We are at a stage whereby human activity has potentially huge and long term “consequences on both environmental amenities and the capacity to provide material well being.” Global warming is one of these consequences which will have both economic and environmental repercussions. The greatest impact of global warming will primarily be felt by future generations, hence the benefits of greenhouse gas emission abatement are aimed for them, whilst the costs will be borne by today’s generation. However, global warming being such a complex premise implies that not all of its outcomes are negative; indeed, some regions will actually benefit from global warming. Russia would be one of the countries which would be affected positively, seeing as it is close to the poles. The concept of global warming is so contested that “older estimates of damage due to a doubling of CO2 in the atmosphere range between 1-2.5% of GDP”. However, newer studies have tended to show that it is more economically viable to tackle adaptability rather than greenhouse gas abatement. Seeing as global warming is such a disputed issue it follows that there has been great debate on how to manage it. The principle of discounting has been at the center of this debate.
Eric Neumayer’s paper discusses the relevance of discounting on tackling global warming. Neumayer first presents the neoclassical approach by concentrating on William Nordhaus’s study of 1994. Nordhaus implicitly assumes the validity of perfect substitutability (which is at the center of the weak sustainability paradigm). Arguably one of the ways in which he achieves this, is in the manner he discounts the future. Nordhaus’s formula for discounting is the infamous Ramsey formula of 1928 (which is shown below.)
Symbol | Definition | Figures assigned by Nordhaus |
r | social discount rate | 6% |
p | pure rate of time preference | 3% |
n(c) | product of the elasticity of the | 1 |
marginal utility of consumption | ||
C/C | per capita growth rate of | 3 |
comsumption |
Per capita growth rate of consumption (C/C) is not tremendously important in Neumayer’s discussion. In fact, irrespective of its value, the assumption is that environmental costs and benefits can be substituted by material costs and benefits. Moreover, according to Nordhaus, “given that n(c) C/C > 0, the future should count less because it is then presumed to be better off due to the increase in consumption”.
Nordhaus’s study has received a lot of speculation. Most critics disapprove of his social discount rate of 6% and his pure rate of time preference of 3%. Indeed, many environmental economists have wanted to set the pure rate of time preference to zero “for reasons of intergenerational fairness”. The premise is that being of a future generation shouldn’t be a reason for being of less value. However, Neumayer observes various problems with the critics’ propositions, especially those to lower the discount rate. The first being that lowering the discount rate is dubious, seeing as future generations have been estimated to be 4.5 times richer 100 years from now. The second problem is that lowering the discount rate means that society must channel scarce financial resources for the purpose of combating global warming when current populations are in need of the resources today. Lastly, and arguably most importantly Neumayer is of the opinion that such propositions do not attack the real issue in Nordhaus’s methodology, which is his “underlying assumption of perfect substitutability”.
Rigorous emission abatement must presuppose that natural capital and manufactured capital are less than perfect substitutes for each other. Indeed, proponents of strong sustainability are of the opinion that natural capital cannot be substituted by human-made capital. There is a consensus emerging that global warming is putting ecosystems under stress and therefore damaging the capacity of natural capital to provide food, medicine, purify water, control floods and more. “Since natural capital as such should be kept intact, strong sustainability calls for aggressive policies to combat global warming”. According to this view, held by proponents of strong sustainability, seeing as natural capital cannot be substituted, “global warming has to be prevented quite regardless of the costs of doing so”. The question Neumayer asks is: But is it really true that damages to natural capital cannot be compensated for with higher consumption levels?
To conclude, we can ask ourselves the following question- if substitutability is the key issue and discounting is not, then what steps need to be taken to manage global warming? Strong sustainability calls for stringent CO2 emission abatement policies whilst weak sustainability calls for lenient abatement policies. Both strong and weak sustainability have negative and positive propositions. The question Neumayer asks is which of these proponents are correct? I think the answer to this question depends on whether future generations will value natural capital or consumption more.
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