The Argument From Utilitarianism

The basic argument that supports the use of high discount rates is described in the preceding paragraphs. Since private individuals demand a 6% annual return on investments in standard financial assets, public decision-makers should discount the future benefits of climate change policies at that same 6% rate in the context of monetary cost-benefit analysis. Proponents of this view argue that the use of lower discount rates would violate the principle of consumer sovereignty - the notion that people are the best judge of their individual welfare and that policy-makers should respect the preferences people reveal in their market decisions. This reasoning assumes that market decisions are based on a rational assessment of the consequences of one's actions for one's experienced utility - an assumption that is called into question by analysts such as Norton, Costanza, and Bishop (1998). The notion of consumer sovereignty, however, has significant intuitive appeal, emphasizing as it does the importance of individual freedom.

In the discounting literature, however, this line of reasoning runs up against a powerful critique. While rational individuals may discount future benefits that accrue to them personally, it does not logically follow that policy-makers should discount costs and benefits that fall on members of future generations (Parfit, 1983b). From this perspective, issues of personal time preference are simply not relevant to the moral problem of adjudicating conflicts between the interests of present and future society. Instead, discount rates should be chosen based on explicit principles of intergenera-tional fairness.

Defenders of high discount rates have a well-articulated response to this critique. Although individual persons have finite life spans, they assert, savings and investment decisions are managed by households or "dynasties" with preferences that stretch from the present into the indefinite future (Barro, 1974). From this perspective, market decisions reflect the altruistic concern that parents may feel for their children and more distant descendants. Accordingly, market rates of return reveal the preferences that present society holds regarding intergenerational trade-offs, thus justifying the use of conventional discounting procedures.

Critics, however, have identified at least two potential flaws in this line of reasoning. On the one hand, empirical evidence does not unambiguously support the hypothesis that investment decisions are premised on a desire to transfer wealth to one's children and grandchildren. An empirical study by Hurd (1987), for example, suggests that investment behavior is best described in terms of individuals' desire to enjoy financial security in old age. Bequests to one's children - although a real phenomenon - play a minor role in explaining people's economic behavior. More deeply, Chichilnisky (1997) argues that the notion that discount rates should be based on the altruistic preferences that present society holds toward posterity constitutes a "dictatorship of the present'' that denies full moral standing to members of future generations. This point mirrors the general ethical principle that moral obligations - for example, the duty to alleviate the suffering of the poor and infirm - are conceptually independent of individual preferences, altruistic or otherwise.

An alternative approach to the analysis of climate change response strategies is based on the theory of Classical Utilitarianism, a moral framework that traces its roots to the works of Bentham (1823) and Mill (1863). According to Utilitarians, social decisions (and hence climate change policies) should seek to maximize the total level of well-being (or "utility") experienced by all present and future persons (Broome, 1992; Cline, 1992). Although this framework is analogous to cost-benefit analysis in the sense that it aims to maximize a formal conception of the good, it differs from cost-benefit analysis in two crucial respects. First, gains and losses are measured in terms of utility as opposed to monetary units. Second, Utilitarianism holds that equal weight should be attached to the welfare of present and future generations.

The implications of this debate for climate change policy are illustrated in Figs. 1-4. These figures, which are based on Howarth's (1998) model of interactions between climate change and the world economy, compare the climate change policies that emerge under four alternative social choice rules:

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Fig. 1. Greenhouse Gas Emissions (Billion tee/Year).

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Fig. 1. Greenhouse Gas Emissions (Billion tee/Year).

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1. Business-as-usual (BAU), which assumes that greenhouse gas emissions remain unregulated both in the present and at all future dates.

2. Cost-benefit analysis (CBA), which discounts the future at a rate equal to the market return on capital investment.

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Fig. 4. Net Benefits - Change Relative to BAU (Trillion $/Year).

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Fig. 4. Net Benefits - Change Relative to BAU (Trillion $/Year).

3. Classical Utilitarianism.

4. Climate stabilization, in which emissions are maintained at a fixed level that limits long-term greenhouse gas concentrations to a doubling relative to preindustrial levels.

In this model, decisions concerning consumption, investment, and economic production are managed by private households and businesses in the context of competitive markets. The role of public policy is limited to defining a tax on greenhouse gas emissions that strikes an optimal balance between the short-run costs and long-run benefits of climate mitigation measures. The revenues raised by the emissions tax at each date are returned to private individuals in equal payments. A further description of the model is presented in the appendix.

As the figures show, greenhouse gas emissions grow quite substantially over time in the business-as-usual scenario. In this case, emissions rise from 10 billion tonnes of carbon equivalent (tce) in the year 2000 to 31 billion tce per year in the long-term future. Most of this increase occurs during the 21st century. This emissions path leads mean global temperature to increase by 6.3°C over the next four centuries. Although this increase in temperature is small when compared to seasonal fluctuations or differences between geographic regions, it is large in comparison with the changes have occurred during the Earth's geological history (IPCC, 2001c). In the context of this model, this temperature change leads to costs equivalent to 10% of long-term economic output. This figure accounts for the impacts of climate change on both market activities (such as agriculture, energy use, water supply, and real estate) and nonmarket goods (such as human health and the functioning and integrity of natural ecosystems).

In this model, cost-benefit analysis gives rise to optimal policies that involve relatively modest rates of emissions control. In comparison with business-as-usual, emissions are reduced by 16% in the short run and by 23% in the long run. These reductions are achieved through a greenhouse gas emissions tax that rises from $16/tce in the present to $76/tce in 2420. (Throughout this discussion, monetary values are measured in inflation-adjusted 1989 US dollars.) Although this scenario leads to a relatively small reduction in the rate and magnitude of climate change, it confers quite substantial economic benefits on members of future generations. In the year 2105, for example, society experiences a net benefit of $0.8 trillion in comparison with the business-as-usual case, while net benefits rise to $4.0 trillion in the year 2420. Interestingly, however, this policy has almost no impact on short-run economic welfare. By way of comparison, the optimal emissions tax in the year 2000 is equivalent to a gasoline tax of just 4 cents per gallon -a figure that would allow producers and consumers to respond at a relatively low economic cost.

Classical Utilitarianism, in contrast, gives rise to substantially more aggressive policies. Under Utilitarianism, greenhouse gas emissions are reduced by 51% relative to business-as-usual in the year 2000. Although emissions rise gradually during the 21st century, they are stabilized at a level of 8.1 billion tce per year, a figure that is significantly below the year 2000 level under business-as-usual. This emissions path, which limits the long-run rise in mean global temperature to 2.6 °C, is supported by an emissions tax that rises from $146/tce to $636/tce over the next four centuries. Relative to business-as-usual, greenhouse gas emissions abatement imposes net economic costs of $0.3 trillion in the year 2000 and $1.0 trillion in the year 2070. These short-term costs, however, give rise to future net benefits that rise to $8.4 trillion in the year 2420. These net benefits are more than twice as large as those that arise under conventional cost-benefit analysis.

These particular numerical results depend of course on empirical assumptions that are open to critical examination (Howarth & Monahan, 1996). Nonetheless, the analysis reveals the sensitivity of optimal climate change policies to changes in the discount rate. Although Utilitarianism attaches equal weight to changes in present and future well-being, the Utilitarian optimum described is consistent with the results that arise when a small positive discount rate is used in monetary cost-benefit analysis. Given anticipated growth in income and consumption, Cline (1992) gauges that the satisfaction provided by an incremental unit of expenditure will decline at a 1% annual rate over the course of the next century. Hence, the Utilitarian social choice rule may be operationalized through the use of a 1% discount rate in monetary cost-benefit analysis (IPCC, 1996).

Authors such as Manne (1995) argue that the Utilitarian approach to climate change policy is ''unrealistic'' because, in a world of economic growth, it requires sacrifice on the part of relatively poor people (living in the present) to provide benefits to people with much higher incomes (future generations). While this argument seems plausible on its face, it overlooks an important dimension of climate change policy that is emphasized by Schelling (2000). As Schelling notes, emissions control costs would fall principally on affluent people living in industrialized nations, while the impacts of climate change would fall hardest on future peasant farmers living in developing countries who lacked the resources required to adapt to altered environmental conditions. This issue is obscured in aggregate models of climate-economy interactions that abstract away from issues of uneven development and economic inequality. This observation, however, generally reinforces Utilitarian arguments that favor relatively stringent steps toward climate stabilization.

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