5 trillion worth of damages to the earth. And we’d still be left with $9 trillion worth of climate-related damage.

The European Climate Exchange, a market for companies to buy and sell permits to emit CO
₂
, which was launched in 2005 as part of Europe’s efforts to reduce carbon emissions, suggests that investors believe the world’s policy makers are closer to adopting Nordhaus’s views than Stern’s. In the summer of 2010, the future contract for December priced one ton of CO
₂
at about €15 a ton—about $18.75.

What should our voter instruct her elected representatives to do? Dasgupta doesn’t quite know. And he is well versed in the economics of climate change. Perhaps, he suggests, cost-benefit considerations should be eschewed in favor of what is known as the precautionary principle, which would support large-scale spending to curb carbon emissions on the grounds that there is a chance, even if highly uncertain, of an Armageddon-like climatic catastrophe if we don’t.

He argues it might be more politically feasible than we think to mobilize resources to save future generations. If voters in rich countries saw ourselves as directly responsible for future generations’ plight, we might overcome our hostility toward foreign aid, which stems from the belief that the developing world’s poverty is, to some extent, the developing world’s fault.

Our voter could seek the high ethical ground by tweaking the parameters—maybe trimming Nordhaus’s 4 percent by a point or two. After all, even though it’s probably right to discount the value of money, environmental goods are likely to become more valuable as they become scarcer. So the monetary discount rate should be adjusted to take into account the rising value of environmental “goods.” Saving that forest with 107 trees next year will be worth more than saving the 100-tree forest today because though we will have more money next year there will be fewer forests to go around. So each surviving tree will be more valuable to us.

Maybe our hypothetical voter should just follow her belly. Ultimately, Dasgupta argues, “it is a ‘gut feeling’ about the awful things that could occur if the global mean temperature were to rise another 5 degrees that should make us very scared.” And there’s no parameter to tell us precisely how to price this fear.

Or maybe she could cross her fingers and hope we will devise some clever technology to stop us from colliding head-on with the limits of the planet. Some scientists have been toying with the idea that geo-engineering might save the day from climate change: putting mirrors in orbit to reflect part of the sun’s energy away from the earth, or pumping sulfur dioxide into the stratosphere. This would replicate the effects of the 1991 eruption of Mount Pinatubo in the Philippines—which sent up so much stuff into the air it blocked the sun and reduced surface temperatures by half a degree Celsius over the next two years.

Unfortunately, some studies suggest this strategy could trigger catastrophic drought in parts of the world. Still, it has the advantage that if it works, it would work fast. Moreover, it is cheap: a few billion at the most. This approach would fit what we have done, at least since Malthus’s day. Every time we have faced physical constraints, we have deployed technology to squeeze more out of the finite resources of the planet.

Only forty years ago, as concern over population growth and environmental degradation was shaping into an environmental movement, the economist Julian Simon decided to challenge the prevailing concern about the state of the earth and dared the Stanford ecologist Paul R. Ehrlich, a noted prophet of doom, to a bet.

Ehrlich had built his reputation dusting off Malthus’s expectation of impending environmental collapse. “In the 1970s the world will undergo famines—hundreds of millions of people are going to starve to death,” he wrote in
The Population Bomb
in 1968. In
The End of Affluence,
published in 1974, he forecast “a genuine age of scarcity” by 1985. Simon would have none of it. In 1980 he challenged Ehrlich to choose any natural resource he wanted—from coal to copper to corn. If these commodities were to become scarce as the world’s population grew, their price would naturally rise. Simon bet that the price of whatever Ehrlich chose would, instead, decline over the next decade.

Ehrlich bet $1,000 on a basket of five metals—chromium, copper, nickel, tin, and tungsten. He scoffed that explaining to an economist the inevitability of rising commodity prices was like “attempting to explain odd-day-even-day gas distribution to a cranberry.” But Simon won. The world’s population grew by 800 million people over the decade. But phone companies abandoned copper wire for fiber optics. Tin cans were displaced by aluminum. And the price of every one of the metals in Ehrlich’s chosen basket fell, after accounting for inflation. Tin and tungsten plummeted 71 percent.