By the time she is my age, my daughter will be worth only 12.9 percent of what she’s worth now. This according to the 5% “discount rate” applied by our federal government for one of their calculations of the social cost of greenhouse gas pollution, also called the social cost of carbon.
Start With an Entire Planet
A discount rate is a calculation which basically says that the future doesn’t matter as much as the present. Every year you look ahead into the future, it matters less what happens, by some annual percentage such as 5% or 3%.
So the harmful effects of global warming, climate change, and ocean acidification that may occur in as few as 40 years are reckoned as only 12.9% as harmful as they actually will be.
That’s at odds with my values – my child’s future matters a whole lot more than my present.
Just One Year - Discounted to 95%
By the year 2100, at a 5% discount rate, the discounted number is 1.15%. That’s right – the year 2100 counts at just over one percent compared to today. So an action that increases wealth by at least 1.15% right now would be reckoned to be a good investment, even if it also resulted in the destruction, in 2100, of value equal to absolutely all assets that exist right now.
A discount rate is a reasonable concept in business. It is used, for instance, to calculate the present value of a stream of future payments. An underlying assumption, of course, is that a business having X dollars right now can grow its stash by some amount that that is at least equal to the discount rate.
Five Years
Historically, it has also been somewhat reasonable to use a discount rate when considering national investments or choices. If the economy of a country grows at a rate of say 3% a year, then it is reasonable to suppose that people, governments, and businesses will have more resources to deal with the issues of that future day.
But should such a discount rate be applied when considering environmental crises such as global warming? The dirty not-so-secret is that conventional economic growth, rooted in extraction and destruction of nature, is wholly incapable of dealing with a crisis that arises from that same destruction.
When considering loss of forest land, for instance, it will do no good to have a demonstrated capacity to fell lots of trees and turn them into wood products. As we hit hard limits on allowable emissions of carbon fuels, the increase in our ability to extract and burn those materials will actually be counterproductive.
Ten
Indeed, the recognized costs of global warming and related environmental degradation are going up far more steeply than the rate of our conventional economic growth. This is partly due to emerging understanding that many of the changes are irreversible and simply can’t be mitigated.
For instance, land that is salinated due to any of rising seas and storm surges, overpumping, or irrigation, will stay salinated, harming the capacity of that land to grow crops on an effectively permanent basis. When land is infested by a climate-driven invader such as the pine beetle, the beetles won’t go away any time soon. An acidic ocean will have costs beyond reckoning, and will be impossible to repair.
And to make the vicious cycle worse, some of the potential mitigations would themselves be massive construction projects, causing their own impacts. When evaluating, for instance, the idea of building a massive levee system around New York City, this is an important perspective. The various carbon capture and sequestration unicorns, if ever put into practice, all have one thing in common: construction on a planetary scale.
We won’t be able to “grow” our way out of this one.
Twenty
All of this strongly suggests that when we look ahead to the consequences of greenhouse pollution, a very low discount rate is applicable, potentially a value that is close to zero.
And a low discount rate, in turn, means that the true social cost of carbon pollution, right now, is very, very high; much higher than the current government estimate. The right number, considering true costs to our futureselves and our children, is likely hundreds of dollars per ton of CO2 emitted.
More generally, the idea of applying a discount rate to world-wide issues is just one way that extractive business institutions have infected and confounded our ability to think. A steep discount rate is a fiction that makes it apparently profitable to extract some wealth from a piece of land, and then leave it destroyed and useless forever, because that permanent loss in value gets discounted away over a few years.
Fifty Years in the Future
It’s especially ironic that efforts to do the right thing – estimate the social cost of carbon pollution, have accepted the concept of a discount rate and built it into the core of their calculations. [To be fair, the 5% discount rate is the highest one used in the most recent federal figures. Carbon costs with discount rates of 2.5% and 3% are also used.]
Wonky? Yes. Technical? Sure. Obscure? Yup.
But the discount rate, as applied to the future, is an example of how a wonky, technical, obscure idea can deeply affect how so many decisions about our future are made. This idea literally discounts the significance of a future that people care deeply about. The discount rate isn't the only thing that makes people myopic, but it legitimizes short sighted decisions and makes them appears to be economically "correct."
The time when my daughter arrives at my current age is many years away from the point of view of any person setting policy right now. But for her, it’s very, very soon. And, it’s worth a lot more than 12.9 percent.
Our Future - Worth Saving
Any time you think that you don't have a choice, you actually do.
Any time you think you have to do something that's wrong, you don't.
Not Here
Not Today
Not Any More
We shall not participate in our own destruction.
References:
A good description of why discount rates matter for environmental planning is here: Discount Rates for Environmental Benefits. Check out the very interesting idea of declining discount rates over time, near the end of the paper.
From Vanderbilt Law review in 1993, get scholarly. Note that one of the cases is about evaluating harm from greenhouse gas pollutants - global warming was well understood 20 years ago, no matter what you may hear.
Want more? Google "discount rate effect on environment" for oodles lots to read.