Sustainability First has called for the government to use a lower social discount rate when comparing the costs and benefits of policies to tackle climate change to ensure future generation are not unfairly burdened by its impacts.
It said the standard assumptions underpinning the social discount rate currently used by decision makers may not hold when looking at climate change.
The environmental charity made the comments in a response to a report commissioned from the consultancy Frontier Economics concerning the intergenerational effects of decarbonisation and climate change adaption.
“The development of international and national policy has to consider, implicitly and explicitly, the wellbeing of future generations,” the report stated. “The half-life of greenhouse gases range anywhere from 12 years in the case of methane to centuries in the case of carbon dioxide. There are also warnings of ‘tipping points’ beyond which irreversible changes to the climate and a domino effect of climate emergencies may be triggered.”
It continued: “While the impact of climate inaction is felt more acutely in the future, the costs of action may be borne by the present generation. This risks weaker incentives to solve issues today even where earlier actions reduce costs. This disincentive, known as the tragedy of the horizon, would be detrimental to a fair transition to net zero as it places a disproportionate burden on future generations.”
Frontier Economics said it is imperative that decision makers are able to compare different actions on a consistent value basis. It said this is achieved through the use of social discount rates (SDRs).
“By applying a high SDR to future scenarios, we are assuming that future costs and benefits are valued less highly than present costs and benefits,” the report said. “This inherently ignores the very real risks that may be present to society from unmanaged environmental degradation. Conversely, using a low SDR supports the view that, by acting now, we protect future generations from any negative impacts of a climate emergency.”
It noted that there are two main reasons for discounting the future: the first being that in the future people are expected to be wealthier due to economic growth, meaning a unit of wealth today is worth more than a unit of wealth at some future point in time; and the second being peoples’ general preference for consuming today rather than in the future, independent of any changes in wealth (pure time preference).
But the report said: “Applied to an intergenerational context, any pure-time discounting value that is greater than zero effectively places a lower weight on the lives of future generations relative to the lives of present generations. Other than uncertainty surrounding an unavoidable extinction of human life, it is difficult to find ethical arguments to support pure-time discounting in an intergenerational context.”
Since 2003, the Treasury has recommended using a headline SDR of 3.5 per cent as standard practice but suggested that pure-time discounting could be removed for actions with an intergenerational impact.
The report said one area where has the Treasury has recommended a lower SDR is policies that have health or life impacts for which it has suggested a figure of 1.5 per cent: “This reflects the fact that, as the population becomes wealthier, society does not place a lower value on health. An individual’s health is a scarce resource that is not readily substitutable with other purchasable benefits.”
Sustainability First argued that a similar case can also be made for efforts to tackle climate change, with director Sharon Darcy stating: “To ensure a just transition, legislation needs to reinforce the need for policy makers to consider the interests of future generations. Dealing with climate impacts may mean future generations are not richer. Some change may be irreversible.
“We need a lower social discount rate for considering climate impacts. And to ensure a fair climate future, regulators need to take account of co-benefits and explicitly consider the risk of under-investing.”
Stranding risk
Frontier Economics also drew attention to the issue of stranding risk, explaining: “It is possible that certain technologies may prove sub-optimal in the future such that investments in these technologies may not further the goal of net zero emissions. Depending how they are funded, such investments could detract from the goal of achieving intergenerational equity.
“There is also the opposite consideration – lead times for investments to have an impact. Many infrastructure investments take years or decades to have an impact. Failure to invest now may leave it too late to achieve certain outcomes in the future. The risks of stranding and of delayed action often have to be traded off and present a critical decision where inter-generational equity comes into play.”
The report highlighted the decarbonisation of heating as an area where this is of particular relevance: “If both gas and electricity distribution networks invested in assets based on different assumptions about the proportion of hydrogen to electric heating, this would lead to asset stranding. Existing gas networks could be subject to stranding depending on the pathway taken.
“Failure to decide on the path to be taken risks that stranding, but also risks the achievement of the ultimate goal. For example, retrofitting homes with heat pumps cannot be done quickly. If we do not start soon, it will not be possible to achieve the levels required to meet net zero targets.”
It said the development of blue hydrogen could also lead to asset stranding if there are limitations to the deployment of carbon capture and storage.
Sustainability First called for more work to be done to establish how the costs of stranding are shared across generations.