Climate change will influence human, biological and physical systems in the near, as well as in the far off future, but uncertainties hinder getting an accurate picture of how mankind and the environment will be affected. The anticipated consequences range from coral bleaching through acidification of the oceans, to increased severity of natural disasters such as hurricanes, droughts, the flooding of coastal areas through glacial melting, to the extinction of vast amounts of species (Stern, 2007) . As we are at least partly to blame for such, it is our duty to act and minimise the damage future generations are exposed to and achieve intergenerational equity. However in evaluating abatement, mitigation or adaptation projects, general practise is to discount future costs and benefits. This essays aim will be to elaborate the implications discounting might have on future generations.
Uncertainties arise when one cannot be certain about the outcome. Considering climate change, there is severe uncertainty regarding the scale and timing of potential consequences. There is scenario uncertainty, in relation to future GHG emissions, and model uncertainty, concerning errors in accurately representing the dynamic aspects of earth’s systems (Stern, 2007). Nevertheless, scientists’ warnings of the potential dangers our resource depleting and emitting actions accompany oblige us to take some action today.
The main underlying assumption is that climate change is at least partly man-made, and it is our responsibility to act despite existing uncertainties (IPCC, 2014) . A further complication is that the consequences of climate change unfold slowly over time. The effect of our actions today might only have limited impact in the coming decades, but might result in severe consequences towards the end of the century and the centuries to come. Hence, unsustainable use of earth’s scarce and finite resources for our benefit today may result in intergenerational inequity in the form of social and economic costs imposed on future generations.
With international treaties, such as the United Nations 2030 Agenda for Sustainable Development (UN, 2015) we committed to a pathway to achieve economic, social and environmental equity within and across generations (Dietz & Neumayer, 2009) . To develop strategies and policy to tackle climate change, some framework may be established for evaluation purposes. Edith Braun Weiss supplied such a concept determining equity based on religious, cultural and legal traditions (Weiss, 1989). She states that each generation would expect to inherit planetary conditions not worse than the ones experienced by the generation before. In this context she calls for legally enforceable norms to conserve options, quality, and access of and to resources, a framework she calls ‘Declaration of Planetary Rights and Obligations to Future Generations’. In short, she calls for each generation to act in a way to ensure that forthcoming generations inherit a planet comprising equitable diversity of natural and cultural resources, a planet where resources are in no condition worse than before received, as well as equal access to these resources.
In short, in tapping natural resources and transforming them in a way to enhance our well being, present generations exert some force on the attributes (i.e. option, quality, and access) of such resources. Although not immediately visible, such forces can have severe consequences in forthcoming centuries and the uncertainty of such binds us to some action now.
It might sound quite straightforward to base the need of action on ethical judgements based on religion, culture, and other social norms, however investing in abatement, mitigation, and adaptation also has an economic side. In general, the ultimate aim of policy is to improve the wellbeing of individuals (Bosetti et al., 2014). In deciding over policy measures concerning adaptation or mitigation, policy makers often use Cost-Benefit Analysis (CBA). Hereby, costs and benefits, often measured in monetary terms, are compared directly, showing whether a project’s benefits exceed its costs, thereby given a necessary condition of a project to go ahead (Pearce et al., 2003).
The particular issue with climate change is that costs are born today, whereas benefits will unfold in the distant future. General practise is to compute the net present value (NPV) (Pearce et al., 2003). By doing so, all future return, excess of benefits over cost, is discounted to present value by some discount rate. The rationale of discounting is mainly twofold. Firstly, future generations may be better endowed; hence, a one-unit increase in consumption would be proportionately less enriching for a richer generation than for a poorer. Secondly, welfare theory suggests that people prefer current consumption to future consumption simply for the reason of impatience and due to the chance of not being alive to enjoy such consumption in the future (Stern, 2007).
In CBA, the outcome heavily depends on the discount rate chosen. With high discount rates, CBA will show that abatement efforts should be postponed to the future, whereas low discount rates call for action now. The further we go into the future, the less value we attach to benefits in discounted terms, possibly leading to no action to achieve intergenerational equity depending on the rate chosen. Hence, there is uncertainty about defining the discount rate. One way of defining such is the descriptive approach, where market returns, for instance on risk free assets such as government bonds are chosen. The main rationale is that by using such, abatement measures are only to be chosen if the adoption results in redistribution of capital rather than a reduction of consumption today (i.e. capital is not drawn from higher yielding investment opportunities)(Kolstad et al., 2014). However, there are major drawbacks. First and foremost, the maturity of climate change impacts is by far higher than any traded assets in financial markets. One way of viewing interest rates it that they represent the risk perception of individuals in transferring consumption into the future. This anyhow is in terms of individuals’ own consumption, not in terms of transferring consumption across generations. Thus, rates might not accurately reflect the risk associated in transferring consumption to future generations.
An alternative approach is brought forward by the Ramsey-Koopman-Cass construct. In the ‘Ramsey Equation’, the discount rate, ρ, depends upon a time discount rate, δ, and the product of the elasticity of marginal utility of consumption, η, and the growth rate of consumption at time t, gt. In other words, the social discount rate is equal to the sum of the rate at which future utility, or wellbeing, is discounted and the product of the responsiveness of utility to an increase in consumption and the expected growth rate: ρ_t=δ+ηg_t(Kolstad et al., 2014) . This represents the prescriptive approach to discounting, where δ and η can be based on ethical principles. Table 1 summarises various recommendations for the parameters by different authors.
Table 1
(Kolstad et al., 2014)
It shows that a rate for δ of close to zero is widely accepted, as well as that η should be somewhere between 1 and 3.
Although providing a good framework, the model has several drawbacks. It neglects uncertainty regarding future economic growth. Observing table 1, the computed social discount rate appears to be highly dependent upon the anticipated growth path. The higher the growth, the better off are future generations and the larger are their resources to pay for climate change damages themselves, and vice versa. However, future growth of consumption and income is increasingly uncertain the further away future generations are. Although there is the possibility to build a model, weigh possible growth paths according to their likelihood and develop an expected growth path, there is still uncertainty over the assigned probabilities, and whether the economy will actually follow such expected growth path.
With increasing uncertainty, policy action should increasingly focus on benefitting individuals of such uncertain future (Kolstad et al., 2014). One proposition is declining discount rates as brought forward by Weitzman (as in Pearce et al., 2003). Similar to growth rates, discount rates could be chosen by attaching some weight to different options and computing an expected value. However, uncertainty will arise in respect to the chosen weights. Weitzman’s proposal is to evaluate different interest rate scenarios for different periods of time according to their discount factors, averaging such, and subsequently computing the relevant discount rate . The results are summarized in table 2 below.
Table 2
(Pearce et al., 2003)
This will result in declining rates to be used to discount the far off future. Thus, such regime would reflect uncertainty and care for intergenerational equity, in that it assigns value to the mere possibility of severe damages, and hence, the benefits of abatement, as Claude Henry said: “uncertainty should not be inflated and invoked as an alibi for inaction” (as cited in Stern, 2007).
Figure 1 illustrates how such declining discount rates might affect the NPV of marginal damage of an additional ton of CO2 emissions measured in dollar for a 400 and a 200 year period. It is worth observing that with conventional discounting, damage accruing within the second 200 years is assigned almost no value in present terms, which is questionable, as at least some GHGs emitted today will be present then (Hartmann et al., 2013). Gamma discounting represents Weitzman’s approach, Newell and Pizer’s approach bases their future interest rate scenarios on historic uncertainties, and Li and Löfgren achieve declining rates by attaching weight to a conservationist and a utilitarian discount rate, and letting the social rate approach the lower one with the passage of time (Pearce et al., 2003) . All three show higher damage in present terms, and increased weight attached to uncertain futures.
Figure 1
(Pearce et al., 2003)
There are several drawbacks with today’s evaluation of climate change efforts, culminating in international papers discouraging climate change actions, for instance the Copenhagen Consensus (Dietz & Neumayer, 2009). Firstly, the focus on consumption or income is no criteria to judge peoples wellbeing. As according to Amartya Sen (Sen, 1985), not the resource in possession are what matter, but what an individual can make out of it. Therefore, although future generations may be richer in monetary terms, environmental conditions might not allow them to enjoy their resources in the way they would otherwise. Too much emphasis is placed on value rather than justice and rights, and therefore introducing a system of principles is an important step towards intergenerational equity, although enforcement of such, and defining what might constitute a breach is difficult. In general, the issue is not one of change, but of fast change. A compromise might be policy designed to minimise direct impact and provide future generations with a minimum of resources to accommodate any potential threat that might arise (Weiss, 1989) . This becomes especially apparent when observing the ethical framework brought forward by Hans Jonas (Jonas, 1976). Such states that with technological progress humans augmented themselves with the power to influence their surroundings. However, with power comes responsibility, and such extends beyond material needs, and towards the goal of self-preservation. Thus, the mere possibility of an event causing near- or total extinction, regardless the uncertainty attached should lead to action preventing such. My suggestion is to use CBA as a guiding instrument, however, never as a deciding one. Discount rates should be in form of declining rates, in order to represent increased care for future generations.
To sum up, climate change accommodates various uncertainties, mainly regarding timing and scale of its impact. The main issue underlying is that although uncertain, some changes are to be anticipated, which are already present today, however will become much more severe towards the end of the century. Thus, in making policy appraisal not only today’s, but also future generations have to be considered. Todays most common practise of CBA, hereby imposes further uncertainties, mainly regarding the interest rate to be used to discount benefits and costs arising in the far future. The choice of such discount rate is detrimental to future generations, as high rates imply no action today, whereas low rates imply to act now for the benefit of future generations.