The High Discount Rate Problem

May 8th, 2014 at 6:05 pm

A quick note on an important challenge.

Reading recent reports on the already-arrived impacts of climate change, I suspect I’m not the only one who’s asking: “what will it take to get people to take more action against this existential threat?”

I say more action, because we’ve made some progress.  My beloved EIA website is down for some reason so I can’t find the exact numbers I want but I believe more than 30 states now have “renewable portfolio standards:” requirements that a specific percent of the state’s energy be met through renewable sources by a specific time, e.g., 33% in CA by 2020.  Energy derived from solar and wind still comprise tiny shares of our national consumption, but much larger shares of our marginal additions (I’ll add the numbers when the EIA site is back up).

That’s progress, but not nearly enough.  So allow me to wax philosophical, or more precisely, psychological, for a moment.  There are two equally valid ways to think about the breakdown here.

One, humans just have a basic screw loose and, as a broad species, we just don’t have the brainpower to provide ample stewardship over our environment.  We’re thus congenitally doomed.

The “broad species” part is important.  There are of course those who understand the threats better than others and advocate for solutions.  But they lack support because most people, though they believe climate change is real, rank it pretty low on the list of things they worry about.

Which brings me to the second way to think about this, perhaps one that yields some insight: when it comes to the future, most people have a very high discount rate.  They want what they want now, with little regard for future consequences.  Even if you can convince them that things we’re doing today means their beachfront property will be underwater some years from now, they’d rather enjoy it today and worry about that other unpleasantness later.

In economic terms, a high discount rate means you’d be willing to pay less now for more later compared to someone who discounted the future less than you.  If your discount rate is 10%, you’d be willing to put aside only about $15 now to get $100 in 20 years.  If your discount rate is 2%, you’d put aside $67.

The problem then becomes, what will it take to get more people to place a higher value on the future such that they be willing to put aside more today to get something they’re currently undervaluing in the future?

One answer is: fuggetaboutit—see “screw loose” section above.  In this case, society’s best move may be ideas like renewable standards that set goals for the future based on low-discount rates.  Of course, the problem hits when that starts to impose costs on the high discount rate set who, given their majority, can simply revoke the standards.

Another answer is to get people a lot more worried about the future by proving to them that its leading edge is already here and it’s not pretty.  That’s the spirit of recent climate work tying volatile weather, drought, and rising sea levels to existing environmental degradation.  There’s some evidence that high discounters—and remember, they’re the majority—write that off too: “hey, the weather goes up and down, right?”

A final thought—my preferred idea—is to start really, really small.  That is, while most people discount as I’ve discussed, the polling data show that majorities are at least a little worried about the impact of climate, and that’s almost surely going to grow along with its impacts.  So implement a very small tax on carbon, one that is far below the social cost, but one that’s priced to account for people’s actual, negatively biased perceptions of that cost.  Get that in place, and we can build on it.

Like I said, just a thought.

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2 comments in reply to "The High Discount Rate Problem"

  1. Robert Buttons says:

    1. Making energy more expensive. (YES, green energy is more expensive) will, without a doubt, suppress economic activity.
    2. If the climate models are correct, particularly the dire models posited by Michael Mann, et al,, ONLY an “all hands on deck approach” will save us. Even HIGH carbon taxes won’t be enough. Population and immigration controls will be necessary. For example, an immigrant from Mexico increases his carbon footprint by 290% when he comes to the US.

  2. John Barkdull says:

    I’d consider, too, that there is a probability attached to the worst outcomes. For instance, it is not unusual to see assertions that the survival of the human species is at risk. Perhaps, but what is the probability that even the most uncontrolled human contributions to global climate change would have that result? Let’s say it’s 5%. And then let’s say this would occur in 300 years. Then, it’s not just about discounting the future. It’s discounting the small chance that the future would give us a highly negative outcome. Given all the contingencies between now and then, a rational person might well say it’s not worth worrying about.

    If, instead, the dire outcomes are rising sea levels and the like, then it’s likely that humans can handle that, albeit at considerable cost. Maybe people in Miami have to move. Maybe Bangladesh goes half under seawater. Maybe we have to build some extensive protections for Manhattan. Not insignificant, to be sure, but do these manageable problems, well short of species extinction, necessitate massive social and economic change today? A rational person might say no. Over a century or so, people will move, cities will adapt, agriculture will change its location, crops, and practices, and the like. No doubt, some mitigation would help head off some of the larger costs of adjustment, but there’s no need to panic over this.

    I understand that some scientific studies indicate that things could be much worse than the previous paragraph suggests. But in answer to your question as to why people are not alarmed, I’d say that they are thinking something along the lines just described.