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Climate Change and Future Generations

Climate Change and Future Generations

By Richard L. Revesz and Matthew R. Shahabian
September 22, 2010

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Filed under Academic Articles/Working Papers, Transparency

Efforts to reduce greenhouse gases and control climate change implicate a wide range of social, moral, economic, and political issues, none of them simple or clear. But when regulators evaluate the desirability of climate change mitigation through cost-benefit analysis, one factor typically determines whether mitigation is justified: the discount rate or the rate at which future benefits are converted to their present value.

Even low discount rates make the value of future benefits close to worthless: at a discount rate of three percent, ten million dollars five hundred years from now is worth thirty-eight cents today—that is more than we would be willing to pay now to save a life than under a standard cost-benefit analysis. Discounting over very long periods, like in the context of climate change, has long perplexed economists, philosophers, and legal scholars alike.

This working paper evaluates the four principal justifications for intergenerational discounting, which often are conflated in the literature. It shows that none of these justifications supports the prevalent approach of discounting benefits to future generations at the rate of return in financial markets and, more generally, that discounting cannot substitute for a moral theory setting forth our obligations to future generations.