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The sad accounting of climate change

  • Published at 06:04 pm December 6th, 2014

My parents love me. They would make sacrifices for my wellbeing without a moment’s hesitation or complaint. My brother and his wife have two little toddlers. My parents love their grandchildren to bits – more than they love me these days, I suspect. I doubt that they are exceptions. I have yet to meet a parent who will not make sacrifices today to ensure that their child will have a more promising future.

Most frequently, I have seen this in low-income communities in our country, where men and women will work day and night, suffering through all hardships and even go hungry – just to ensure that their children will have an education.

Where I’m writing from – the UN Climate Change conference in Lima, Peru – we just had the Young and Future Generations Day. In this complex world of negotiations, suited officials from my parents’ generation also talk about us sometimes with lofty, but mostly empty words. Behind those words is a very simple and hurtful fact – our lives are just not as valuable.

This is done through a mechanism called discounting, whereby economic cost-benefit analysis renders future benefits derived as less valuable to benefits derived at present.

The main argument usually placed forward to justify this discounting is a predication that future generations will be richer than current ones because of continued economic growth, and thus will have more means to address their challenges. However, there is now significant research that shows that long-term economic growth has permanently slowed, and even that the current model of continuous economic expansion is heading for collapse.

This does not inspire confidence on the argument to base critical decision-making on – especially when that can have potentially catastrophic effects in the near-to-medium term future.

If you do away with that assumption and accept that future real wealth will not increase continuously because we may have, or will soon, reach the biocapacity of Earth, the equation changes drastically. Based on this, let us compare how the lives of young and future generations matter compared to the current generation (with decision-making authority) taking the critical decisions that will shape the future.

A standard representative discount rate used is 4%, which means $100 worth of value now is the same as $104 next year, and 104 times 1.04 the year after that, and so on.

The Stern Review has put forward a number of 1.4% for wiser decision-making in the context of climate change, and the “Inteq,” or Intergenerational Equity group, has argued for a zero or near-zero percent discount rate.

It should be easy to see why it is not a good guide for decision-making on climate change. If it is not evident yet, consider this:

Let’s say, hypothetically speaking, the rapid melt of glaciers leads to a global water crisis, fuelling conflict and a nuclear world war in the year 2100.

For such a catastrophic outcome, scenarios of which have come eerily within sight, the discounted (current) economic loss is only 2-3% of the total loss and of course do not capture the severity of the consequences.

This results in the preposterous conclusion that economic cost-benefit analysis says spending a few percentage points of global GDP does not yield enough value to have a high certainty of preventing those outcomes.

Therefore, we are at a position where our economic cost-benefit analyses yields not just sub-optimal, but recklessly bad decision-making on current investments on climate action.

This has started to change in recent years, because the near-term future costs of climate change are increasingly being predicted to be so astronomically large that even after discounting heavily, present inaction is too costly.

The United Nations Environment Program (UNEP) just released a report on the “adaptation gap” saying that adaptation costs to climate change even limited to less than the targeted two degrees celsius rise will be roughly three times higher than was predicted in recent years – reaching a staggering few hundreds of billions of dollars per year by 2050.

To ramp up rapid action within this decade so that we are able to prevent the most severe consequences of climate change, we need a thorough, worldwide reassessment of the discount rate reflecting latest economic realities.

Its use should be ensured for economic cost-benefit calculations when countries present their intended contributions early next year for the Paris agreement on climate change to be signed in December 2015.

Otherwise, we are likely to simply continue the criminal inaction and condemn our young and future generations to a future they have done nothing to deserve, and can do little to change. 

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