Intertemporal Evaluation Criteria for Climate Change Policy: The Basic Ethical Issues

The evaluation of long-term effects of climate change in cost-benefit analysis has a long tradition in environmental economics. Since the publication of the Stern Review in 2006 the debate about the "appropriate" discounting of future welfare and utility levels was revived and the most renowned scholars of the profession participated in this debate. But it seems that some contributions dealing with the Stern Review and the Review itself mixed up normative and positive issues to defend the own position. Furthermore, as we argue in this contribution, it also seems that the debate misses the heart of the problem. The aim of this work is to bring together economic and philosophical reasoning about justice and intergenerational equity in the context of climate change. So we adopt the normative view in order to present the most important ethical issues that, particularly in the context of climate policy, are most relevant for the choice of intertemporal welfare criteria. We investigate the properties of the Maximin, the Undiscounted Utilitarianism, Discounted Utilitarianism and more recently developed hybrid criteria. Subsequently we explore whether ethical considerations may also be helpful to determine the parameter values which, after the choice of some type of intertemporal social welfare function, are needed to specify the concrete criterion that is employed to make decisions on climate policy. Namely we try to delimit the range for the inequality aversion parameter (η) and for the pure rate of time preference (p). Our findings are, at least from an ethical point of view, rather pessimistic. Following Max Weber’s famous "Wertfreiheitspostulat" it can never be decided objectively and on a scientific base what should be considered as an equitable distribution e.g. among generations. Nevertheless, our considerations allow some tentative conclusions. First, the decision between undiscounted and discounted utilitarianism turning down the undiscounted version as often postulated in the literature neither seems to be appropriate nor necessary. To endorse equal treatment of generations and thus undiscounted utilitarianism at the fundamental level does, moreover, not preclude that some, possibly extremely small pure time discount rate is applied through which the uncertainty of future costs and benefits is taken into account. And second, as a consequence, the decisive parameter in intertemporal decisions is the η. We agree with Stern’s argumentation for an extremely small pure rate of time preference, but we fundamentally disagree with his low choice of η of 1. We recommend values of η that are closer to 2 than to 1. The question of principle whether to use undiscounted or discounted utilitarianism is to some degree futile concerning practical policy implications. What in the end matters much more is the selection of specific parameter values for which some well-founded ethical judgment, however, is often hard to provide.

Buchholz, Wolfgang and Michael Schymura (2011), Intertemporal Evaluation Criteria for Climate Change Policy: The Basic Ethical Issues, ZEW Discussion Paper No. 11-031, Mannheim.