EVENTS

Date:	Friday, October 3, 2008
Time:	12:00 PM -- 2:00 PM
Location:	Wohlstetter Conference Center, Twelfth Floor, AEI 1150 Seventeenth Street, N.W., Washington, D.C. 20036

The Climate Debate: Who's Looking Out for Future Generations?

WASHINGTON, OCTOBER 9, 2008--There is widespread agreement that climate change caused by greenhouse gases is a serious problem that could lead to drastic and possibly catastrophic environmental changes, doing great harm to the welfare of future generations. But according to legal scholars at an AEI Reg-Markets Center event on October 3, going all out to cut emissions today is not the most valuable use of our resources. David A. Weisbach of AEI and the University of Chicago and Cass R. Sunstein of Harvard University presented their Reg-Markets Center working paper on one of the most important and controversial variables of climate change policy analysis: the discount rate.

The discount rate is the premium that people are willing to pay to consume this year rather than next year. If people prefer to consume today because they believe that they will be richer next year, then the discount rate is high. If people prefer to save because they believe the future may be the same as today, the discount rate is lower. Climate change policies like emissions mitigation are likely to reduce the welfare of current generations while benefiting future generations, and the discount rate determines how that welfare loss is distributed across generations.

Weisbach and Sunstein described the disagreement over the choice of the discount rate as a debate between two schools of thought: positivists and ethicists. Positivists equate the discount rate with the market rate of return. Projects for which the rate of return is less than the market rate should be rejected, because resources could be more productively engaged elsewhere. Ethicists disagree with this analysis, arguing that the market rate will not adequately reflect all the social or long-term benefits of climate change mitigation projects. Additionally, climate change investments are so immense that they will likely alter the economy fundamentally, changing the market rate of return itself. Because of the benefits that the market rate of return neglects, ethicists argue that the true discount rate should be lower and that climate change action should be more aggressive.

Weisbach and Sunstein argued that the two camps' arguments are not mutually exclusive. While the ethicists are discussing how much we need to leave to the future, Weisbach explained, positivists are discussing which projects to choose given how much we have chosen to leave for the future. Weisbach and Sunstein concluded that the positivists have the more efficient viewpoint, but, as the ethicists contend, cost-benefit analysis might breach current generations' moral obligations. That said, Sunstein added, refusing to discount is not the appropriate response. "If we are leaving [future generations] less or worse off than ethics requires," he said, "we should think about the best way to do that, and refusing to discount isn't going to be helpful."

Steve Newbold, an economist at the Environmental Protection Agency, disagreed with Sunstein and Weisbach's characterization of the ethicists' arguments. He advocated a more generous interpretation and contended that ethicists may have a healthier appreciation for the complexities of climate policy--including risk, uncertainty, and the growing scarcity of environmental services--than the positivists. "The ethicists may just be trying to bring these issues to the analysis in the simplest way possible: by adjusting the discount rate downward," he said.

Richard Newell of Duke University pointed out that the positivist approach--when applied carefully--is complicated by a number of real-world issues, including taxation and uncertainty. While he agreed that investing in the policies with the greatest rate of return is desirable, the feasibility of different options is also relevant to climate policy decisions: "Even if we'd like to maximize the rate of return, if we had a net positive investment in greenhouse gas mitigation, even if it's not the biggest one we could imagine, if it's positive and we have nothing else on the table, I think economics suggests that we should take it."

Balancing the positivist and ethicist approaches will be a key climate policy consideration during the next administration. "If it turns out that emissions reductions are the best way to help [future generations], great," Sunstein said. "But it would be a bit of a surprise if that were the best way of helping them."

--ADAM SCHMIDT and POH LIN TAN

For more information about AEI's Center for Regulatory and Market Studies, visit www.reg-markets.org.

For video, audio, and more information about this event, visit www.aei.org/event1800/. Weisbach and Sunstein's working paper, "Climate Change and Discounting the Future: A Guide for the Perplexed," is available at www.reg-markets.org/publications/abstract.php?pid=1286. 

For media inquiries, contact Véronique Rodman at 202.862.4870 or vrodman@aei.org.

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