Should We Discount Global Warming?

No, by "discount," I don't mean "ignore altogether." What I mean is what bankers and economists mean by the word. The discount rate is an assumed interest rate that is used to make economic decisions, as anyone who has taken engineering economics will recall. And the funny thing is, although discussions of global warming invariably deal with matters fifty or a hundred years in the future, hardly anyone applies the simple economics of discount rates to the problem. When you do, the result is a surprise.

Gary S. Becker is a Nobel-Prize-winning economist who thinks any discussion of global warming should factor in a reasonable discount rate. Here is his argument in a nutshell. Suppose, for the sake of argument, that if we do nothing about global warming, fifty years from now it will cause $2 trillion of damage (technically termed "utility costs" in terms of lost income from flooded coastlands, etc.). It turns out that if you roll the tape of time back to 2008, you could pay for that $2 trillion by investing only $500 billion at a rate of return of 3 percent, which is pretty easy to do (assuming you have the $500 billion in the first place). Becker makes the point that if we went ahead now with most of the more radical proposals for doing something about global warming—reducing carbon emissions by 70%, putting big restrictions on fossil-fuel-burning technologies, and so on—they would cost a lot more than $500 billion in the next few years. If these restrictions cost, say, $1 trillion, we are being foolish by spending all that money now to avert something we could offset with half that amount.

This is not an argument to do nothing. On the contrary, it is one of the few arguments I've seen on the subject that requires us to come up with some quantitative information in order to make a rational economic decision, which is what engineers do all the time. The usual approach used by advocates of extreme measures is to paint a picture of the end of civilization as we know it if we don't go green 24/7 and never allow the problem to leave our consciousness for the rest of our lives. Put more quantitatively, these folks use a discount rate of zero, which I suppose is a reasonable one if you assume that the alternative is either peace and security on the one hand by doing everything they advocate, or death to humanity on the other. If a mugger walks up to you in a dark alley, puts a knife to your ribs, and mutters, "Your money or your life," you're not likely to deliberate a long time before handing over all your cash, not just some of it.

But implicit in Becker's economic argument is the assumption that, as damaging as global warming and its consequences might be, it will not be the equivalent of a giant meteor smashing the earth to bits. Its effects will be gradual, not sudden; spotty, not universally bad everywhere; and will be quantifiable in economic terms. Anything with a finite future cost can be discounted using standard economic assumptions. The rate of 3 percent that Becker uses is quite conservative—many investments in physical capital pay rates of return much higher than that. What Becker is saying is that we shouldn't stop all economic growth and divert all our resources to fighting global warming, because we're wasting resources that would pay off better if invested in other things. Wise investment in future economic growth, which over the last century has raised billions of people from poverty into something approaching a middle class, can continue to bring prosperity to future generations even in the face of problems like global warming.

Economics isn't everything, of course. If we took a poll to find out what Americans would pay to keep the Statue of Liberty from submerging (which would also flood most of the East and West Coasts), the answer would probably come out close to "whatever it takes." But engineering is about economics as much as it is about technology. And any analysis of global warming that makes unrealistic economic assumptions is simply bad engineering, whatever else you might call it.

Sources: Becker makes his argument in an essay in the Hoover Digest (2007), no. 2, published by the Hoover Institution, at http://www.hoover.org/publications/digest/7465817.html.