by By Peter Dorman (originally published at Econospeak) The Cost of Climate Change: It’s Not About Psychology You know there are problems with economics when things that are perfectly reasonable in the context of economic theory are clearly absurd once you step out of it. Case in point: the claim in today’s New York Times piece by Neil Irwin that the economic cost of climate change vs the actions we’d need to mitigate it depends on “how, as a society, we count the value of time.” In economics? Yes. The present value of climate and climate mitigation costs depends on the discount rate, the extent to which we devalue something a year from now because it’s a year away. That’s how you do a cost-benefit analysis. It really matters for climate policy because
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by Peter Dorman (originally published at Econospeak)
The Cost of Climate Change: It’s Not About Psychology
You know there are problems with economics when things that are perfectly reasonable in the context of economic theory are clearly absurd once you step out of it. Case in point: the claim in today’s New York Times piece by Neil Irwin that the economic cost of climate change vs the actions we’d need to mitigate it depends on “how, as a society, we count the value of time.”
In economics? Yes. The present value of climate and climate mitigation costs depends on the discount rate, the extent to which we devalue something a year from now because it’s a year away. That’s how you do a cost-benefit analysis. It really matters for climate policy because the costs tend to be upfront and the benefits decades or even centuries down the road. Economists wrack their brains over how to select exactly the “right” discount rate to perform these calculations.
But think about it for a moment. While there’s a “technical” aspect to time preference—investing today can result in measurable returns over time—the discount rate also depends on psychology: how present-oriented are we?
How much do we live in the here and now rather than looking down the road and preparing for tomorrow? We all occupy different places on this classic grasshopper-ant continuum, and we usually shift our position over the course of our life cycle. Yet how does this psychological characteristic, either individually or socially, affect the economic consequences of acting on climate change, or not? It certainly affects the kinds of choices we’re likely to make, but the consequences?
The whole point of Aesop’s grasshopper-ant fable is that there’s a real world that both insects inhabit, with consequences that don’t depend on their psychology at a moment in time. Grasshoppers are not better off because they follow the myopic dictates of their grasshopper brains. This was obvious 2500 years ago, and it’s obvious today. Economists’ obsession with identifying the “right” discount rate for cost-benefit calculations is a product of their own warped world (the logical and empirical craziness of welfare economics) and has nothing to do with rational decision-making about how to adapt to ecological constraints.
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