Climate change: pay now or ask for credit?

An ethical as well as an economic question

If we continue business-as-usual, climate change — according to both the worst prognoses and the more optimistic ones — will confront humanity with serious consequences and a high price tag. However, the cost to society of mitigating climate change by reducing greenhouse gas emissions is also high. So inevitably, the question arises: what we should do? Pay today for mitigating climate change or pay later to deal with its consequences?

This question is most often presented as a mere economic problem. Not so, says John Broom in the Scientific American article 'The ethics of climate change'. The answer, he maintains, also entails ethical decisions.

John Broom refers to the 'Stern Review on the Economics of Climate Change' by Nicolas Stern and the UK Treasury, and to the studies of William Nordhaus at Yale University. While Stern concludes that urgent action to control Greenhouse Gas emissions is required, Nordhaus’s position is that the need to act is not acute. Broom identifies and explains the premises at the basis of this contradictory outcome.

The problem of the discount factor

The difference between the conclusions of Stern and Nordhaus primarily derives from fact that each economist uses a different discount rate for future goods. The economic value of goods diminishes when they only become available at a certain point in the future. Therefore, the value of future goods is discounted when they are compared with present day goods. Stern uses a discount rate of 1.4% while Nordhaus is using 6%. The latter figure is also the one that is used by the money market.

The discount rate is a consequence of three elements:

• Economic growth: the more goods people have, the less they value new goods
• The idea that people in the future can make a lower claim on goods, because they will be richer than we are (= prioritism)
• The idea that people in the future can make a lower claim on goods or simply because of their temporal distance from us allows us to care less about them than we do about our own generation (= temporal impartiality)

The first element is a non-ethical parameter, based solely on economic prediction. However, the degree to which the second and third elements should be incorporated in the discount factor, if at all, is a purely ethical decision.

Nicolas Stern does not accept temporal impartiality, William Nordhaus does. Nordhaus substantiates his choice by saying that the average behaviour of people on the money market includes temporal impartiality. So he sees 'temporal impartial thinking' as a democratic fact that we must accept, and not as an ethical choice. He accused Stern of basing his calculations on his personal ethical premises.

John Broom disagrees with the Nordhaus choice:

1. Goods on the money market are of a different kind than those that are at stake due to climate change, so this market cannot reveal ethical judgements about the value of future well-being.
2. A democratic standpoint is not the average of individual opinions. Most individuals tend to be impatient, but it is the power of a democratic society that it can surpass this short-sighted way of thinking by debate and deliberation. The Stern standpoint is one of many valuable contributions to this democratic debate.

So, regardless of which discount factor is used in these kinds of calculations, its choice will always be an ethical one.

Minimising the risk at any cost?

It is remarkable that Stern, Nordhaus, and Broom all accept economic growth as an absolute fact. Nevertheless, Broom points out that there exists a small but real chance that climate change could lead to a worldwide catastrophe. Will the global economy keep on growing in times of such a catastrophe? Economic growth is not a foregone conclusion nor is it a natural law. Consequently, there is a certain degree of risk that people in the future will not be richer than we and would therefore result in an inverse discount factor.

This idea can be incorporated into the arithmetic by conventional risk calculation. But is that the end of it? I don’t know. Maybe there is another ethical question arising here, at the risk of sounding naïve. If something seems to be threatening the peaceful continued existence of our civilisation and we are technically capable of removing this threat, should we not always try to do that, whatever the cost? If we are not heading towards such a catastrophe, it might turn out cheaper to pay for the consequences later instead of acting now. But do we want to rely on 'if' for such a serious matter? In other words, to what degree are we willing to put the future at risk and which cost are we willing to pay to remove this risk?

I don’t know the answers to these questions, but I think these kinds of problems require a wide global debate. It is time that the topic on the global public forums shifts from whether climate change is real or not, to how and when we prefer to pay the cost, a decision that should be based on both economic and ethical considerations.

References

'The Ethics of Climate Change: Pay Now or Pay More Later' by John Broome in Scientific American