Matthew Yglesias » More Discount Rate Madness

Aug 26th, 2008 at 4:22 pm

More Discount Rate Madness

Relevant to the earlier discussion of discount rates and climate change, here’s a document in which Frank Ackerman and Lisa Heinzerling make the case against “cost-benefit analysis” in general as an approach to environmental policy decision-making. Some of the problems with this approach, which unfortunately has been given a name that makes you sound crazy to argue against it, are, I think, especially severe in the case of climate change because the concerns about equity that exist with this overall approach get really problematic when you operate on a global scale where gaps in income get really immense.

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Filed under: Environment, Regulations,

20 Responses to “More Discount Rate Madness”

Edward Witten Says:
August 26th, 2008 at 5:07 pm
I think there is a fallacy in using discounting to assess the merits of environmental protection. If future generations are richer than we are, they will probably also assign a greater value to preserving the natural world than we do. So the cost to future generations of irrevocable environmental losses is probably greatly underestimated by anyone who applies conventional discounting.

I actually wonder if a negative discounting rate should be used here. There aren’t many other questions, if any, for which economists would seriously consider assuming a negative rate of discounting.
rickhavoc Says:
August 26th, 2008 at 5:16 pm
The best model in the world can not account for the intergenerational mindreading required. You might as well consult The Amazing Kreskin.

On top of this is the old ‘the thinking that got you into the mess can not get you out of it.’ Wait, here it is, and its that Einstein guy: “No problem can be solved from the same consciousness that created it. You must learn to see the world anew.”

Then again, as a substitute for action, C-B analysis is in a case by itself. It fights with the power of ten blue-ribbon commissions.
Craig McGillivary Says:
August 27th, 2008 at 2:09 am
I think cost benefit analysis is fine. I think the easiest way to think about discounting is this. What will the world be like in 2100 if we stop climate change by reducing C02 vs what will the world be like if we don’t? I think discount rate obscure that by making a microeconomic analogy that doesn’t apply in the macroeconomic sense. Yes stopping Global warming is a bad investment for my parents if they only care about themselves. But in 2100 we will be better off if we have stopped climate change. Also we are going to start addressing this a some point in my life the sooner we get started the cheaper it will be.
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Matt Yglesias

More Discount Rate Madness

20 Responses to “More Discount Rate Madness”

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