Jaisal Noor, TRNN Producer: Welcome to The Real News Network. I’m Jaisal Noor in Baltimore. And welcome to our continuing discussion with James Boyce.
He is the director of the environment program at the PERI institute. So, Professor Boyce, we’re talking about the economics of global climate change; we’re talking about cost-benefit analysis, some of the problems with it. I wanted to ask you: is cost-benefit analysis democratic? That is, does cost-benefit analysis treat everyone equally?
James K. Boyce, Prof. Economics, UMASS Amherst: Well, the short answer to that, Jaisal, is no, it doesn’t. As I mentioned, in addition to the problem of putting dollars and cents values on things that many would regard as priceless, there are also problems with the methodologies that are used to ascribe those monetary values to things like clean air, clean water, or the future of the planet’s climate.
And in the weighing up costs and benefits to different individuals, it’s not the case that cost-benefit analysis typically treats everyone individually. The damage that is done to one person isn’t necessarily treated the same as the damage done to others, one of the main reasons being that what’s added up is not effects on different individuals, but rather dollar amounts are added up. So instead of treating people equally, it treats dollars equally, and the more dollars a person has, the bigger their weight in the cost-benefit decision-making process.
It’s kind of like what happens in markets, actually. You know, if we ask, how much purchasing power do you bring to the market, that is based on how much money you’ve got, and some people have more purchasing power than others. Well, in the similar fashion in the shadow markets of cost-benefit analysis, some people, because they have more dollars than others, have more weight than others in the decisions that are reached. So that’s one of the troubling things about cost-benefit analysis.
Put bluntly, a dollar is assumed to be worth the same whether it’s a dollar in my pocket, in your pocket, in the pocket of Bill Gates, or in the pocket of someone who is living right at the margin of survival and in danger of starvation. They’re all dollars, and no differentiation is made in terms of who gets what.
Noor: And finally, how does cost-benefit analysis handle the question of environmental quality for future generations?
Boyce: Well, just as cost-benefit analysis doesn’t treat every individual who’s alive today equally (it treats our dollars equally), it also doesn’t treat the lives of people today equal to those of our children or our grandchildren or their children after them. Instead what cost-benefit analysis uses is a technique called discounting. Discounting is used to convert future values, future dollar and cents amounts into what are called present values. It’s basically just running the opposite way from an interest rate, with which many of your viewers will be more familiar. If I put $100 in the bank and it pays 5 percent interest at the end of ten years, 15 years, whatever, I’ll get back more than $100. Well, discounting is doing the same thing in reverse. It’s saying if there is a cost to future generations equivalent to, let’s say, $1 million, how much is that worth today in terms of present dollars? And the answer is: it’s less than $1 million because it’s been discounted away.
It turns out that when we’re talking about environmental problems that have long-lasting effects—and many forms of pollution, including global warming pollution, certainly fall within that category—the choice of the discount rate makes a really big difference, just like the choice between getting an interest rate of half a percent versus 5 percent makes a big difference.
So, as you mentioned in our first segment, the U.S. government’s new estimates of the so-called social cost of carbon vary dramatically. And one of the reasons for those variations is that they look at what happens with different discount rates. If they use a relatively high one of 5 percent, they get numbers as low as $11 per ton of carbon. That is to say, it’s only efficient to spend up to $11 to reduce a ton of carbon emissions; beyond that, it would be inefficient to reduce them any further. If instead they use a discount rate of 2.5 percent, which is still not zero, then suddenly, just from that change alone, the social cost of carbon goes up to $52. So it’d be worth spending four or five times as much to prevent climate change if we use 2.5 percent as the discount rate.
Now, even 2.5 percent is a little bit debatable in terms of what we ought to be using here. I mean, there’s a real difference between how individuals think about the passage of time and how we ought to think about that as a society. Right? As an individual it may well be true that $100 today is worth a lot [incompr.] than $100 in 20 years, because who knows if I’ll be here in 20 years, etc. But when we’re thinking about society, we’re talking about people who haven’t even been born yet. We’re talking about future generations who aren’t here to vote for themselves.
And so does it really make sense to say, well, $100 is worth a lot more to me than it would be to my children or to my grandchildren or to their children? I don’t think so. You know. At 2.5 percent, which is the low-end discount rate used in the U.S. government’s estimates of the cost of carbon, $1 million in damages 300 years from now would be worth about $600 today. So it would say, well, it’s efficient for us to spend up to $600 to prevent imposing a $1 million cost on those future generations. Think about that. And here we’re not talking about inflation. These are inflation-adjusted dollars. So we’re talking about a $1 million cost in today’s dollars.
Now, is it really reasonable to say that, oh, well, we shouldn’t worry about that ’cause it’s—you know, they’re future generations and we should discount their well-being? I think there are really profound ethical questions on the table here when we’re thinking about how to use economic analysis to think about problems like global climate change. And while I think a good case can be made for using the cost-effective means to reduce global warming, I don’t think a very strong case can be made for using economic analysis to decide whether or not we ought to do it or how much we ought to do it. I think we have a moral obligation. We ought to honor that obligation to future generations and figure out how to make it work, rather than asking if it’s really worth it to us to honor that commitment.
Noor: James Boyce, thank you so much for joining us.
Boyce: Thank you, Jaisal. Nice to be with you, as always.
Noor: Thank you for joining us at The Real News Network.