Climate Economists Deftly Tackle their Second-Hardest Question

Among economists, "What's the future worth?" has been one of the most chewed over questions since the U.K. released a major assessment of the costs of climate change in 2006. There are plenty of answers that the question brings up in ordinary life, from the emotional ("Every bit as much as the present!") to the practical ("How will answering this question help my re-election to the U.S. House of Representatives?")

In the world of climate change, though, it's a hard numbers question: how much should we spend now to head off climate disaster in the future? It depends on how much you think the value of money will change over large spans of time. Economists talk about the value of the future in terms of a "discount rate": how much we value a dollar's worth of goods or resources X years in the future compared to today.

Slide the discount rate up and down, and the future value of money drops or rises. The value of $1,000 today drops to about $368 after a century, with a one percent discount rate, Maureen Cropper, a University of Maryland economist and senior fellow at Resources for the Future, wrote earlier this year. That same amount shrinks to $18 with a discount rate of 4 percent, which is closer to historical returns. Recent research shows there might be a middle ground, with the discount rate gradually dropping in the out-years of the projections.

The U.K.'s 2006 Stern Review on the Economics of Climate Change provoked many mainstream resource economists by choosing a very low rate at which the cost of potential future climate damages are translated back into current dollars. It had profound implications for the report's policy recommendations.

If a future pound, or dollar, has value closer to today's, as it did in the Stern review, then climate change could add up to enormous economic damage. A carbon price now might seem like better medicine than disabling pain later.

If money loses value faster, then projected future damages are discounted back into today's more valuable currency, and the cost of policy comes out lower. In this case it might make more sense for our richer progeny to take their chances as the climate goes south.

Having the benefit of previous approaches to consider, current and former officials from seven countries launched on Tuesday a high-level initiative to look at the costs and benefits of climate policies and the transition to a low-carbon economy. Led by Felipe Calderon, the former president of Mexico, the Global Commission on the Economy and Climate is a group of former heads of state and ministers, and luminaries from economics, business and finance, including Lord Nicholas Stern , chairman of the Grantham Research Institute at the London School of Economics. [Click here for the full Bloomberg News story.]

The research will be led by Jeremy Oppenheim , whose work at McKinsey's sustainability practice has been fundamental to international and national climate economic debates for years.

"My hypothesis walking into this is that we will run our economics with a range of discount rates," he said. "I don't think there is a single discount rate that everybody will agree to. So we'll look at a range of them and we'll see what the implications of moving the discount rate up and down look like."

More scenarios will allow the commission to focus on its primary interest, "whether there are win-wins between the economic agenda and the climate agenda."

The year-long study will be published in September 2014, before a United Nations' summit on low-carbon economic growth.

The release this morning of the fifth assessment of global climate change by the Intergovernmental Panel on Climate Change (IPCC) , which was founded in 1988 by the United Nations and the World Meteorological Organization, will stimulate debate about proper policy responses to global warming. Ultimately, a transparent and wide range of assumptions should shift debate from the community of research wonks to elected officials, who can decide for themselves the smartest way to price the future.

That leaves the hardest question of all, which is how to get them to do that.

Analysis and commentary on The Grid are the views of the author and don't necessarily reflect the views of Bloomberg News.

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