More on climate change and budget deficits

When I wrote this, I was reminded of a rather different but clearly related argument that I have seen the Oxford philosopher (but also economist) John Broome make,[1] although its fullest exploration is probably by Duncan Foley (pdf)[2]. The Stern report clearly suggests that incurring the costs of mitigating climate change today will raise the utility of future generations by more than it reduces ours.[3] However the current generation appears unwilling to incur these costs.[4] Let us call the ‘status quo’ the situation where nothing much is done to prevent climate change, and so future generations suffer as a result.

Broome and Foley suggest that a Pareto improvement is possible compared to the status quo. (A Pareto improvement is a change where some people are better off, but no one is worse off.) This would involve taking measures today to mitigate climate change, but getting future generations to pay for it. How can this trick be pulled off? Following the logic of the arguments I discussed here and here - that government debt involves a transfer between generations - we could pay for climate change mitigation by issuing government debt, which would be redeemed by future generations. Reducing CO2 emissions would not cost us anything, because the money to pay for it would come from selling government debt to the young. The cost would fall on future generations, who would have to pay the higher taxes to either service the extra debt or pay it off. The Stern report suggests future generations would prefer this outcome to the status quo, because they would be prepared to pay to reduce climate change. It is therefore a Pareto improvement compared to the status quo. Let’s call this the ‘debt solution’.[5]

Now there is one immediate and powerful objection to the debt solution, which is that future generations have to pay for something that this generation is doing. It violates the polluter pays principle. This makes the debt solution unfair or unjust. It would be fairer if the current generation incurs the cost of mitigating climate change, just as it is right for a company that pollutes a river to pay to clear up the pollution. Let us call this the ‘just solution’.

The Stern review recommends that we move from the status quo to the just solution. Unfortunately so far most governments, individually or collectively, seem unwilling to do this. In these circumstances should we instead at least start by implementing the debt solution, and then work on achieving the just solution? Broome suggests “we should not encumber the process of controlling climate change with the quite different matter of transferring resources to future people.” That is a controversial suggestion: many will feel that giving governments that option will reduce the chances of achieving the just solution. But perhaps this is an example of where the best is the enemy of the good.

     

---

[1] Broome’s paper is mainly about how we value the hopefully small chance of total catastrophe, but the argument discussed in this post is made early on in that paper.

[2] Foley, D. 2007. The Economic Fundamentals of Global Warming. Working paper 07-12-044. Santa Fe, New Mexico: Santa Fe Institute.

[3] Stern argued that it was ethically wrong to value the utility of future generations less than our own. He values their consumption less, because they will be better off and so require more consumption to achieve a certain level of utility. Stern’s report was controversial among many economists because they prefer to follow the supposed ‘revealed preference’ of the current generation to discount the utility of future generations.

[4] The qualifier ‘appears’ is important here. My own, relatively uninformed, view of the politics is that policy in this area is guided by particular vested interests, rather than the collective view of the current generation. If it was the case that the current generation was simply unwilling to make a present sacrifice for future benefit, why is so much money spent on trying to discredit the evidence about climate change?

[5] Government debt probably crowds out productive capital to some extent, but this could be offset if the money spent today involves increasing capital, in the form of renewable energy generation for example.