Ecological Economics 105 (2014) 4047

Contents lists available at ScienceDirect

Ecological Economics
journal homepage: www.elsevier.com/locate/ecolecon

Analysis

Zero discounting can compensate future generations for climate damage

Marc D. Davidson
Institute for Biodiversity and Ecosystem Dynamics, and Research group Philosophy and Public Affairs, University of Amsterdam, Science Park 904, 1098 XH Amsterdam, The Netherlands

a r t i c l e

i n f o

Article history:
Received 15 March 2014
Received in revised form 29 April 2014
Accepted 19 May 2014
Available online 13 June 2014
Keywords:
Future generations
Discount rate
Compensation
Climate change
Costbenet analysis
Deontology

a b s t r a c t
In costbenet analysis of climate policy there are two main approaches to discounting, each with implications
conicting with our moral intuitions. Thus, discounted utilitarianism implies that we hardly need to protect
future generations against climate change, while classical utilitarianism implies that we should reduce our
consumption across the board to benet future generations. The insolubility of the debate derives from the
fact that both classical and discounted utilitarianism permit only a single discount rate for all consequences
occurring in the same future year, while our intuitions clearly do distinguish between consequences, depending
on whether we cause adverse effects on other people's interests and violate their rights. Most people share the
moral intuition that we ought to refrain from harming others, and ought to compensate them if we were unable
to prevent harm. To regain a reective equilibrium between such deontological intuitions and economic theory
there is a need to accept different discount rates for different situations: a zero consumption discount rate in the
case of costbenet analysis of measures to prevent wrongful harm to future generations, and standard
discounting in all other cases. Applying a zero consumption discount rate means that future generations are
automatically largely compensated for climate damage that remains unmitigated.
2014 Elsevier B.V. All rights reserved.

1. Introduction
Discounting is the procedure whereby a lower value is assigned to
costs and benets the farther in the future they occur.1 Since the consequences of greenhouse gas emissions extend centuries to millennia into
the future, the choice of discount rate in costbenet analysis of climate
policy is of decisive importance (see e.g. Dasgupta, 2008; Nordhaus,
2007; Stern, 2006). Discounting at a typical constant rate of 6%, for
example, means being willing to spend less than nine dollars today to prevent a million dollars of climate damage two hundred years hence. When
standard discount rates are applied, therefore, there is hardly any climate
change mitigation effort that passes a costbenet test. Many concur
with the observation of Weitzman (1998: 201) that "to think about the distant future in terms of standard discounting is to have an uneasy intuitive
feeling that something is wrong, somewhere". Unfortunately, economists
have to date been unable to reconcile moral intuitions with economic theory. In September 2011 the US Environmental Protection Agency asked
twelve economists central to the discounting debate2 how the benets
and costs of regulations should be discounted for projects that affect future

Tel.: +31 20 5257379.

E-mail address: m.d.davidson@uva.nl.
1
Throughout this article the term discount rate will refer to the consumption discount
rate unless mentioned otherwise.
2
Kenneth J. Arrow, Christian Gollier, Ben Groom, Geoffrey M. Heal, Richard G. Newell,
William D. Nordhaus, Robert S. Pindyck, William A. Pizer, Paul R. Portney, Thomas
Sterner, Richard S. J. Tol, and Martin L. Weitzman. The workshop was chaired by
Maureen L. Cropper.

http://dx.doi.org/10.1016/j.ecolecon.2014.05.018
0921-8009/ 2014 Elsevier B.V. All rights reserved.

generations. In a recent Science article (Arrow et al., 2013) they recommend using declining discount rates as a means of accounting for the uncertainty concerning future discount rates (see e.g. Weitzman, 1998,
2001) and uncertainty in future consumption (see e.g. Gollier, 2012;
Gollier et al., 2008). The proposed rates decline only slowly from around
3.5% to lower values, however. Consequently, the resultant damage estimates remain relatively low, in the order of $10$17/tC (=$4$5/tCO2)
in 1990 U.S. dollars (Freeman et al., 2013), still hardly a spur for stringent
climate policy. Something remains wrong, somewhere.3
When theoretical considerations and moral intuitions conict,
neither is to be trusted. To restore a reective equilibrium we need to
enter into a dialectical process, as a result of which either our intuitions
shift or we adapt our theory, or both (Rawls, 1971). The purpose of this
article is to argue that a reective equilibrium is restored by assuming
that discount rates depend on our specic duties under the circumstances. In other words, it requires incorporating deontological
elements in costbenet analysis (see also Caney, 2008; Davidson,
2006; Howarth, 1995; Padilla, 2002; Sen, 1982a; Spash, 1993,
1994). This shift is rather alien to mainstream economics, however,
which is based on the view that normative properties depend solely on
consequences. Moreover, our moral intuitions may require actual compensation for climate damage (Spash, 1994), while standard costbenet

3
It has been suggested that present damage estimates may be too low given the uncertainty about damages and the possibility of a catastrophe (see e.g., Anthoff and Tol, 2013;
Weitzman, 2009). Higher damage estimates may weaken some people's intuition that
something is wrong with discounting. For others, however, the problem will remain to
lie in the procedure of discounting itself.

M.D. Davidson / Ecological Economics 105 (2014) 4047

analysis requires only potential compensation (Hicks, 1939; Kaldor,

1939). It should be emphasized that there is no single right reective
equilibrium. Reective equilibrium is subjective and different people
may therefore reach different equilibria.
The argument developed in this paper differs from earlier proposals
for so-called dual-rate discounting. Earlier articles that advocate zero
discounting in the case of wrongful harm to future generations
(Caney, 2008; Davidson, 2006; Part, 1983: 36; Spash, 1993, 1994)
have not discussed the relation between discounting and compensation.
This article provides a discussion of how compensation can be offered in
practice and an actual calculation of the results when applying alternative
principles. Some have argued for different discount rates for environmental goods (or intangible effects) and other goods, to account for the
expectation that the value or relative importance of the former will
grow over time (see e.g. Almansa and Calatrava, 2007; Gollier, 2010;
Hoel and Sterner, 2007; Krutilla and Fisher, 1975; Kula and Evans,
2011; Tol, 1994; Weikard and Zhu, 2005). However, this approach
does not really apply different discount rates, but rather compensates
for undervaluation of intangible effects. Hasselmann et al. (1997:
370-1) proposed a zero discount rate for climate damage costs, arguing
that future sustainable development is perceived as a non-timedegradable commitment to which one should assign a time-independent
welfare value. Yang (2003) argued, however, that using different discount
rates for mitigation and climate damage costs, i.e. in costbenet analysis of
the same project, would lead to time-inconsistency. The issue of
time-inconsistency would be resolved by using different discount rates
for environmental impacts that are not (readily) substitutable by conventional private goods (see also Neumayer, 1999). According to Yang,
dual-discounting would reect people's willingness-to-pay for environmental projects that are only justied with very low discount rates, but
he did not further investigate the scope and nature of such environmental
projects.
The setup of this article is as follows. In Section 2, I rst discuss the
RamseyCassKoopmans model as a description of household saving
behavior. In Section 3, I discuss the debate between the so-called
descriptive and prescriptive approaches to discounting climate
damages. In Section 4, I argue that our moral intuitions in the discounting
debate are largely deontological. In Section 5, I offer a simplied example
to illustrate the consequences of a zero discount rate both for consumption and compensation. Section 6 concludes.

41

Since people generally expect to become wealthier in the future, i.e. to

have higher consumption levels, this gives people a second reason besides impatience to discount future consumption compared with
present consumption. The consumption discount rate CDR thus reads:
CDR g

where is the absolute value of the elasticity of marginal utility (a measure

of the relative effect of a change in consumption on welfare) and g the
expected growth rate of consumption. Note that this so-called Ramsey
equation holds only under conditions of certainty. An uncertain future
can give rise to precautionary savings and consequently a lower CDR
(see e.g. Gollier, 2010; Kimball, 1990).
In optimizing utility over time, individuals choose how to divert the
returns of capital (K) available at time t. These returns, y(K(t)), are
divided over consumption, c(t), and saving, K(t):
0

yK t ct K t

Because of their positive CDR, consumers require a reward for

postponing their consumption. Producers are willing to pay this reward
because capital is productive, i.e. there is a positive marginal rate of
return on investment (MRRI). The outcome of this supply and demand
for capital is a market interest rate (i). In a world without market failure,
taxes or risks, i equals both CDR and MRRI.
i MRRI CDR g

MRRI and CDR also determine the saving rate or marginal propensity
to save (mps): K (t)/y(K(t)). If MRRI N CDR, people will increase their
savings and vice versa. A typical mps is in the order of 20% (see e.g.
Lind, 1982; Moore et al., 2004; Pearce and Ulph, 1999; Stern, 2006: 161).
There are various approaches to estimating practical values for i and
MRRI (see e.g. Nordhaus, 2007). For example, the real return on twentyyear U.S. Treasury securities in Autumn 2013 was about one percent per
year, although the average of the real interest rate on long-term
Treasury securities between 1870 and 2000 is about three percent (US
Department of the Treasury, 2005). The U.S. Ofce of Management and
Budget assumes a real, pretax average return on private investments of
seven percent (OMB, 2003).

2. A Description of Discounting and Saving

3. The PrescriptiveDescriptive Debate
Central to the discount debate is the Ramsey model, a neo-classical
model of economic growth (Ramsey, 1928), later extended by Cass
(1965) and Koopmans (1965). Ramsey originally intended his model
to answer the question of how much of its income a nation should
save. Later, the model was also used to describe the actual economy, particularly to describe household saving behavior, capital accumulation and
economic growth. The model assumes that households face an
intertemporal optimization problem: households can choose to consume
or to save the returns to capital and labor, so as to optimize utility over
their lifetime. Essential in the description of the actual economy is that
households do not simply maximize intertemporal utility, but prefer
present over future utility. The intertemporal welfare function (W) is
thus given by
Z
W

t0

uct e

dt

where u(c) is the utility accruing from consumption, c(t) is the consumption at time t, and is the pure rate of time preference. This is also called
the discounted utility model (Samuelson, 1937). Utility (u) is usually a
concave function of consumption (c), for the higher the level of consumption, the less additional consumption offers people additional utility.
Better an additional dollar as a poor student than as a well-paid doctor.

What are the implications of the RamseyCassKoopmans model as

a description of the economy for discounting climate damage in cost
benet analysis? According to Arrow et al. (1996), there is a general
agreement that when evaluating alternative policy scenarios all present
and future consequences, including consequences for spending and
investments, are to be converted into consumption equivalents rst,
then discounted against the appropriate consumption discount rate
(Arrow and Kurz, 1970; Lind et al., 1982). Calculation of these different
consumption paths (from the present to the indenite future) must be
consistent with a description of the actual economy, in terms of actual
household saving rates and marginal rates of return on investment, for
example. There is a disagreement, however, as to what consumption
discount rate is appropriate for comparing the resulting consumption
paths. Arrow et al. (1996) classied the various approaches as either
descriptive or prescriptive. The descriptive approach bases the CDR on
rates of return on investment (see e.g. Manne, 1995; Nordhaus, 2007;
Weitzman, 2007), while the prescriptive approach bases it on ethical
principles (see e.g. Broome, 1992; Cline, 1992; Stern, 2006). In this
section, I rst argue that the descriptive approach is based on erroneous
assumptions and is therefore to be rejected. And secondly, I argue that
the prescriptive approaches followed to date have been based upon
moral principles incapable of restoring a reective equilibrium.

42

M.D. Davidson / Ecological Economics 105 (2014) 4047

Two assumptions underlie the descriptive approach.4 The rst is that

society's preferences as to how to discount climate damage are revealed
through capital markets, i.e. through rates of return on investment, and
that the model of discounted utilitarianism describing household saving
behavior is therefore also applicable to climate change. Capital markets,
however, only reveal how people compare changes in their own present
and future consumption. Capital markets have little to say about how
people compare changes in their own present consumption with changes
in the consumption of others, such as future generations (Part, 1983;
Roemer, 2013: 143; Schelling, 1995: 396). We must therefore look
elsewhere if we wish to describe how people actually prefer climate damage to be discounted, such as polls, political processes or mock referenda
(Hasselmann et al., 1997; Kopp and Portney, 1999).
The second assumption underlying the descriptive approach is that
the discount rate ought to be based upon society's actual preferences,
instead of the moral views of specic economists or philosophers.
Prescribing a discount rate on moral grounds would be undemocratic
(Marglin, 1963; Nordhaus, 2007; Weitzman, 2007). Costbenet analysis,
however, neither intends to describe society nor is it a decision-making
algorithm reecting the will of the people. Rather, cost-benet analysis
intends to advise society and governments about wise policy. As such, it
is based on expert insights that may deviate from the description of
beliefs and preferences observable in society. Democracy interpreted as
majority rule may require governments not to translate advice that
conicts with society's preferences into action, but this is unrelated to
the question of whether or not the advice itself is sound (Part, 1983:
32). Climate costbenet analysis, for example, is based on knowledge
of the impacts of climate change deriving from climate scientists, rather
than on public (dis)beliefs about climate change. It is based on insights
from economists about how to reduce the impacts of climate change
efciently, rather than incorporating the irrationality and inefciency of
the average citizen. Likewise, costbenet analysis may be based on
insights from moral philosophers as to how to reduce the impacts of
climate change fairly. One could imagine testing moral opinions on
analogous lines with the formal principle of justice to treat like cases
alike (Aristotle, 1975), or the requirement of reective equilibrium
(Rawls, 1971). So if optimal climate policy is based on the insights of
scientists and economists, often in opposition to the beliefs of the public
at large, there is no reason to exclude moral insights. Moreover, many
authors have shown that even the aim of efciency already presupposes
moral choices (see e.g. Baum, 2009; Sen, 1999; Stern, 2006; 29). It only
makes sense to recommend efciency if an efcient outcome is considered
more valuable than an inefcient outcome. Such a valuation only makes
sense within a moral framework, however, such as utilitarianism.
In contrast to the descriptive approach, the prescriptive approach
has no problems with openly basing the discount rate on moral considerations. Although details differ, these moral considerations have been
related primarily to classical utilitarianism: the claim that an act is
morally right if and only if that act maximizes utility, where utility can
be dened as pleasure, happiness, desire satisfaction or welfare in
some other sense. According to Sidgwick (1874), one of the founding
fathers of utilitarianism, the interests of posterity must concern a
Utilitarian as much as those of his contemporaries. Many authors,
such as Broome (1992), Cline (1992) and Stern (2006), have followed
this stance. Counting present and future utilities equally in costbenet
analysis ( = 0) does indeed support aggressive climate policy, shown
for example by high damage estimates for carbon dioxide emissions.
According to Stern (2006: 304) the current social cost of carbon with
business-as-usual might be around $85/tCO2 (=$312/tC) in year 2000
prices. Note that Stern assumes = 0.1% to account for the probability
of the extinction of mankind and = 1.
Although in the case of climate policy classical utilitarianism yields results corresponding to our moral intuitions, it offers fatal counterintuitive

In the previous section I argued that the descriptive approach to

discounting is to be rejected, but that the prescriptive approaches
followed thus far have been unable to restore a reective equilibrium.
The prescriptivedescriptive debate on how to discount climate damage
in cost-benet analysis has so far been framed primarily within the
bounds of welfarist consequentialism (Sen, 1979, 1982b; Stern, 2006:
32): the view that normative properties depend only on consequences
(consequentialism) combined with the view that states of affairs can
be judged entirely by the personal utility features of the respective
states (welfarism).5 The moral view of welfarist consequentialism is
not only explicitly advocated in the prescriptive approaches followed
to date (generally either classical or discounted utilitarianism), but
also emerges from how economists have described society's preferences
(discounted utilitarianism). Welfarist consequentialism is what Nozick
(1974: 153-4) has called an end-result principle of justice, meaning
that the justice of a distribution is determined by how things are
distributed (who has what) as judged by some structural principle(s)
of just distribution. By denition, welfarist consequentialism does not
consider entitlements such as rights to bodily integrity and personal
property, and therefore does not distinguish between such cases as
not inicting a thousand dollar of damage to someone else's property
and giving a thousand dollar to the same person as a gift. Since welfarist
consequentialism sees no relevant distinction, it must prescribe the
same discount rate for inicted damage and gifts.

4
See Baum (2009) for an extensive discussion on how the descriptive and prescriptive
approaches each comprise both descriptive and prescriptive elements.

5
See for non-welfarist consequentialism e.g., perfectionist consequentialism (Hurka,
1993).

results in other policy areas. Utilitarianism has been criticized on various

grounds (see e.g., Rawls, 1971). Classical utilitarianism has been criticized
in particular, however, for being over-demanding as it would require to
treat other people's happiness fully on a par with one's own (see e.g.,
Brandt, 1979: 277; MacKie, 1990: 133; Williams, 1973; see Singer, 1972
for a defense of the demands of classical utilitarianism). Various economists have pointed out the counter-intuitive consequences of classical
utilitarianism as a basis for governmental policy, including Koopmans
(1965), Mirrlees (1967), Olsen and Bailey (1981), Manne (1995),
Pearce et al. (2003), Nordhaus (2007) and Hampicke (2011: 47). According to Dasgupta (2008: 155), a CDR based on = 0.1% a year and = 1, as
proposed by Stern (2006), implies a 97% saving rate out of income. In
other words, the consequences of adjusting the CDR extend far beyond
just climate policy: it would require governments to tax away present
consumption to the benet of future consumption.
To circumvent the counter-intuitive consequences of classical
utilitarianism, some have prescribed discounted utilitarianism on the
basis of an agent-relative ethics. According to Arrow (1995, 1999) and
Beckerman and Hepburn (2007), it is morally justied to pay more
attention to what is near than to what is distant and thus to apply a
positive . Others have advocated higher values for instead. This
value may reect the absolute value of the elasticity of marginal utility,
but also the aversion society ought to display towards consumption
inequality among people (Dasgupta, 2008). Since many economists
expect future generations to be better off than the present, high values
for have been based for example on prioritarianism (see e.g. Adler,
2009; Broome, 2008) and Rawls' difference principle (see e.g. D'Arge
et al., 1982; Solow, 1974). According to prioritarianism an increase in
the well-being of those who are worse off has a greater moral weight
or value than an increase in the well-being of those who are better off,
while according to the difference principle inequalities in the distribution
of goods are permitted only if those inequalities benet the worst-off
members of society. Such approaches are in line with our moral intuitions
about how much present generations generally ought to save for the
future, but in the case of climate change reintroduce the counterintuitive
results cited in the introduction.
4. Welfarist Consequentialism, Deontology and our Moral Intuitions

M.D. Davidson / Ecological Economics 105 (2014) 4047

Given the bounds of welfarist consequentialism it is hardly surprising

that it has proven impossible to restore a reective equilibrium between
economic theory and the moral intuitions that it is wrong to apply
standard discounting to climate damage on the one hand and that
we are not required to make excessive savings for future generations
on the other hand. Within a deontological ethics, however, such intuitions
make perfect sense. According to a deontological ethics we are never
allowed to use others merely as means to our ends and it is therefore
morally wrong to inict harm on others such as harm to bodily integrity
and personal property.6 This also holds if these others are emotionally
distant from us or much wealthier, notwithstanding Marshall's
observation (1890) that a pound's worth of satisfaction to an ordinary
poor man is a much greater thing than a pound's worth of satisfaction
to an ordinary rich man. If we unwittingly do inict wrongful harm,
we are obliged to compensate for it. We are under no duty, however, to
improve the wellbeing of others if they are in no way particularly entitled
to such improvements. If our actions do not cause an adverse effect on
someone else's interests and simultaneously violate that other person's
rights, we are allowed to discount consequences for other people
depending on their wealth and emotional distance from us, similarly to
how we discount future consequences for ourselves (see e.g. Pearce
et al., 2003; Schelling, 1995, 1999).7 According to a deontological ethics
it would be wrong if the Mexican government, say, were to discount
transboundary air pollution that harms U.S. citizens on the grounds that
U.S. citizens are on average ve times wealthier and that Mexicans,
like others, simply prefer the near to the distant. It would be perfectly
acceptable, however, if the same Mexican government were to discount
or even ignore any positive externalities in costbenet analysis, such
as employment for U.S. citizens. In fact, these deontological intuitions
are codied in both national and international law (Davidson, 2006).
Similarly, according to a deontological ethics it would be wrong to
discount harm to future generations due to transgenerational air
pollution, while it would be perfectly acceptable to discount any
positive externalities experienced by future generations due to present
investments in education or infrastructure. A welfarist consequentialist
would reject such an asymmetry. According to Arrow et al. (2013), for
example, discounting costs and benets occurring in the same future
year at different rates is clearly inappropriate and inconsistent. It is
only so, however, because it is dened as such within the framework of
welfarist consequentialism.
The purpose of this article is by no means to argue that deontology is a
better theory than welfarist consequentialism.8 In principle, reective
equilibrium could also be obtained if one's moral intuitions in specic
cases were always to t the theoretical framework of welfarist
consequentialism. In practice, however, economists' moral intuitions
often conict with welfarist consequentialism in the discounting debate.
Although the uneasy intuitive feeling that something is wrong with
standard discounting could arise in the case of any policy that affects
the distant future, in practice it does not. This already shows from the
examples given in the literature when discussing the problematic nature

6
Feinberg (1984) denes a wrongful harm as having two components: it must lead to
some kind of adverse effect, or create the danger of such an effect, on its victim's interests;
and it must be inicted wrongfully in violation of the victim's rights, such as rights to personal property and bodily integrity. Wrongful harms to future generations therefore do
not include only irreversible losses of key environmental qualities and natural resources,
but also avoidable damage to reproducible assets.
7
Howarth (1995, 1996) interprets a deontological approach as a sustainability or nondeclining utility constraint, based on a perceived moral duty to ensure that present actions
do not jeopardize the life opportunities available to posterity.
8
In this article, I discuss a deontological ethics as an alternative to welfarist consequentialism to accommodate the moral intuition that we have a strong duty to mitigate climate
change, but no similar duty to improve future generations' wellbeing through increasing
our general saving rate. Note however that non-welfarist forms of consequentialism are
conceivable that assign value to respecting future generations' rights not to be harmed,
for example.

43

of discounting. Weitzman (1998: 201), for example, mentions global

climate change, radioactive waste disposal, loss of biodiversity, thinning
of stratospheric ozone, groundwater pollution, [and] minerals depletion
(see also e.g. Heal, 1997). These are all examples that may be considered
wrongful harms across generational borders just as air pollution can be
considered a wrongful harm crossing national borders. See Davidson
(2008) for an explanation why climate damage should be considered a
violation of future generations' rights to bodily integrity and personal
property. There are other policy areas, however, that affect the far future
equally when expressed purely in terms of their welfare consequences,
such as investments in education, technology and (medical) science.
Increasing our investments in these elds would have far-reaching
consequences for future generations as well. If we do not make these
investments today, future generations will not reap the benets that
our present acts could have offered. For a welfarist consequentialist,
inicted harms (costs) and missed benets are indistinguishable.
Within a deontological ethics they are not, however. Many economists
therefore do not feel as uncomfortable when discounting the future
benets of investments in education, benets to which future generations are in no way particularly entitled and which we therefore have
no duty to transfer. In other words, there is a general deontological
intuition that imposing risk of harm to the bodily integrity and property
of others is wrong, while simply failing to transfer benets to others is
not, unless they are clearly in need.

5. Compensating Future Generations

Restoring reective equilibrium between deontological intuitions
and theory is not as straightforward in the case of transgenerational
harm as it is in the case of transnational harm, however. First, it is
virtually impossible to ban all activities that violate future generations
rights not to be harmed, as proposed for example by Spash (1993:
128, 1994) (see for a similar view Shue, 1999; Caney, 2008). Given our
present dependence on fossil fuels we cannot stop our emissions
overnight without completely disrupting society, with accompanying
disproportionate risks for both present and future generations, if this
were physically possible at all. We must therefore strike a balance
between the costs of mitigation and compensation. Second, we cannot
compensate future generations in person since we will probably already
be defunct by then. Creating an intergenerational institution to offer
compensation decades to centuries hence is unrealistic, however,
since the preservation of such compensation funds and institutions
cannot be guaranteed over such a long time span (Arrow et al., 1996;
Cline, 1999; Lind, 1995). Arguing that general economic growth will
compensate future generations will not sufce either, since the higher
living standards of future generations are largely an unintentional
side-effect of improving our own lives today; they can also become
available with fewer harmful activities and therefore cannot count as
compensation. As Spash (1994: 32) observes (see also Barry, 1983;
Davidson, 2008): Government transfer payments to the poor cannot
be taken as allowing the government to inict injury on the poor
while claiming the transfers as compensation. One can also think of
international trade and interaction: the fact that a country offers overall
benets to other countries does not protect it against liability in the case
of transnational pollution.
There is one kind of benet transfer to future generations that is
less prone to the previous objections, however. If a government
decides not to make an expenditure on mitigation, part of the
saved resources will be spent on alternative investments leading to
an eternal stream of consumption, i.e. including consumption by
future generations. These benets are inextricably bound up with
the harmful activity. The question is which activities create sufcient
compensation and which do not. We therefore need to take the
advice of Koopman (1965: 226) seriously about planning for the
future :

44

M.D. Davidson / Ecological Economics 105 (2014) 4047

The problem of optimal growth is too complicated, or at least too

unfamiliar, for one to feel comfortable in making an entirely a priori
choice of an optimality criterion before one knows the implications
of alternative choices. One may wish to choose between principles
on the basis of the results of their application. In order to do so, one
rst needs to know what these results are. This is an economic
question logically prior to the ethical or political choice of a criterion.
To illustrate the consequences for consumption of choices regarding
mitigation I provide a highly simplied example.9 Let us rst look at the
consequences for consumption if governmental policy leads to CO2
emissions being mitigated. I assume that any expenditure on mitigation
(M) is at the expense of both savings and consumption in the proportion of mps and mpc, respectively, with mps = 0.2 and mpc = 0.8. If a
government imposes emission standards for cars, for example,
consumers nance the higher purchase cost partly by reducing their
consumption of other goods and partly by reducing their savings.
Similarly, when a government itself invests, these investments are
nanced through taxes that once more are at the expense of both
consumption and savings in society (see e.g. Lind, 1982). If M would
not be spent on mitigation a fraction mpc would thus be spent on
consumption and a fraction mps on alternative investments. Furthermore,
I assume that invested capital remains fully invested, that depreciated
capital is renewed, and that of the remaining returns on investment
(i = 5%) every year t once more a fraction mpc is consumed and mps
is reinvested (Lind, 1982). A mitigation expenditure M at t = 0 will
thus rst, at t = 0, lead to a loss of consumption equal to mpc M and
a loss of investment equal to mps M. After one year, this investment
would have offered a return equal to i mps M, of which a fraction
mpc is consumed and a fraction mps is reinvested. In year t = 1 the
consumption loss due to the mitigation expenditure M at t = 0 is
thus mpc i mps M, while the loss of investment has grown to mps
M + mps i mps M = mps M (1 + mps i). The investment, starting
as mps M at t = 0, therefore grows in time to mps M (1 + mps i)t.
Of its returns i each year a fraction mpc is consumed. A mitigation
expenditure M at t = 0 will thus lead to an innite stream of
consumption losses equal to
cM t mpc  M at t 0
t1
mpc  i  mps  M  1 mpsi

equilibrium temperature change of 3 C (IPCC, 2013: 14), in turn

leading to a 2.5% reduction of world output ( = 0.025) if the
economy remained unchanged in time (Nordhaus, 2008; see for
further discussion Tol, 2012, 2013). World output (y) in 2012 is
in the order of 70,000 billion dollars. Although the economy will
in fact change with time, I assume that climate change will result
in equal damage in the future to that which would have
manifested today. The reason is that the economy is assumed
both to grow and to become less vulnerable to climate change
(Adger, 2006; Smit and Wandel, 2006; Tol, 2009; Yohe and Tol,
2002). The share of climate-sensitive sectors such as agriculture
will diminish, while vulnerability will decline, for example through
technological progress and adaptation (Tol, 2002b, 2009; Yohe and
Tol, 2002). There is insufcient information to assume that the resultant of both growth and adaptation will deviate from zero and in
the face of uncertainty it is not unreasonable to protect future generations as if we ourselves were facing the risks. Given these parameters, the equation for climate damage at time t resulting
from an amount E of CO 2 emitted at t = 0 is (see also Nordhaus,
1991: Eq. (6)):
dt


E y  t
t
 e e
:

Epre

Although climate damage is assumed to decrease in time with the

removal of CO2 from the atmosphere, the impacts on consumption do
not. Climate damage will be at the expense of both consumption
and savings, with resulting consequences for later consumption.
Analogously to Eq. (5), consumption losses due to climate damage
are thus given by:

E y  t
t
 e e


Epre
Zt 

E y
k
k
t1k

 1 mps  i
mpc  i  mps 

e e
dk:
Epre
cd t mpc 

k1

at t 1 :

If instead of mitigation an amount of CO2 (E) is emitted at t = 0,

this will lead to climate damage at a later time t. The following rough
calculation is inspired by the back of a cigar box approach of Nordhaus
(1991). I assume that there is a delay of climate change in response to
an increase in emissions, particularly due to the inertia of the oceans. I
take this delay parameter to equal 0.02 per year, corresponding to a
response time of 50 years. I assume a rate of removal of CO2 from the
atmosphere equal to 0.005 per year, corresponding to a removal
time of 200 years.10 Furthermore, I assume that climate damage varies
linearly with emissions, thus ignoring any higher-order responses
such as the risk of reaching dangerous tipping points.11 A doubling of
the pre-industrial concentration of CO 2 -equivalent greenhouse
gasses (E pre = 2200 billion tCO2) is assumed to lead to an

9
See for sophisticated integrated assessment models: DICE/RICE (Nordhaus, 2008;
Nordhaus and Boyer, 2000), FUND (Tol, 2002a, 2006), MERGE (Manne and Richels,
2004), and PAGE (Hope, 2006, 2011).
10
In the case of CO2 a single removal time does not exist. According to Solomon et al.
(2009) (see also Archer et al., 2009), about half may be removed within a few decades,
but about 20% may still be in the atmosphere after 1000 years.
11
Integrated assessment models generally assume that global damages depend on the
square of temperature increases. Including this nonlinearity in the calculation would make
the term a nonlinear function of E, the concentration of CO2-equivalent greenhouse gasses. Although this correction could alter the numerical outcomes, it has no inuence on the
core of the argument since at the margin damages remain linear with emissions, i.e. with
E.

The rst term represents the direct consumption loss due to climate
change, while the second term represents the stream of consumption
losses due to reduced savings. Eq. (7) can be rewritten as:

cd t mpc 


E y  t
t
 e e


Epre
E y
t1
 1 mps  i
mpc  i  mps 

Epre
Zt 

mps ik
mps ik
dk:

e
e

k1

For larger t (compared with , the response time of the climate

system) the rst term becomes negligible and the integral in the second
term becomes equal to 1/( + mps i)1/( + mps i). For larger t the
consumption losses due to climate change thus approximate the
function:
cd t mpc  i  mps 

E y


Epre mps  i mps  i

t1

 1 mps  i

Comparing Eqs. (5) and (9) shows that for larger t the consumption effects of mitigation approximate the consumption effects due

M.D. Davidson / Ecological Economics 105 (2014) 4047

45

c ($)

c ($)
$ 28 (= mpc $ 35)

$ 3.20 (= mpc $ 4)

t (years)

t (years)

Fig. 1. Consumption losses (c) due to climate change as a result of the emission of 1 tCO2
(dashed line) and the consumption gains if 35 dollars are not spent on mitigation (solid
line). Gains and losses balance when discounted against 0%.

Fig. 2. Consumption losses (c) due to climate change as a result of the emission of 1 tCO2
(dashed line) and the consumption gains if about 4 dollars are not spent on mitigation
(solid line). Gains and losses balance when discounted against 5%.

to climate change if the costs of mitigation per tonne CO2 (M/E)

are equal to

losses due to climate change, but future generations are hardly compensated for climate damage.

M=E

:

Epre mps  i mps  i

10

Given the specic parameters in this simplied example, this happens at mitigation costs of about 35 dollar per tonne of CO2 (=$130/tC).
Fig. 1 shows the consumption gains and losses if 35 dollars are not
spent on mitigation and 1 tCO2 is emitted as a result. The dashed line
shows the consumption losses due to climate change (Eq. (7)); the
solid line shows the consumption gains due to spending 35 dollars for
alternative purposes (Eq. (5)). The consumption gains show a large
consumption pulse at t = 0 when at once 80% of 35 dollars is consumed
(rst line of Eq. (5)).
There are two conclusions to be drawn from Eq. (10) and Fig. 1. First,
that in this simplied example and without discounting (CDR = 0) a
costbenet analysis is positive for any mitigation measure with costs
below $35/tCO2, and negative for any measure with costs above that
value. Eq. (10) therefore offers the criterion for efcient mitigation assuming CDR = 0.12 Note that in cost benet analyses both gains and
losses are discounted against the same rate. Different rates should be
used for different cost benet analyses, depending upon the issue at
hand, not for different terms in the same CBA. And second, that at
mitigation costs above $35/tCO2 the consumption benets of refraining
from mitigation also largely compensate future generations; at mitigation
costs below this gure they do not.
If we assume CDR = 5%, however, costs and benets are balanced at
mitigation costs of about $4/tCO2 (=$16/tC). This is the net present
value of the difference between the two consumption streams, cM(t)
due to refraining from mitigation and cd(t) due to climate change
Z
W

t0

CDR t

cm t cd t  e

dt

11

Fig. 2 shows the consumption paths at these mitigation costs. The

curve for the consumption losses due to climate change is still the
same as in Fig. 1, but the consumption gains due to refraining from
mitigation are far less. The consumption pulse at t = 0 of about 3 dollars
is considered sufcient to balance the innite stream of consumption

12
Eq. (10) is also obtained by directly discounting climate damage (Eq. (6)) against mps
i. Nordhaus obtains basically the same equation to calculate the present value of CO2
emissions (1991: Eq. (10) and Table 3). The critical parameter in Nordhaus' model is the
difference between the discount rate on goods and the growth rate of the economy,
denoted in his article by the symbols r and h respectively. Note that I assumed that
(rh) = mpsi = 1% and that the fraction of emissions that enter the atmosphere
() is 1. Also note that Nordhaus presents values per ton of carbon instead of CO2.

6. Discussion and Conclusion

In costbenet analysis of climate policy there are two main
approaches to discounting, each with implications conicting with our
moral intuitions. Thus, discounted utilitarianism implies we hardly need
to protect future generations against climate change, classical utilitarianism that we should reduce our consumption across the board to benet
future generations. The insolubility of the debate derives from the fact
that both classical and discounted utilitarianism permit only a single
discount rate for all utility changes occurring in the same future year,
while our intuitions clearly do distinguish between consequences,
depending on our specic duties under the circumstances. Most people
share the moral intuition that we ought to refrain from harming others
in bodily integrity and personal property, and ought to compensate
them if we were unable to prevent harm. To regain a reective equilibrium between such deontological intuitions and economic theory there is a
need to accept different discount rates for different situations: a zero consumption discount rate in the case of cost-benet analysis of measures to
prevent wrongful harm to future generations, and standard discounting
in all other cases. When we apply a zero consumption discount rate, future
generations are largely compensated for climate damage in the case of
mitigation measures that do not pass the cost-benet test. If we apply a
positive consumption discount rate, however, future generations are left
uncompensated.
The issue of compensation is much more complicated in the intergenerational context than in the present. Present-day policy-makers
can only guarantee compensation to future generations for climate
damage through the returns of alternative investments that would
have been lost if those resources were spent on mitigation. Such
compensation will not always exhibit an exact match in time. Moreover,
the idea that the returns of alternative investments can compensate
future generations depends upon the critical assumption that climate
damages resulting from present emissions decrease in the long run,
i.e. that the rates at which carbon is removed from the atmosphere ()
and the economy becomes resilient to climate change (h) outweigh
the growth rate of the economy (g). If they do not, climate damages
would keep growing forever and alternative investments would be
unable to offer full compensation. The assumption that + h N g may
appear an ad hoc solution to make the cost-benet analysis calculable
when applying a zero consumption discount rate. It is defensible on
the basis of current knowledge, however. Moreover, the alternative of
assuming a positive consumption discount rate would be like solving
the problems one sees ahead by simply turning down the light. Nevertheless, the robustness of the claim that future generations are compensated
for climate damage at zero discounting will have to be tested in more
sophisticated integrated assessment models.

46

M.D. Davidson / Ecological Economics 105 (2014) 4047

Finally, it should be noted that there will be a poor match between the
compensating stream of consumption and the spatial or intragenerational
distribution of consumption losses due to climate change. The returns on
investment will be reaped mostly by the descendants of those presently
responsible for the highest emissions, while those hardest hit by climate
change may well be the descendants of those presently responsible for
the lowest emissions. Therefore, intergenerational justice will require
more than zero discounting in cost-benet analysis of climate policy.
It will also require the creation and maintenance of a sense of global
and historical justice according to which nations that owe their
prosperity in part to past carbon emissions compensate nations that are
disproportionally hit by climate change (see e.g. Meyer and Roser,
2010; Neumayer, 2000).
Acknowledgments
A grant by the Netherlands Organisation for Scientic Research
(NWO) 276-20-017 within its Innovational Research Incentives Scheme
(VIDI) provided funding to conduct the research for this article. The author is grateful to Thu-Ha Dang Phan, Hans-Peter Weikard and three
anonymous reviewers for very helpful comments on this work, and to
Nigel Harle for brushing up his English.
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