Researchers find new way of valuing the welfare of future generations in climate policy

Posted on 24 Feb 2014 in

One of the most controversial issues in climate change economics and policy could be resolved by a novel method put forward in a new journal paper by researchers from the ESRC Centre for Climate Change Economics and Policy, at the London School of Economics and Political Science, and Columbia University, New York, which is published today (24 February 2013) in ‘Proceedings of the National Academy of Sciences’.

Dr Antony Millner and Professor Geoffrey Heal outline a new way of resolving disagreements about how the welfare of future generations should be taken into account when assessing the costs and benefits of policies to limit the risks of climate change.

Economists assess potential costs and benefits by calculating how the consumption of goods and services by current and future generations would be affected by different policies. Policy consequences that occur in the future are down-weighted using a consumption discount rate which accounts for the extent to which future generations might be richer (and hence an additional unit of consumption would have less value to them than an additional unit would have to today’s generation) and the extent to which we care more for the welfare of current generations than future generations. The rate at which our concern for the welfare of future generations declines with their distance from us in time is called the ‘pure rate of time preference’ or ‘utility discount rate’.

High values for the pure rate of time preference mean relatively less importance placed on the welfare of future generations, and lead to higher consumption discount rates and hence less aggressive policies to reduce greenhouse gas emissions. Low values for the pure rate of time preference mean relatively more importance placed on the welfare of future generations, and lead to lower consumption discount rates and hence more aggressive policies to reduce greenhouse gas emissions.

Dr Millner and Prof Heal point out that economists disagree about what the appropriate value of the pure rate of time preference is, depending on their own particular ethical viewpoint or approach. For instance, some argue for a low value of 0.1 per cent per year, which means that the welfare of someone living 45 years from today is considered to be worth about 96 per cent of the welfare of someone living an identical life today. Others argue for a much higher rate of 1.5 per cent per year which means that the welfare of someone living 45 years from today is considered to be worth only about 50 per cent of the welfare of someone living an identical life today.

The solution, according to Dr Millner and Prof Heal, is to calculate a representative value for the pure rate of time preference that takes into account the different opinions about its value. Dr Millner said: “Everyone may have a different viewpoint about how much we should account for the impact of decisions we make today on the welfare of future generations. In that sense, the choice of the pure rate of time preference is an ethical issue, much like the question of how much social inequality we are willing to tolerate as a society. We argue that there are many different legitimate opinions, and that none should receive a privileged place in economic analyses of policies to tackle climate change.”

Dr Millner and Prof Heal also note that their method should help governments when they calculate the social cost of carbon, a key indicator that is used in setting carbon prices.

Dr Millner said: “We hope that our new method will help to resolve the ethical impasse in the economic analysis of climate change policies, and allow researchers and policy-makers instead to focus on other important issues, such as the extent to which economic models are capable of accurately reflecting the damage that unmanaged climate change could potentially cause in the future.”

Notes for editors

  • The ESRC Centre for Climate Change Economics and Policy (https://www.cccep.ac.uk/) is hosted by the University of Leeds and the London School of Economics and Political Science. It is funded by the UK Economic and Social Research Council (http://www.esrc.ac.uk/). The Centre’s mission is to advance public and private action on climate change through rigorous, innovative research.