Are we worth more than our grandkids?

Last updated on: December 4, 2006 at 6:07 pm by Desh Kapoor

Are we worth more than our grandkids? 2006-12-04T18:07:36-06:00 Desh Kapoor

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In UK this report came out and has raised a lot of eyebrows. As usual, there are camps on either side of the debate. But, to me, it is amazing that we are debating AT ALL!

One of the most popular argument used by many is that the calculations of the cost-benefits do not match up .. as they use the benefits accruing and line up all the costs and then discount the resultant by a certain factor – which is usually 3-5%.. well that is because the money tomorrow is worth less than today. But is it just money? Is a tree or a breath of Fresh Air only assessable in money terms? How about the availability of these basic needs to our great grandkids?

The question that we need to answer is: Are we worth More than our grandkids?

Here is a good article from Economist on this.

ONE month after Sir Nicholas Stern published his review of the economics of climate change, his peers have had time to say what they think of his work. And the answer, it seems, is: not a lot.

Sir Nicholas, the head of the British government’s economic service, concluded that the potential costs of climate change were so large, and the costs of shifting away from fossil fuels so relatively modest, that the world should take urgent action.

Those who disagree with that analysis and prescription fall into three main camps.

The first group says that he lacks political realism–a charge well made by Robert Samuelson, in the Washington Post, when he called the report “a masterpiece of misleading public relations.” Policies that might curb greenhouse gases, Mr Samuelson said, would “require politicians and the public to act in exceptionally ‘enlightened’ (read: ‘unrealistic’) ways.” They would have to impose and bear costs that would not deliver returns until after they were dead.

This may be true, but it is unfair as a criticism of the Stern review, which took this problem as a starting point.

A second camp has accused the report of selection bias. One eminent climate-change economist, Richard Tol, complains that, “For water, agriculture, health and insurance, the Stern review consistently selects the most pessimistic study in the literature.” There is something in this, though Sir Nicholas would claim that he chose his studies according to the robustness of their methodology.

A third line of criticism, made by William Nordhaus, a father of climate-change economics, has emerged as the most forceful. It turns on fairness, and how we place a value today on benefits in the future.

When economists do a cost-benefit analysis, they try to place a present-day value on benefits assumed to be enjoyed in the future. To do this they discount the future value by an annual percentage rate, a discount rate, which is typically set at around 3-5%.

But such calculations are typically done for benefits expected to come in 20, 30 or, at most, 50 years’ time. Climate-change economics requires a time horizon of centuries. A typical discount rate would assign almost no current value to benefits accruing in, say, the 23rd century. So why spend money today on something with no apparent value today?

Sir Nicholas argues that, in this case, we are wrong to use a typical discount rate. How can we say that our great-great-great-grandchildren are worth less than we are worth ourselves? He argues for a discount rate of 0.1%. That places a much higher present-day value on benefits accruing centuries into the future, and thus makes a stronger case for spending money now.

Mr Nordhaus retorts that there are other ways to look at the ethics of inter-generational investment. One option would be to take into account the expected wealth of future generations. Global per capita consumption is increasing by 1.3% a year in real terms. At that rate today’s average income per head, of $7,600, would rise to $94,000 by 2200. If climate change were to reduce global income by 13.8% over the same period (a figure derived from Stern), the average income per head would rise to $81,000 rather than $94,000. On that basis, says Mr Nordhaus, it would be fairer to constrain the income of future and richer generations, than to impose additional costs on a poorer generation today.

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