by the Congressional Budget Office

“ Economists who analyze public policy reason that if a public investment is going to improve public welfare, it should produce rates of return similar to those of the private investments that it displaces. So in analyzing the costs and benefits of policies intended to avert climate change, economists typically apply discount rates that are similar to market interest rates, after adjusting for taxes, risk, and inflation. Those discount rates reflect the distributional choices that people in the economy, taken together, actually make. ”

“ The economic value of a resource reflects those choices rather than something intrinsic to it. Value is measured by people’s willingness to pay for the benefits that a resource provides—or, nearly equivalent, their willingness to accept compensation for lost benefits. ”

“ The Earth’s atmosphere and climate are part of the stock of natural resources that are available to people to satisfy their needs and wants over time. From an economic point of view, climate policy involves measuring and comparing people’s valuations of climate resources, across alternative uses and at different points in time, and applying the results to choose a best course of action. Effective climate policy would balance the benefits and costs of using the atmosphere and climate and would distribute them among people in an acceptable way. ”

“ The effectiveness of those institutions depends in part on characteristics of the resources. Market institutions do not work well when resources have the characteristics of public goods—that is, when it is difficult to prevent people from using the resources without paying for them (consumption is “nonexcludable”) and when the incremental cost of allowing more users is near zero (consumption is “nonrival”) . Market failures also arise when the many people using a resource affect each others’ use—for instance, when rush-hour drivers create congestion and air pollution. ”

“ Certain types of rights, such as rights to emit greenhouse gases by burning fossil fuels, could be delineated without great difficulty. Other rights, such as credits for carbon stored in the soil and trees of a forest stand or in the ocean, would be more complicated to define. Still others—such as the right to enjoy a particular type of climate in a particular part of the world at a particular time—would be impossible. Without clearly delineated, enforceable rights, individuals cannot easily bargain with one another in markets to resolve their conflicting claims. ”

“ That balancing of current costs and future benefits also includes weighing the cost of reducing emissions to avert climate-related problems in the future against the cost of adapting to the climate change that occurs—that is, balancing mitigation and adaptation. If the incremental costs of reducing emissions today are higher than those of adapting to the consequences of emissions in the future—say, by spending more on insect control to prevent the spread of tropical diseases—then it would be more cost-effective to reduce emissions less and to adapt more. ”

“ Applying a lower discount rate gives more weight to the well-being of future generations, shifting the balance of costs and benefits in favor of investing more to reduce emissions today (and investing more in other kinds of capital formation as well) . An extreme case would be to apply a discount rate that took into account only the expected gradual increase in future generations’ well-being that sprang from economic growth. ”

“ Since resources devoted to climate policy would be diverted from other uses, the total benefit from all types of investment would be greatest if the rates of return were the same “at the margin”—that is, for the last dollar of each type of investment. However, efforts to ensure equal rates of return become extremely complicated in the case of long-term issues such as climate change. Few other investments compare with climate policy in yielding an enormous variety of returns on a global scale and over such long periods, or in having returns that are as uncertain. ”

“ Discounting and the Distant Future For a variety of reasons, people place less value on the future than they do on the present; a dollar today is worth more to them than a dollar tomorrow. The practice of valuing future income less highly than current income is called discounting. A person who greatly devalues, or discounts, future consumption and hence does not save and invest much is said to have a high discount rate. A person who places great value on the future is said to have a low discount rate.
Such valuations are expressed in the market as interest rates. ”

“ Common Air Resources As a resource problem, air pollution is typically more complicated than overfishing. Unlike markets for fish, in which a product actually changes hands, people generally do not buy and sell air, so there is no market price that reflects the value of air. In addition, modest air pollution may hurt only some especially sensitive people, or it may contribute to health problems in ways that are hard to trace back to it. Pollution levels may have to be very high before many people notice a problem and demand a remedy. ”

“ Integrated assessments of the potential costs and benefits of averting climate change typically find relatively small net benefits from stringent emissions controls in the near term, even though they conclude that the continued growth of emissions could ultimately cause extensive physical and economic damage. ”

“ Distributional concerns are at the heart of much of the controversy about climate policy. For example, imposing controls on emissions today would cut coal mining companies’ profits but would benefit manufacturers of solar energy equipment. Preventing climate change in the future might greatly benefit countries at very high risk of damage but might actually hurt countries that stood to gain from a warmer climate. Similarly, emissions control policies would impose costs on people today and yield benefits to people in the future. ”

“ People are likely to be wealthier in the future and therefore may find it easier to pay to reduce emissions. If income and wealth grow and technology improves as expected, future generations may find it relatively easy to cope with the impacts of climate change and to gradually impose increasingly strict restraints on emissions to avert further change. At least for carbon dioxide, emissions that occur sooner rather than later will have more time to be absorbed from the atmosphere by the oceans. ”

“ The study found little net advantage in averting climate change because the assessment balanced current prosperity against future prosperity and the future benefits of economic growth against the future benefits of a stable climate. To avert climate change over the long run, society would have to reduce emissions both today and later. That policy would reduce current generations’ prosperity and slow the rate of economic growth, thus leaving future generations less affluent, too. ”

“ If people had less of a preference for current consumption (a lower time preference) —and thus lower discount rates—they would save and invest more of their current income. Because highly profitable investment opportunities are not unlimited, people’s pursuit of increasingly less profitable ones would drive down the marginal rate of return. Ultimately, their lower time preference would be reflected in a larger stock of capital, greater output and income, and lower interest rates. ”

“ For most of human history, open access to the oceans and air was appropriate because the world’s population was too small and its technologies too limited to deplete stocks of fish, degrade air quality, or affect the climate.
But population growth and advances in technology have changed the way people use natural resources and made them vulnerable to overuse, depletion, and degradation. ”

“ Those factors converge in the case of climate change, which involves great uncertainty about a public good.
In attempting to manage such resources, policymakers may simulate markets by estimating individuals’ willingness to pay, using proxy measures that economists have developed for resources that are not directly bought and sold. Even with those measures, however, policymakers face the challenge of limited information, as well as the impossibility of learning what values future generations might assign to those resources. ”

“ The choice of discount rate therefore makes a huge difference in thinking about long-term problems such as climate change.
Long-term discounting has such a strong effect precisely because private investments yield relatively high rates of return. As long as society continues to have extensive opportunities for investment, it will be able to set aside modest resources today, continuously reinvest the earnings, and have enormous wealth in the distant future. ”

“ And as Chapter 2 discussed, the scientific and economic uncertainty involved makes climate trade-offs extremely difficult to evaluate.
In sum, policymakers may be faced with the extraordinarily complicated task of managing a resource that no one owns, that everyone depends on, and that provides a wide range of very different—and often public—benefits to different people in different regions over very long periods, benefits for which property rights would be very difficult to define, agree on, and enforce. ”

“ Because the tax becomes a cost of catching fish, fishermen will raise the market price of their fish, consumers will buy fewer fish as the price rises, and the government will receive tax revenues. As the demand for fish falls, fishermen will make less money, and some of them will be pushed out of the market. As in the case of auctioned rights, the government will receive revenues that it can use to partially offset consumers’ and fishermen’s losses, and fishing will be maintained at a sustainable level. ”

“ In contrast, not acting would benefit people today and probably yield somewhat more wealth in the future—but it might also leave the world with a different and possibly worse climate for many generations to come.
Choosing among policies is not purely a matter of balancing costs and benefits but also a question of how to distribute the benefits of energy consumption, land use, and climate among generations. Policy recommendations from the integrated assessments described earlier are very sensitive to such intergenerational choices. ”

“ Climate policy thus involves balancing investments that may yield future climate-related benefits against other, non-climate-related investments—such as education, the development of new technologies, and increases in the stock of physical capital—that are also beneficial. If climate change turned out to be relatively benign, a policy that restricted emissions at very high expense might divert funds from other investments that could have yielded higher returns. Conversely, if climate change proved to be a very serious problem, the same policy could yield a much higher return. ”

“ The task of developing and enforcing property rights generally falls to governments—and it may be further complicated if several countries are involved and international negotiations are needed to resolve conflicts. Governments use a variety of approaches to regulate fisheries, many of which explicitly involve the technology of fishing. For instance, the government may restrict the size of fish that can be taken, prohibit the use of large dragnets, or require the use of handheld lines. Other regulatory strategies apply more directly to the market for fish. ”