The Price of Everything - Eduardo Porter [103]
With this investment, Stern suggested, we could stabilize the concentration of greenhouse gases in the atmosphere at somewhere in the upper end of the range of 450 and 550 parts per million, compared with 430 ppm today, conserving energy and switching into more expensive nonfossil fuels. He said this should keep global temperatures from rising more than 2.5°C. It wouldn’t prevent all environmental damages, of course. Stern estimated that allowing 550 ppm of greenhouse gases in the atmosphere would cause losses amounting to about 1.1 percent of the world’s economic product. That’s the equivalent of losing Indonesia or Turkey.
And there is a fair chance that the bill to avoid catastrophic warming is even higher. Vulnerable countries like the Maldives, a small archipelago of low-lying islands that rise only a few feet above sea level, are suggesting even a lower cap on carbon concentrations in the atmosphere. A couple of years after his initial report, Stern suggested that concentrations of greenhouse gases should best be kept below 500 ppm, an endeavor that would cost 2 percent of the world’s gross domestic product.
That is a lot to spend. Stern’s conclusion that the investment is worthwhile is based on a proposition that is either obvious or radically controversial about the value of human life. Stern assumes that the welfare of a person hundreds of years from now is worth the same as the welfare of a person alive today. Not everybody agrees.
Stern allows two modest adjustments to this equality. He acknowledges that the value of money to people is inversely proportional to how much they have. An extra dollar is worth less to an investment banker in New York than to a subsistence farmer in Michoacán. What’s more, there is a minuscule chance that a meteorite will strike a devastating blow to the earth at some point in the future and kill everyone on it. In this case the welfare of humans beyond that point in time would fall to zero. We would have no justification to spend anything to enhance their welfare because by then humanity would be extinct. Those tweaks aside, the bedrock concept of the equal value of human welfare across time leads Stern to a straightforward rule of thumb: devoting a given share of the current generation’s income to forestall global warming is justified if it produces a benefit amounting to at least the same share of that future generation’s income no matter how many hundreds of years down the line.
This approach sounds reasonable when taken at face value. But it has a problem: it places too little value on the people of the present by making the future extremely expensive. That’s because there isn’t just one future generation to save at the present generation’s expense, but many. Say we were justified in protecting future people from the damages of warming as long as the benefits, as a share of their future incomes, were greater than our investment was, as a share of our incomes now. Adding up the bill for the rescue over a large number of future generations would justify humongous spending today.
This kind of counting allows the Stern Review to estimate that the future costs of climate change are equivalent to a fifth of the world’s income “now and forever.” He reaches this price tag by adding very small costs in the near future with larger and larger costs in faraway centuries.
IF WE WERE to apply the most common economic techniques to value the future, we would not accept this conclusion. Outside the debate over climate change, money today is worth more than the same amount of money tomorrow. That’s not just because of inflation : a businessman will make an investment only if it generates a higher return than putting the money in the bank to earn interest.
The return on corporate investments in the United States, before taxes, has averaged 6.6 percent per year over the past four decades. Government agencies are directed to use a “discount rate” of 7 percent to compare the expected future benefit of some programs with their up-front cost. This choice assumes that, excluding the effects