Last week, while Europe’s sovereign debt crisis dominated the headlines, the International Energy Agency warned that we are running out of time to avert dangerous climate change. This was an unfortunate moment to publish my case for more government borrowing to fund the transition to low-carbon economies.
Yet, my article, which has just appeared in Political Studies, argues that the scariest thing about climate change is the small chance that it could be absolutely catastrophic, with consequences that would make the collapse of the Euro look like peanuts
In a widely cited survey of 22 recent scientific studies, the Harvard economist Martin Weitzman estimates ‘ballpark probabilities’ of 5% that temperatures could rise 10° or more in the next two centuries, and of 1% that they will rise at least 20°. A rise of 20° would not only mean mass extinctions of various species; it would also kill off a large share of humanity. It would be incomparably the greatest catastrophe in history, impoverishing the lives of countless future generations.
The expected cost of a disaster is its damage multiplied by the probability of its occurring. If we accord the same weight to future damages as present ones, the expected cost of even a 1% chance of wrecking our environment for hundreds or thousands of years is astronomical. Many economists, however, assume that damages that come in the distant future shouldn’t count very much at all. Indeed, when in 2006 Nicholas Stern’s team issued their Review on the Economics of Climate Change on behalf of the UK government and recommended strong measures to reduce emissions, it was attacked on the ground that it hadn’t sufficiently ‘discounted the future’.
Three arguments are often given for giving less weight to future gains and losses:
(1) Human beings are impatient;
(2) money in our pockets now can be invested, yielding much more money later;
(3) our descendants will be much richer.
Only the third really holds up in the case of climate change. We may prefer to receive a pound today to a pound tomorrow, if we choose, but that does not give us the right to discount gains and losses to other people in the future. Nor can we skimp on carbon reductions and invest the money we save, in the confidence that in two centuries, compound interest will yield enough money to offset the damage.
The claim that our descendants will be richer deserves more attention. Leading figures in the debate, including the economists William Nordhaus and Thomas Schelling, and the statistician Bjørn Lomborg, have argued that sacrifices to prevent climate change will benefit people much richer than the present generation. If we really want to make the world a better place, Lomborg argued, we should spend that money on problems like malaria that afflict poor people now.
These critics have a good point. We are much richer—at any rate in a material sense—than our great grandparents, and they were richer than their ancestors. Barring disaster, this trend should continue. A 2009 paper by Neil Buchanan notes ‘even pessimistic forecasts showing impressively high cumulative economic growth leading to very high average future living standards … The estimates from the [US] Social Security Trustees … have been very steady over the years, and the scale of revisions necessary to result in a forecast of zero net growth (or something even close to that level) over a several-decade span appears to be beyond reason. Short of unpredictable cataclysms (weather-related disasters, world war, the collapse of global capitalism), these forecasts are apparently among the most solid available.’
But there’s the rub. If we get a big enough cataclysm—such as 20° of warming—there’s no guarantee that future generations will be richer. For that scenario the ‘they will be richer than us’ rationale for discounting future losses goes out the window. Given the vast number of future people at risk, that makes the expected value of doing something very high indeed, even if the chance of catastrophe is quite small. That shouldn’t be so hard to believe. Intuitively, it seems a bad idea to take even a 1% chance of wrecking the climate for countless future generations.
If carbon cuts increase the chance that our descendants would be richer, it would be better to pass on some of the cost of the cuts to them than for us to cross our fingers and hope we avoid disaster. Fortunately, there are ways to spread the cost of measures that benefit more than one generation. One way is to divert funds from other long-term investments, such as in public infrastructure or nature conservation. Another is through public debt. Cities do it when they issue long-term bonds to fund new schools, or a new water system. National governments do it when they issue war bonds.
Public debt is often seen as a paradigmatic example of unfairness to future generations, but this is not always the case. Take the example of war bonds. ‘Quite aside from obvious incentive considerations’, as Nobel laureate Franco Modigliani observed long ago, ‘there may be perfectly good equity reasons for lightening the burden of the generation that suffered through the war by granting them a more comfortable life after the war, at the expense of later generations’. Likewise, there would be nothing unfair to future generations in funding climate-change mitigation in part through public debt.
Certainly, I would rather not have published this argument in the midst of a debt crisis. At present, some states cannot increase deficit financing. But others, notably China, may be able to borrow and spend considerably more without jeopardizing their creditworthiness. Moreover, they could all invest more in carbon mitigation at the expense of other long-term investments. This would not be unfair to our descendants. Our real duty is to avoid disaster. Provided we do that, they will still be richer than we are.