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ON DISCOUNT RATES IN THE COST-BENEFIT ANALYSIS OF CLIMATE CHANGE
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Edmund Tweedy Flanigan
2011
[I am grateful to Patrick Connolly, Simon Feldman, and especially to
John Broome and David Miller for comments on an earlier draft of
this paper. A version of this paper made up Chapter 4 of my 2011
M.Phil. thesis (Department of Politics, University of Oxford).]
## Introduction
There has been much discussion lately about the selection of
an appropriate discount rate in the cost-benefit analysis of
climate change. This is the rate at which the value of future
stuff - commodities, harms, benefits - is weighed against the value
of present stuff. To 'discount' in cost-benefit analysis is to
select a positive discount rate, thereby devaluing future stuff.
A number of factors determine what rate is appropriate, and
theorizing about these factors has led eminent economists to select
very different discount rates for the cost-benefit analysis of
climate change. This seemingly small matter is of great practical
importance. Nicholas Stern and William Nordhaus are two economists
who make sharply divergent recommendations for action based on the
results of their respective analyses; the divergence is due
primarily to differences in the discount rate used.[1]
Philosophers appear to stand largely against the practice of
discounting, which is also called 'discounting the future.'
They oppose it on ethical grounds. Different philosophers oppose
the practice in different ways. Most commonly, philosophers tend to
oppose the incorporation of what is called a 'pure time discount
rate' or a 'rate of pure time preference' into the overall
discount rate. This is discounting future stuff simply because it
comes in the future.
I stand with most philosophers in thinking the practice to be
misguided, at least as it is commonly construed. Nevertheless, I
also think that philosophers and economists are, as John Broome has
said, in important respects talking at cross-purposes on the matter
(see Broome 1992, 1994). Discounting is not quite so objectionable
as writing by philosophers may make it seem. I think much of the
disagreement arises from differing views about the purpose of
cost-benefit analysis.
I will argue here for that claim. I begin by giving a preliminary
account of what I take to be the purpose of cost-benefit analysis.
This is, perhaps surprisingly, quite difficult to do. Cost-benefit
analysis is ultimately a way of weighing harms and benefits,[2] but
it's hard to specify exactly what counts as a harm and what
counts as a benefit in a way that is both precise and consistent
with economic practice. Since cost-benefit analysis is not my
primary subject here, I give a loose characterization. I also
introduce the idea of an analysis-given reason, which is the reason
for action produced by a cost-benefit analysis. How forcefully that
reason counts in favor of a plan of action depends on two things:
(1) whether the analysis accurately evaluates and aggregates harms
and benefits, and (2) whether the conception of harm and benefit
adopted by the analysis captures enough of the goods and bads
associated with the plan being considered (or maybe just enough of
the important ones).
Discounting is done with respect to time. There are at least two
very good reasons for discounting; these have to do with the way
that economists use prices to approximate the values of harms and
benefits. I describe these reasons. Next, I describe some other
reasons that are commonly given for discounting. These reasons are
ethical and political ones, and they have nothing to do with the
price evaluation method that supports the first two discounting
practices. They have to do with the force of the analysis-given
reason. I suggest that these should be considered separately.
This sets up my discussion of 'pure time discounting.' I review
an argument recently given for the practice by the economist Martin
Weitzman. While the motivation for the argument seems to come from
the method of economic cost-benefit analysis, its justification
appears to be moral or political. I consider the merits of this
justification.
This leads me to turn, finally, to one political reason for
discounting that I think is especially important. It has not
received enough attention. The reason is that nations, whose
responsibility it is to enact climate policy, have special
obligations to their citizens. These special obligations may extend
to future citizens. As such, I'll consider some arguments for and
against including future citizens among those people to whom
nations owe special obligations.
One further point before beginning. There is quite a lot to say
about discounting, and I will not attempt to say anywhere near all
of it. Some of what will go unsaid here is of great importance to
the economic analysis of climate change. A few of these issues are
(a) hyperbolic and gamma discounting,[3] (b) implausibly high
implied savings rates of low discount rates,[4] and (c) the
appropriate formalization of discounting formulas.[5] These matters
are, in my view, better left to economists, who have the expertise
necessary to really address them. I don't think my omission of
them here will have any adverse effects on the arguments I offer.
## Cost-Benefit Analysis
The conventional view of cost-benefit analysis is that it is a tool
to assess the value of a possible plan of action (see Dreze and
Stern 1987, Broome 2000).[6] When a person, or a group of persons,
wants to know whether to undertake some plan, one way of beginning
to answer that question is to ask how good or bad the plan is. That
is, we can evaluate the plan. Oftentimes a plan will have various
bad consequences associated with it; call these harms. If it is a
plan we are seriously considering, it probably has some good
consequences associated with it as well; call these benefits.
Cost-benefit analysis is the adding up and weighing - the
aggregation - of the harms and benefits of a plan of action as a
method of evaluating it.[7]
Why do we want to assess the value of a plan of action? We do so
because if the plan is a good one, in the sense that it will result
in more benefits than harms, it may be that it is one that should
be undertaken. If, on balance, a plan will result in a net harm,
this fact may be said to count against the plan; and if, by
contrast, the plan will result in a net benefit, this fact
may be said to count in the plan's favor. In this sense,
cost-benefit analysis aims at producing a practical reason. Call
the reason generated by the cost-benefit analysis of some plan the
analysis-given reason for or against that plan.
The analysis-given reason is a derivative reason. It is derivative
of some of the reasons linked to the harms and benefits of a plan.
Each benefit counts in favor of a plan and is thus a reason for
undertaking the plan; and conversely, each harm counts against the
plan and is thus a reason not to undertake the plan. The weighing
of these harms and benefits in the analysis is also an aggregation
of reasons associated with each. But the analysis-given reason may
not be derivative of all the reasons linked to the harms and
benefits associated with a plan; indeed it is typically not.[8]
How large the slice of reasons is that is captured by the
analysis-given reason depends on how ambitious the analysis is and
how good its methods are. This may seem opaque. What I mean should
become clearer shortly.
Whether the analysis-given reason produced by a cost-benefit
analysis counts strongly in favor of or against the plan depends
mostly on two factors. The first is how accurate the evaluation of
the harms and benefits of a plan is. This depends on whether the
estimates made by the analysis of the value of each harm and
benefit reflect the true values of those harms and benefits (Broome
2000, p. 954). Because of this, a cost-benefit analysis needs a
theory of value. The second factor is how well the analysis-given
reason captures the entire set of reasons for or against the plan.
If it captures only a small slice of those reasons, or if
the reasons it does capture are unimportant reasons, then the
analysis-given reason may not do much to guide us practically.
Because of this, a cost-benefit analysis needs to have an idea of
the set of reasons it aims to capture.
This second factor is of special importance. It is important
because what reasons are captured by a cost-benefit analysis is
determined at least in part by the specification of harm and
benefit that it employs; that is, by which of the bads and goods
associated with a plan are aggregated by the analysis. This
specification is constrained in two directions. It is constrained
first by the ambitions of the analysis. The cost-benefit analysis
of climate change is particularly ambitious. Judging at least by
the analyses of the Stern Review (2007) and the Garnaut Report
(2008), the cost-benefit analysis of climate change aims to provide
a strong analysis-given reason for action. It thus needs to adopt a
fairly wide specification of what counts as harms and benefits, so
that it can account for harms to the environment, harms resulting
from premature deaths, and so on.
The specification is constrained second by the demands and
possibilities of its methods. Economic cost-benefit analysis uses
the market price method of evaluation (see Broome 1994, p. 133).
This method uses market prices - or estimated market prices for
stuff that is not traded-to value harms and benefits. Because the
price of a benefit is a ranking of that benefit's value to people
compared to other benefits, the price that people pay (or are
willing to pay) to avoid a harm or receive a benefit does not give
a value to that harm or benefit that is independent of the values
of other harms and benefits. Cost-benefit analyses using the market
price method of evaluation are thus committed to the full range of
specifications of harm and benefit associated with market prices,
and they may be committed to not weighing harms and benefits that
cannot be priced.
For a cost-benefit analysis as ambitious as the cost-benefit
analysis of climate change, this makes things very tricky.
When weighing the harms and benefits associated with premature
deaths and population change, for instance, the theory of value
underpinning the analysis needs to be more explicitly worked out.
This is because we need to know how bad it is if a life is cut
short, and whether it is good or bad if certain people come into
existence rather than others. In an ambitious analysis it is also
more difficult to see how strong the analysis-given reason is for
action, since it is more difficult to tell what portion of the
reasons for or against the proposed plan of action the evaluated
harms and benefits capture. For instance, it is hard to say
whether the prices it assigns to certain benefits (such as the
non-destruction of certain species) reflect attitudes about matters
of justice. If so, we need to know whether those attitudes
are correct. If not, matters of justice need to be considered
exogenously when evaluating the strength of the analysis-given
reason.
## Value in the Future
Cost-benefit analysis weighs harms and benefits that come at
different times. Most such analyses, as practiced by economists,
adopt a rate of discount. As I have said, using a discount rate is
a way of counting future harms and benefits for less than similar
harms and benefits in the present.
This should seem surprising. Harms and benefits are differences in
goodness. But whether something is good, or bad, seems independent
of timing. A harm is no less a harm if it takes place now, at some
time in the future, or at some time in the past. Call this the
time-insensitivity of harms. Benefits, too, are insensitive to
timing in this way. Similarly, we could say that harms and
benefits are subject-insensitive and location-insensitive. They are
subject-insensitive because a harm is just as bad no matter who
endures it, just as a benefit is just as good. A harm is just as
bad for me as it is for you; and as to the kind of harms that can
be endured by both humans and other animals, those harms are just
as bad no matter whether they are endured by a human or an animal,
a person or a non-person.[9] The argument is the same for
location-insensitivity. How bad or good a harm or benefit is does
not depend on where it is endured or received. I take these
features to be part of the meaning of harm and benefit.
There is thus a moral presumption against discounting. How can the
practice be justified? I will now very briefly survey two of the
ways in which it can be, since it is important to get clear on
exactly what the justification is in these cases. These two cases
represent extremely common practices in economic cost-benefit
analyses.
### Discounting Prices
Discounting can be justified when it is applied to certain harms
and benefits within the market price method of evaluation. This
method is, as John Broome and Joseph Stiglitz have said, a way of
using "reasonable shortcuts" to approximate the aggregation of
harms and benefits I described above (Broome 1994, Stiglitz 1983).
The central feature of this method is that it uses market
prices - a 'money metric' - to give a value ranking of harms
and benefits. The prices, however, are not prices of benefits but
rather prices of commodities that count as benefits. Because of
certain facts about economies (namely, the growth of economies and
the difference in the value of money at different times), prices at
different times need to be adjusted if they are to form a
reasonable basis for accurate comparisons of value. A commodity
with some price X in the present may not have the same value as a
commodity priced at X in the past or the future.
Consider a simple example, which I've taken from Broome (1994).
Suppose that the price of a bottle of wine is $5. With $100, I
could buy twenty bottles of wine. Alternatively, I could save that
money and earn interest on it. Say the interest rate for saving is
10% and the price of wine a year from now rises to $5.25. By saving
the money and earning interest on it (bringing my holdings to
$110), I could buy twenty-one bottles a year from now. The interest
rate of the wine is 5%, which is reflected in its price increase.
Call the wine I can buy now present wine and the wine I can buy
next year future wine. Present wine and future wine have both a
present and future price. If I want to compare their value using
the market price method of evaluation, I need to choose a time
index. Presently, I can buy twenty bottles of present wine. How
much future wine can I buy now? Twenty-one bottles. That is because
future wine is worth five percent less in present prices. This
example can be generalized, since most commodities behave this
way.[10] The present prices of future commodities are usually less
than the present prices of present commodities. This represents a
justified reason for discounting the value of future commodities.
Another justified reason for discounting within the market price
evaluation method is because of the law of decreasing marginal
value. Many commodities are less valuable to people 'at the
margin'. In other words, the value to a person of an additional
unit of some commodity depends on how many units of that commodity
the person already has: the more of it had, the less valuable an
additional unit. My tenth orange is less of a benefit than my
second; a restauranteur's ten thousandth dollar less of a benefit
than her first; a family's fourth home bathroom less of a benefit
than its second; and so on. Additional stuff counts as less of a
benefit to those who have more stuff to begin with. (The converse
is true as well. A family losing one of its four home bathrooms
counts as less of a harm than a family losing its only bathroom,
etc.) Since economies grow, people in the future will be better off
in the sense that they will have more commodities. Many benefits to
them will thus be less valuable. In general, then, we can
justifiably discount the value of stuff that will be received by
people in the future as long as those people will have more stuff
to begin with.
The thing that's important about these reasons for discounting is
that they're methods of correcting the price of commodities at
different times so as to reflect the fact that the harms and
benefits brought about by them count for the same no matter when
they're endured or received. This supports the time-insensitivity
of harms and benefits. There can thus be reasons for discounting
within the market price method of evaluation that are not reasons
for discounting generally.[11] That is, there can be reasons for
discounting price valuations that are not reasons for discounting
harms and benefits.
### Discounting Harms and Benefits
Neither of the immediately preceding justifications for
discounting, then, justify discounting harms and benefits. They
justify discounting prices. Are there other reasons for discounting
harms and benefits? Some have been proposed. I'll discuss three of
these now.
#### Risk and Uncertainty
The further into the future we look, the less likely we are to be
correct about what benefits will or will not come about. There are
lots of factors that may prevent the realization of a benefit.
Storms might cause delays in construction that raise the cost of a
construction project. Natural disasters may have similar but much
more severe effects. In the cost-benefit analysis of climate
change, we need to account for the possibility that humanity will
not survive far into the future. In all of these cases, unforeseen
events prevent the realization of a benefit, so in adding up
expected future benefits, we might discount them due to this
uncertainty. The same goes, mutatis mutandis, for harms.
I can think of just one justification for discounting expected
future harms and benefits in this way. This justification requires
us to assume that the likelihood of each (of every) future harm and
benefit occurring decreases uniformly with time. If an expected
benefit has an 85% chance of occurring at time t1 and a 65%
chance of occurring at time t2, then they should not be valued
equally; a good cost-benefit analysis should take account of this
difference. Thus, the appropriate rate of discount for risk and
uncertainty would be the rate according to time at which the
expectancy of each future harm and benefit decreases.
But of course there is no single rate at which the expectancy
of future harms and benefits decreases. Different events, and
therefore different expected harms and benefits, are more and less
likely to occur in the future, and the rate at which that
likelihood changes with time is similarly differential.
Consider: If a benefit occasions every 'heads' in a series of
coin tosses extending into the future, the likelihood of that
benefit occurring remains 50% as far into the future as the series
of coin tosses does. This is a very different kind of uncertainty
from the kind that accounts for harms due to certain natural
disasters that are, let's say, 50% likely to occur every four
years. To discount both of these kinds of uncertainty according to
a single rate would be to commit a serious error.
Moreover, economists have a mechanism for accounting for risk and
uncertainty that is a much finer implement than a discount
rate. It is called expected utility theory,[12] and it weights
individual future harms and benefits according to their likelihood
of occurring. It works, more or less, like this. Instead of
aggregating future harms and benefits, which there is an epistemic
barrier to doing accurately, in practice what we do is to aggregate
expected harms and benefits. If Plan A has a 90% chance of bringing
about some benefit and Plan B has a 95% chance of bringing about
the same benefit, then Plan B has a greater expected benefit. That
fact ought to count in favor of Plan B in a cost-benefit analysis
comparing the two. Expected utility theory is the right tool for
this job; a discount rate is not.[13]
#### Future People Will Be Better Off
I mentioned just above that one good reason for discounting the
future within the market price method of evaluation is that if
future people will have more stuff, additional stuff that comes to
these people will count as less of a benefit. This is due to the
law of decreasing marginal value. But there is another argument
that says harms and benefits themselves count for less to people
who are better off. This argument is similar but distinct, and
worth considering on its own.
It is widely held that it is either usually or always more
important to benefit people who are worse off. Conversely, it is
widely held that it is either usually or always more important to
avoid harming people who are worse off. John Rawls held something
like this view; prioritarians certainly hold this view; and most
egalitarians presumably hold this view, if only derivatively. We
might think that, if we hold this view, and if future people will
be better off, we have reason to discount future harms and
benefits.
This is a good argument, but some care is warranted here. There is
an ambiguity when we speak of harms being 'worse' or benefits
being 'better' under certain circumstances or for certain
people. Take a harm, such as the infliction of some amount of pain,
and consider it as befalling two people: a poor child and a rich
adult. In one sense, we could say that the harm to the poor child
is worse than the harm to the poor adult, either because the child
is a child (and harms to children are worse), because she is poor
(and harms to the poor are worse), or both. But each endures
the same amount of pain, so in another sense the harm is
just as bad for each. When I say that harms and benefits are
subject-insensitive, I mean that in this latter way. Another way of
formulating this would be to say that a harm or a benefit qua harm
or benefit is just as bad or good no matter who endures it.
To avoid this ambiguity, I will say that a harm is never worse to
one person or another, but that it can be less important. The same
goes for benefits. According to this way of speaking, if we say we
should discount harms or benefits because future people will be
better off, what we must mean is that a harm or benefit that comes
to someone who is better off is less important; that is, that it
counts for less as a reason for or against adopting some plan of
action.
This may well be a good reason for discounting harms and benefits.
If it is, it is because (a) the ethical view about the importance
of benefitting people who are worse off is the right one, and
because (b) enough future people will indeed be better off, and in
a way that bears a good correlation to time. The first of these two
justifications has to do with ethics; the second concerns a matter
of empirical fact.
It should be clear that this reason for discounting is very
different from the reasons discussed in the preceding section.
Those were reasons for discounting prices; they operated within the
price method of evaluation as a way of making that method's
evaluations accurate. This reason represents a view about how to
weigh certain kinds of harms and benefits as they are aggregated.
It is a way of giving greater force to the analysis-given reason by
weighing harms and benefits in a way that better captures the
reasons associated with them. It is an explicitly ethical view for
discounting, and it should be considered on its merits as an
ethical view. It should be considered separately from price
discounting reasons.
#### Self-Interest and Special Ties
There is a third argument we might take to justify discounting
future harms and benefits that I think is especially important. It
is the argument from special ties. Special ties are obligations
that we have to ourselves or to certain other people because of a
relationship that exists between us. We have special ties to
ourselves because we each have a special interest in our own
wellbeing. We have special ties to our families, friends, and
fellow citizens because we have a special interest in their
wellbeing. These interests are different from the interests I have
in everyone's doing well or being free from suffering; those
interests are not special.
The argument claims that since we have these special ties, and
since these special ties drop off in the future, we should discount
future harms and benefits.[14] As above, this is not a claim about
harms being any less bad or benefits being any less good to future
people. Rather, it's the claim that harming or benefitting future
people is less important. Since it's less important, the reasons
generated by future harms and benefits count for less as part of
the analysis-given reason.
The same argument could be given in political terms: Nations will
be the actors undertaking climate policy. A nation has special ties
to its own citizens. So nations should discount harms that come to
non-citizens, including to future people.
One thing to notice about this argument is that whether it affects
the force of the analysis-given reason depends on just who is
considering the reason. That is, it makes cost-benefit analysis
agent-relative. Imagine a cost-benefit analyst who gives extra
weight to benefits that will come to her own family. If it is the
cost-benefit analyst who is considering undertaking the plan of
action being evaluated, this way of weighing will indeed capture a
fuller set of reasons for or against the plan. For her, the
analysis-given reason will have greater force than it would have
had otherwise. But if it is someone else who is considering the
plan of action, the cost-benefit analyst will have made an error.
For the analysis will have failed to accurately represent the
importance of the harms and benefits being aggregated, as it will
have given undue extra weight to certain benefits.
Discounting for special ties, then, can be tricky, since it may be
unclear which agent-relative reasons should be incorporated and
what their strength is against other reasons. One plausible view
would be that since the business of cost-benefit analysis is a
'pure' evaluation, it should take account of no agent-relative
reasons to weigh some harms and benefits differently. Special ties
are agent-relative, so on this view it would be improper to
discount (or otherwise give special weight to) harms and benefits
that will be received by those to whom we have special ties.
Another plausible view, however, says that the agent for whom the
analysis-given reason is meant to count should be considered as
part of the analysis, precisely by giving extra weight to harms and
benefits that will be received by those to whom the agent has
special ties. These are not compatible views, so they must be
chosen between.
As I said, I think this argument is especially important, and I
will say more about it soon. Now, however, I just want to reiterate
a point: this reason, like the reason from the argument that future
people will be better off, represents a view about how to weigh
future harms and benefits as they are aggregated. It is a view that
is, depending on its formulation, ethical or political, and it
should be considered on its merits as such a view. It too should be
considered separately from price discounting reasons.
There are other, similar arguments for discounting that I will not
continue to go through now.[15] I have gone through these three to
bring out my central claim in the first part of this paper. It is
that there are reasons for discounting within the market price
method of evaluation and reasons for discounting outside it.
The reasons within the method have to do with the accuracy
of the evaluation given the method of economic cost-benefit
analysis. They are excellent reasons, and correspond in precise
ways with time. The reasons outside the method are very different.
When they do justify discounting, they justify it in ways that
recommend different rates of discount. The grounds for this kind
of justification are ethical and political, and are ways of
altering the force of the analysis-given reason. While an ambitious
cost-benefit analysis should take account of these reasons, since
it aims to produce an analysis-given reason with great force, they
need to be considered separately and on their own merits. Grouping
both kinds of reason under the heading 'discounting' invites
confusion.
## Pure Time Discounting
We are now in a position to assess an argument given very recently
by Martin Weitzman (2007). He argues for what is called a rate of
pure time preference. Such a rate is sometimes incorporated into
the discount rate. I said earlier that pure time discounting
devalues future harms and benefits just because they come in the
future. Though this is how the practice is commonly described, it
should be clear by now that that cannot be exactly right. Let's
get clearer on what it means. Consider two possible interpretations
of the practice.[16]
1. Future harms and benefits are discounted because they count for
less. They count for less just because they come in the future.
2. Future harms and benefits are discounted because they count
for less. They count for less for some reason(s) which corre-
late(s) with time.
I think the only plausible interpretation is the second. (1)
contradicts the time insensitivity of harms and benefits. It offers
a poor justification, since timing as such does not affect how much
a harm or benefit counts for. So we should expect a reason why
future harms and benefits should count for less. Many philosophers
have pointed this out. While philosophers who point this out are
not wrong to do so, some take the unwarranted further step of
rejecting pure time discounting on that basis. It's unwarranted
because there's a better interpretation of the practice. We
should address that interpretation.[17] With that in mind, let's
turn to Weitzman.
Weitzman's focus is the discount rate selected by Nicholas Stern
in the Stern Review. Stern discounts mostly just for the reasons
that correct prices in the market price method; that is, he
discounts for growth. The rate of discount he uses is significantly
lower than observed market interest rates. Since market interest
rates reflect revealed preferences about the value of future stuff,
Weitzman objects to the discrepancy. It is inappropriate, Weitzman
writes, to select a low discount rate
. . . by relying mostly on a priori philosopher-king ethical
judgments about the immorality of treating future generations
differently from the current generation-instead of trying to
back out what possibly more representative members of society . .
. might be revealing from their behavior is their implicit rate
of pure time preference. An enormously important part of the
"discipline" of economics is supposed to be that economists
understand the difference between their own personal preferences
for apples over oranges and the preferences of others for apples
over oranges. Inferring society's revealed preference value . . .
is not an easy task in any event (here for purposes of
long-term discounting, no less), but at least a good-faith effort
at such an inference might have gone some way towards convincing
the public that the economists doing the studies are not drawing
on conclusions primarily from imposing their own value judgments
on the rest of the world. (2007, p. 712)
There's a lot going on in this argument, and I won't try to
address all of it.[18] The main claim seems to me to be that rather
than make ethical or political judgments about the discount rate,
we should try to discover the rate at which people actually
discount the value of future stuff in their day-to-day lives. This
could mean trying to infer a discount rate from the way that
individuals value harms and benefits that will come in the future
in their own lives. This claim is sometimes argued for. But in the
cost-benefit analysis of climate change, we are thinking about
discounting across generations; that is, we are discounting across
lives, not within them. Alternatively, then, the claim might be
that we should try and discover at what rate people actually
discount across generations. This latter claim looks to be what
Weitzman has in mind.
Why would we care what 'representative members of society'
reveal to be their implicit rate of pure time preference with
regard to intergenerational projects? If we were considering an
intragenerational project, one justification might seem appealing.
It is that it is important to respect the attitudes that people
have toward their future wellbeing, since they have the right to
count future harms and benefits for less, even at an overall harm
to themselves. So it only matters whether people prefer benefits to
come sooner and harms to come later, not whether people should
prefer them that way. We must respect the autonomy of individuals.
This argument could be extended to cover intergenerational
projects. If we can discover the rate at which people value
harms and benefits that will be received by their children and
grandchildren, we should respect those valuations even if they
appear to be morally unjustified.
But to argue from respect for people's autonomy is to
misunderstand the purpose of cost-benefit analysis. As I have said,
the conventional view is that it is a tool for evaluating plans of
action. It produces an analysis-given reason for or against the
plan that reflects this evaluation. People should be free to
respond to, disregard, or otherwise react to the analysis-given
reason, but the analysis itself need not take into account how
they are likely to react.[19] Indeed, to do so would be to
view cost-benefit analysis not as an evaluative tool but as a
decision-making procedure - a preference aggregator. But it is not
one. Rather, an agent should take the analysis-given reason into
account as part of its decision-making procedure. If this seems
unclear, consider a parallel. Suppose a government asks for a
report on the security dangers posed by a rogue nation. Key members
of the government are hawkish, so they are likely to give more
weight to reasons for military action. It is obvious that the
report should not take into account the political leanings of the
members of the government. That is because the report has been
asked to give an evaluation of a threat. After receiving the
report, the government should then be free to weigh the advice of
the report as part of its policy decision, or to disregard it. To
incorporate the political leanings of the members of government
into the evaluation would be to turn the evaluation into a
decision-making procedure, which it is not.
Besides, the intergenerational variant of the argument is
problematic on its own terms. It seems doubtful at best that it
would be morally permissible for people to consistently benefit
themselves at the expense of their children or grandchildren,
living or future. This is because while people typically have the
right to make poor decisions that affect themselves, they are not
permitted to do so when those decisions adversely affect others.
Autonomy is no grounds for including the rate at which present
people value harms and benefits to future generations as part of a
cost-benefit analysis. We have no right of autonomy to bring harms
to future people. If we should value harms and benefits that come
to future people for less, it is not because we have a right of
autonomy to do so.
## Future Generations and National Ties
So should the cost-benefit analysis, as an evaluation, give harms
and benefits equal weight no matter what generation will be
affected? To think so would be to endorse the
intergenerational neutrality thesis, which says that we ought to
remain neutral between harms and benefits to present and future
generations.
I'm not sure that the intergenerational neutrality thesis is
true. I can think of several considerations that suggest it might
not be and some others that may suggest it is. These considerations
have to do with discounting for what I called 'special ties'
above. Discounting for this reason is to adopt the view that
cost-benefit analysis should account for agent-relative differences
in the value of harms and benefits to different people.
One reason to doubt the intergenerational neutrality thesis has to
do with a special feature of what we could call the
individual neutrality thesis, which says that we ought to remain
neutral between harms and benefits that will come at different
times in our own lives.
Consider first that many people think that we have special ties to
ourselves. These people think that each person has "one supremely
rational ultimate aim": that her life go, on balance, as well as
possible (Parfit 1984, p. 4) - or something similar.[20] These
people think that this interest generates normative reasons for
action; they think that each should act in such a way as to ensure
that her life go as well as possible.
Does this view contradict or support the individual neutrality
thesis? It supports it. It demands that I assess possible actions
from the point of view of my entire life, rather than from the
present point of view or through what we could call a 'myopic
lens' (giving extra weight to the nearer future).
Since, on this view, my one supremely rational ultimate aim is that
my entire life go as well as possible, any preference for one time
in my life over another can only be derivative; that is, it can
only matter insofar as preferring my wellbeing at some time
is instrumental to the overall wellbeing of my life. In this
sense, individual self-interest view requires that we support the
individual neutrality thesis. It requires that we remain rationally
neutral between the wellbeing of our present and future selves.
Now consider that there is no plausible direct parallel of the
individual self-interest view to support the intergenerational
neutrality thesis. Such a parallel would recommend, from the point
of view of humanity (i.e. all generations), that we as humanity
act with the supremely rational aim that things go, for humanity
itself, as well as possible. The humanity self-interest view
would entail that we should remain rationally neutral between
the welfare of generations; that is, it would endorse the
intergenerational neutrality thesis. But the humanity self-interest
view is untenable. Humanity cannot act as humanity, nor is it clear
that humanity has robust interests. I know of no one who endorses
the humanity self-interest view, and I know of no reason why anyone
should.
Nevertheless, there may be a different special ties or
'self-interest' view that supports the intergenerational
neutrality thesis. It is a self-interest view that I believe many
people endorse. It is the
national self-interest view, which says that nations have one
supremely rational interest: that things go, for that nation, as
well as possible.
Does this view support the intergenerational neutrality thesis? The
answer is that it depends. It depends on the nature of the special
ties that nations have. It is possible that the nature of a
nation's special ties depends on the correct view about the
identity of nations through time. On one view of this kind, nations
have special ties only to the people who make it up at a time; that
is, only to present people. This first view is the view that
nations do not have an identity that persists through time.
On another such view, nations have a special obligation to
these people, but that obligation extends through time to future
generations. This second view is the view that nations do have
identity through time.
On the first view, nations do not exist above and apart from those
people who currently count among its members. Though the membership
of a nation may change through time, referring to some nation at a
time is just the same as referring to a list of people - namely,
those people who are members of the nation. The only special
obligations that nations have are to a particular set of people who
all exist at a time. The special obligation the nation has is to
the interests or wellbeing of these people. On this view, any
regard that a nation has for future people must be simply
derivative of an interest that present people have in the wellbeing
of future people (e.g. their children and grandchildren). That is,
of course, if present people indeed have an actual interest in the
wellbeing of these future people at all. The special obligation of
nations to act as the caretakers of the interests of future people
on this view is thus a very shallow one. This view does not endorse
the intergenerational neutrality thesis. It endorses something
weaker, such as the claim that we ought to give as much weight to
the wellbeing of future generations as is reflected in the
interests of present people.
I am not inclined to endorse the first view, but I do not have a
decisive argument to give against it. The second view seems to me
the right view about the nature of nations' identities through
time. On this view, a nation is a collection of people, and since
nations persist through time (and indeed across generations), the
collection of people that make up a nation must include people at
all of those times. Thus, the constituency of a nation includes
present and future people.
This view of the nature of nations means that if nations have
special ties, they are to people who exist at different times. The
national self-interest view demands that a nation remain neutral
between its present and future interests. I take it that this means
a nation must remain neutral between the interests or wellbeing of
the people who constitute it in the present and the future. It thus
endorses a particular variant of the intergenerational neutrality
thesis. It says that a nation should remain neutral between its own
present and future generations.
This view raises a further question about the identity of nations.
Certainly, the character of nations changes through time. This has
something to do with the nature of the people who are its citizens
and also something to do with the institutions that govern it. We
could hold different views about the extent to which this matters
for the identity of a nation through time, and further views about
how this affects the special ties that a nation has to its
citizens. One plausible view is that while a nation may have
identity through time despite a changing character, at time t the
only special ties it has are to citizens of the nation when its
character is sufficiently similar to its character at t, or that
the strength of the special ties decreases at temporal distance
from t. This view seems supported by historical cases. While France
may have existed for a very long time, it seems odd to say that the
people fighting in the Gallic Wars had any special ties to
present-day citizens of France. Another plausible view is that
while some continuity of character is a necessary condition for
continued identity of a nation through time, only identity is
required to generate special ties. A nation on this view has
special ties to all of its past, present, and future citizens, and
thus to past, present, and future generations. This view claims
that the Gauls indeed had special ties to the present-day French.
It might explain the apparent oddity of that claim by saying that
since the Gauls would not have known that their history would
extend so far into the future, much less anything about the
interests or wellbeing of the future citizens of their nation, they
did not have reasons to take these future people into account.[21]
While I am inclined to endorse the latter view, I do not really
know which of these views is right. There are interesting parallels
to questions about personal identity, but I suspect that our
intuitions about national identity are much less robust than our
intuitions about personal identity. It may therefore be very
difficult to argue for a position about national identity from
these parallels. Indeed, the question of special ties of nationhood
may come apart significantly from the question of the identity of
nations through time; it may thus be a mistake to argue from the
latter to the former. Which of these views we endorse determines
which future generations we think nations have special ties to. If
we discount for special ties, holding one view rather than another
makes a serious difference.
There may be other self-interest views that support or do not
support some variety of the intergenerational neutrality thesis. I
won't search for them here. Because nations are the agents that
are able to take the action required to mitigate the effects of
climate change, the national self-interest view is the one worth
reckoning with. But as I have argued, there are a number of
plausible ways to interpret the national self-interest view. If we
hold a view that does not give nations special ties to generations
in the further future, that may justify a higher discount rate.
Whether any special ties justify discounting also depends,
as I noted, on whether cost-benefit analysis should account
for agent-relative valuations of harms and benefits. Whether
agent-relative reasons are truly normative is a rather large and
difficult question for moral philosophy in general. Thomas Nagel
asks,
For the purposes of ethics, should we identify with the detached,
impersonal will that chooses total outcomes, and act on reasons
that are determined accordingly? Or is this a denial of what we
are really doing and an avoidance of the full range of reasons
that apply to creatures like us? (Nagel 1986, p. 185)
This is, as he says, a true philosophical dilemma. So is welfare
economics, and particularly cost-benefit analysis, the right place
to take a stand on it? Perhaps not, but then again perhaps the
choice is forced. If we include agent-relative valuations in
cost-benefit analysis and are right to do so, then we will increase
the force of the analysis-given reason. But if we are wrong to do
so, the analysis-given reason will be weakened since it will have
weighed some harms and benefits wrongly. If we choose not to
include agent-relative valuations in cost-benefit analysis, the
risks are the same but in the opposite direction. I don't know
which view should be adopted. Whether cost-benefit analysis should
account for agent-relative valuations seems to me an open question.
## Conclusion
Harms and benefits are just as bad whether they occur now or in the
future, whether they occur to one person or another. This is
because harms and benefits are differences in goodness. That a plan
will occasion a harm counts against the plan; that it will occasion
a benefit counts in its favor. In deciding what to do, we need to
add up and weigh harms and benefits. This is what is meant when we
say that the purpose of cost-benefit analysis is to evaluate a
plan of action. This evaluation produces what I have called an
analysis-given reason.
I have argued, however, that there are a number of grounds on which
we might count future harms and benefits for less than present
ones. Some of these are not very controversial: economic growth,
or, that future people will be better off, gives reason to discount
the future value of certain goods. These grounds for discounting
have to do with the way that economists use prices to value
commodities that count as harms or benefits. Specifically, they are
ways of correcting prices so that they accurately reflect value.
But there are other reasons for discounting that are more
controversial. They aim to increase the force of the analysis-given
reason by changing the way in which certain harms and benefits that
come in the future are weighed against harms and benefits in the
present. One such reason came from special ties, or self-interest
views. These views may give reason to think that a harm or benefit
received by a future person may count for less than the same harm
or benefit to a present person. Whether this is the case depends on
the particular self-interest view adopted.
The cost-benefit analysis of climate change recommends action by
nations, which could recommend adopting a discount rate based on
the national self-interest view. This view gives nations putatively
normative reasons for acting in the interests of their own
citizens. I argued for an interpretation of the national-self
interest view that supports a version of the intergenerational
neutrality thesis. That version says that a nation should
remain neutral between its own present and future generations.
However, I did not have a decisive argument against a rival
interpretation of the national self-interest view that does not
support any version of the intergenerational neutrality thesis, nor
against an interpretation that supports a weak version of the
intergenerational neutrality thesis. Whether nations ought to
support the thesis thus depends on the right view about the nature
of the special ties nations have to their members; namely, whether
they have a strong obligation to their future members. The issues
here are very complex and do not appear to have straightforward
answers. That makes discounting for special ties related to
nationhood a very difficult task.
We might think that it is immaterial whether any self-interest view
supports the intergenerational neutrality thesis since we could
think that self-interest views do not give normative reasons for
action; we could reject agent-relativity as a source of normative
reasons. The intergenerational neutrality thesis is certainly true
from an impartial perspective - Sidgwick's 'point of view of
the Universe' or Nagel's 'view from nowhere' - since an
impartial perspective does not admit of self-interested reasons of
any kind. I am sympathetic to this view, but I know of many
people who support a national self-interest view. Indeed, nations
themselves certainly support it. As I have said, I regard this as a
serious dilemma to which there is as yet no clear answer.
I end therefore with a pragmatic question. Cost-benefit analyses
produce analysis-given reasons, which are reasons for action. But
more than that, they are usually tasked with producing reasons for
someone. In the case of the cost-benefit analysis of climate
change, that someone is nations. If the analysis is to be true, we
may well think it should adopt an impartial perspective and
endorse the intergenerational neutrality thesis. This is to reject
discounting for special ties; this is to deny that agent-relative
reasons are normative. This is the view I tend toward. On this
view, the discount rate should be very low. But normativity may
admit of agent-relative reasons, and anyway nations certainly take
account of their own agent-relative reasons for action. So if we
want the analysis to be accepted, we may well think that it
should adopt some more partial perspective, such as the national
self-interest view. On this view, the discount rate may or may not
be very low. Whether it is or not depends on which is the right
view of national self-interest.
Since it is true on any accounting that climate change will have
some very bad effects, perhaps, as the saying goes, we should not
let the perfect stand in the way of the good. Our efforts may be
best spent by arguing for the interpretation of the national
self-interest view that supports the intergenerational neutrality
thesis, rather than by arguing against self-interested views in
cost-benefit analysis altogether.
## References
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John Broome. Counting the Cost of Global Warming. White Horse
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## Notes
[1] Stern uses a discount rate of 1.4%; Nordhaus recommends
something in the range of 3-5%. Stern recommends strong action
now to mitigate the effects of climate change, whereas Nordhaus
recommends a more slowly ramped-up response. These differences in
policy prescription are due to the differences in view on the
discount rate. See Nordhaus (2007).
[2] I use the term 'harm' rather than 'cost' to reflect
common philosophical practice. 'Benefit,' of course, is used by
both philosophers and economists.
[3] See Cowen (2007, p. 12), Weitzman (1998), and Dasgupta and
Maskin (2005).
[4] See Arrow (1999) and Dasgupta (2007).
[5] By this I mean the appropriate way to incorporate discounting
into the economic cost-benefit model. Economists tend to use an
equation from Frank Ramsey's (1928) growth model. I concur with
Beckerman and Hepburn (2007, pp. 194-195), who think parts of
that formalization are "overworked" and "not rich enough to
separate the key ethical elements relevant to climate change."
For this reason, I have decided not to discuss discounting in terms
of the Ramsey discounting equation, which some readers might expect
to see given prominent treatment.
[6] One welfare economics textbook says right at its outset
that the entire discipline "can be viewed as an investigation
of methods of obtaining a social ordering"-a betterness
ranking-"over alternative possible states of the world"
(Boadway and Bruce 1984, p. 1; original italics).
[7] This may seem an unusual conception of harm and benefit. Many
take harms and benefits to be differences in the wellbeing of
particular persons. This conception is much broader than that,
though it includes it. I discuss the narrower conception of harms
and benefits to people in a note later in the paper.
[8] Beckerman and Hepburn (2007, p. 188) correctly point out that
"the standard welfare economic approach has no room . . . for
ethical dimensions concerning the processes by which outcomes are
reached." We should thus not expect a cost-benefit analysis to
capture any procedural reasons for or against a plan, including
those having to do with "rights, justice and freedoms." This
limitation is very important, and is one example of a way in which
the analysis-given reason fails to capture the full set of reasons
for or against a plan.
[9] It may be thought that a harm is less bad when endured by a
person who deserves to be harmed. This may be true, but it trades
on a different sense of 'good' and 'bad' than the one I am
using. I would say that while a harm is as bad no matter who
endures it, causing it may be less wrong (or indeed not wrong at
all) if it is deserved. This seems to me a very plausible
distinction.
[10] Some commodities have interest rates that are zero or very
near zero. The value of these commodities should not be discounted.
Many of these commodities, like Derek Parfit's example of a
beautiful stretch of countryside (1984, p. 483), need to be
accounted for in the cost-benefit analysis of climate change, which
means that this kind of price adjustment discounting in that
analysis needs to be done with special care.
[11] There are other reasons unrelated to time (and thus to
discounting) for correcting price valuations that reflect different
kinds of insensitivity of harms and benefits. Here is one that is
very important to the cost-benefit analysis of climate change. One
plausible way of valuing the harm represented by loss of life is to
find out how much people are willing to pay to insure their lives.
But people in rich countries are willing to pay much more than
people in poor countries. This does not reflect a difference in the
value of lives between rich and poor countries; it reflects a
difference in the value of money. This difference of valuation
needs to be corrected for precisely because the badness of loss of
life does not depend on the value of money to a person whose life
is lost.
[12] I don't want to spend time talking about 'utility' here.
For a discussion of that term as it's used in the market price
method (and indeed in welfare economics generally), see Broome
(1991). For an analog in ethics, see expectabilism in Parfit's On
What Matters (2011, p. 106).
[13] Savvy readers will know that the risk of human extinction is
sometimes factored into the discount rate of the cost-benefit
analysis of climate change rather than accounted for using expected
utility theory. This practice, which I don't understand, is
adopted in the Stern Review. Stern recognizes that this is
disputable; see Stern (2007, p. 663 fn8). See also Broome (1992,
p. 102) for support on this point.
[14] John Broome has pointed out to me that this argument could be
right about the nature of our special ties but wrong about
discounting. Suppose benefits to grandchildren count for half as
much as benefits to children. If a person has twice as many
grandchildren as children, the aggregate importance of benefits is
constant across these two generations, thus failing to support a
rate of discount. I do not wish to discuss issues relating to
population size here, but this is a point well-worth noting.
[15] One that merits mention even though I do not want to address
it here is that we may not in fact benefit or harm certain future
people at all; namely, those particular people whose very existence
is owed to the policy options being evaluated by a cost-benefit
analysis. This is what Derek Parfit (1984) calls the non-identity
problem. There are different views on the extent to which this is a
problem for cost-benefit analysis, though I cannot think of a
reason why it would justify a rate of discount.
[16] The practice does indeed warrant 'interpretation.' See
Stern (2007, p. 664) and Frederick et al. (2002).
[17] Beckerman and Hepburn (2007) seem to have this in mind when
they suggest we should consider agent-relative ethical theories
when selecting a rate of pure time preference.
[18] For some considerations that call into question the value of
revealed preferences in this context, see Beckerman and Hepburn
(2007, pp. 202-205).
[19] This is different from saying that we should or should not
take agent-relative reasons into account in cost-benefit analysis,
which I have suggested is an open question. The argument from
autonomy says that people should be free to respond or not respond
to the analysis-given reason. This seems right to me, but does not
bear on the cost-benefit analysis itself.
[20] Parfit, of course, argues against this view.
[21] This raises another interesting question. If cost-benefit
analyses are to take account of agent-relative reasons, as
the argument for discounting for special ties suggests,
then the cost-benefit analysis of climate change-generating
an analysis-given reason for a nation-should consider the
possibility that the nation will not exist far into the future.
This is distinct from considering the possibility that humanity
itself will not exist far into the future, which, as I've noted,
the Stern Review does.
