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What Are We Planning For?


Image Source: Shijan Kaakkara


When we make decisions about government policy, we have to consider what that policy’s effects will be. To do this, most governments have specific offices for assessing the environmental impact, the economic impact, and the financial impact, but one of the most common tools is a cost-benefit analysis. In a cost-benefit analysis, all of the costs and benefits of a project are summed in order to assess whether it has a net positive impact; however, many costs and benefits occur at different times, so economists developed “social discounting” to allow comparison of costs and benefits across time. One of the most prominent uses of social discounting is in assessments of the impacts of climate change, which use social discounting to compare the costs that will occur in the future to the benefits that people receive today from emitting CO2.


Briefly, social discounting multiplies the costs and benefits at each interval of time by a discount factor until a certain time horizon in order to convert them to a value in the present time (National Center for Environmental Economics 2010). This discount factor is determined from a discount rate. How we determine the discount rate and the time horizon can have profound effects on what policies seem reasonable. For long-term policies, such as climate change mitigation, determining the discount rate and the time horizon reflect how we value the future and how long we expect the future to last.


Most economists determine these values according to private behavior in financial markets, attempting to assess future value societally according to the same parameters that private agents use (National Center for Environmental Economics 2010); however, I personally value climate change mitigation in the future much more than any future financial returns. We all need to push our governments to more directly consider these assessments and evaluate how best to utilize them. While expertise is valuable and should be trusted in public policy, we must determine as a collective how that expertise should be incorporated and what values experts should use. Being an economist does not qualify one to make the ethical choices that society as whole must consider around our value for the future and future generations.


Writing for Psyche, Roman Krznaric extends this argument further by saying that any form of social discounting is unethical because it colonizes future generations, devaluing and stealing from them (Krznaric 2020). We should take this concern seriously, but we must maintain ways to assess the comparative value of government policies. Completely ridding our processes of social discounting seems unnecessary because it is helpful for comparing between different options. We should be more conscious of how we set its parameters in order to value future generations more highly and ensure that all sorts of costs and benefits, even those which are difficult to quantify, are appropriately considered. Analytic methods will always have their limitations, which is not an argument in favor of their wholesale removal: we must simply be aware and mindful of these limitations when we employ them.


Bibliography

Krznaric, Roman. 2020. “Future Generations Deserve Good Ancestors. Will You Be One?” Psyche. July 21, 2020. https://psyche.co/ideas/future-generations-deserve-good-ancestors-will-you-be-one.

National Center for Environmental Economics. 2010. “Discounting Future Benefits and Costs.” In Guidelines for Preparing Economic Analyses, 6-1-6–20. United State Environmental Protection Agency. https://www.epa.gov/sites/production/files/2017-09/documents/ee-0568-06.pdf.