tim brennan professor, public policy and economics, umbc senior fellow, resources for the future

Can the Future Compensate the Present?

Potential Limitations on Cost-Benefit Analysis in Climate

Policy Tim Brennan

Professor, Public Policy and Economics, UMBC

Senior Fellow, Resources for the [email protected]

Society for Benefit-Cost Analysis Third Annual Conference and Meeting

Washington, DCOct. 20, 2010

Society for Benefit-Cost Analysis, 10/20/10

Brennan: Limits of BCA in Climate Policy

2

Motivation: Climate policy controversial• Inability to pass climate legislation

o Not always sensible: Fight over “taxing energy” vs. “green jobs”

• Yet, assume (at least here) that (at least some) significant climate policy passes a BC test

• If so, climate policy wouldn’t be so contentious if the winners could just compensate the losers!o Green industries compensate coal minerso Developing world compensates developed worldo Using climate tax revenues to reduce payroll taxes

• But why don’t we seem to be able to go all the way?

• Motivates a look at BCA in the climate context



3

A rough list of costs and benefits

• Climate policy involves present costso Carbon taxes/permit priceso Renewable portfolio standardso Smart grid investments to facilitate wind, solar, electric

carso Energy efficiency investments, subsidieso Present lifestyle adaptations

• Climate policy results in mitigated future costs fromo Coastal flooding with sea level riseo More intense storms, tropical disease risko Hydrological, agricultural disruptiono Ocean acidification, current shifts, other ecological

effectso Adaptation to the above

• Enormous uncertainty: Itself a cost to mitigate



4

Can BCA be applied to climate? Issue is NOT …• … Generic complaints against BCA, such as

o Biases in quantification, especially politically motivatedo Relevance of willingness to pay (Sagoff)o Pre-empts democratic deliberation (Heinzerling)o Deep ecology

• [I’ve been drinking the kool-aid for too many decades]

• … Issues with the specific implementation of BCAo Weitzman infinite WTPo Stern vs. Nordhaus on discount rateso But will have something to say on both

• … Critique of underlying scienceo Accept climate change, if uncertain in scale and scope



5

Rather, limits on BCA in climate rest on following:• Normative basis for BCA depends on availability

of hypothetical redistribution of net gainso Redistributive effects not inherent in BCAo Allows BCA to transcend distribution question

• Pareto-improvement requires that future generation winners compensate those in the present for sacrificeso Greenstone: CO2 has 100 year half life

• Redistribution of gains from future generations to present generations impossibleo Redistribution of money not the point; redistribution of

goodso Goods can’t go in a time machine

• => Climate policy unavoidably redistributive

• Inability to redistribute the KEY issue: Is that correct?



6

“Inability to redistribute”: Government debt?• Inviting as way to help the present, have the

future pay

• Run deficits to pay for climate policy?

• But need to think of redistribution as goods—people don’t get utility from money

• Deficits redistribute (ability to purchase) goods from lenders to borrowers today, in exchange for sending (more) (ability to purchase) goods tomorrow

• Can represent intergenerational tradeoff for the borrowerso E.g., future U.S. citizens sending wealth to China

• But it can’t work globally—only for the borrowers



7

Other redistributional policy adjustments?• Reduce other public investments with future

benefitso Education, research support, infrastructureo But are these defended by appeals to distant generations?o Provide net benefits to present households (including utility

derived from welfare of children)

• Need to compensate by reducing expenditure on other policies designed to benefit future generationso Yucca Mountain: Spending to keep nuclear waste radiation

out of the environment for thousands of years (Anthony Paul)

o Could be a good candidate, as more nuclear power reduces greenhouse gas emissions

• Let future generations figure out the nuclear waste problem, in exchange for GHG reductions todayo But is this large enough to constitute compensation?



8

Redistribution and the interest rate debate• What does the discount rate mean?

o Appropriate rate “time preference” plus discounting utility for added per capita wealth over time

• Nordhaus: Use market rateo Nordhaus argues discount should be inferred

from market behavior, gets 4% real rate

• Stern: Only a very low time rate of discount defensibleo Stern assume zero time discount on ethical

grounds; gets 1.4%, => major climate effort

• For Stern, $1000 in a century worth about $246 today; for Nordhaus, $18.30 – different by a factor of over 13



9

Redistribution => Stern wins• If policy could be Pareto-improving, it wouldn’t

mattero Everyone at every time better offo No need to weigh future benefits against present losses

• Who’s utility is maximized in the Ramsey integral?o Utility of people today from future consumption?o Utility of future people relative to utility of present

people?

• If the first, Nordhaus; if the second, Stern

• Inherent redistribution => Stern winso Nordhaus is right in comparing investments

• Redistribution brings in ethics, not market rateo Rawls’s “veil of ignorance” – equalize wealtho Non-overlapping generations: market rates ethically

dubious



10

Does Weitzman’s argument bridge the gap? No• Unlimited obligation to invest now to avoid

potentially catastrophic climate change has two steps

• 1: Empirical statistical measures from finite data have “fat tails” on catastrophe end of distribution

• 2: Standard “constant relative risk aversion” utility measures lead to - expected value of climate change

• I can’t challenge the first statistical/empircal assertion

• But the second is extrapolation out of application rangeo CRRA comes from quadratic Taylor series approximation to

expected utility: Local, not global

o Would imply infinite effort to reduce risk, which isn’t observed

Can other defenses for BCA help?• Mimics what a market would do were there no

failureo Justification for using market values for public good

assessmento E.g.: statistical value of life, value of timeo Don’t reduce risk than people are willing to payo Justifies using future market prices (such as they may

be) to value climate benefits, but not redistribution

• Wealth maximization as intrinsically justifiedo Posner vs. Dworkin: Is wealth intrinsically valuable?o Could justify market-like pecuniary externalitieso E.g.: Using BCA to support public good reduces

demand for private substituteso But “hypothetical consent” requires Pareto

improvemento Otherwise, back to Rawls’ “original position”



11



12

Implications for climate advocates not good• Three options:

Disingenuous, Anti-democratic, or Difficult

• Disingenuous (maybe): Claim that climate harms are not distant, but near-termo That wasn’t what the science seemed to say—but is

this changing?o Implies present winners could compensate present

losers without need for compensation from future generations?

• Anti-democratic: Exploit biases in political influenceo Special interest winners can defeat general

population losers, even if CBA tilts the other wayo The “Green Jobs” argument?



13

That leaves “Difficult”• Inculcate sense of moral obligation to the

future

• What we “owe” future generations in terms of present sacrificeso Straightforward wealth effecto Ability to experience an “authentic” environment

(assuming McKibbin’s “The End of Nature” isn’t quite that)

• Deep ecology: Environment has standing apart from WTP

• Moral duty, not future generations, provides the compensation

• Can people in developed world be motivated to make material sacrifices?

tim brennan professor, public policy and economics, umbc senior fellow, resources for the future

Documents