Paying the Piper
Earth: The Operators' Manual
In case you want to remind yourself of where we might be going with renewables, here is a 7-minute roundup.
Video: Renewables Roundup (7:24)
Investments typically grow over time. But, if you don’t solve them, problems often grow too. And solving problems takes money, which could be invested now to solve problems later. Solve? Invest? Solve a little and invest the rest? Throw a party and worry about it later? What is a poor confused society to do? Call an economist!
Short version:
Using a calculation called discounting that is similar to interest-rate calculations, it is possible to estimate the present value or cost of future events. The discount rate, which is the real return you could get if you invested your money, is a function of the growth rate of the economy, as well as our preference for having things now rather than later (and thus us behaving as if our generation is more important than future generations). Actions to reduce CO2 emissions have costs now but benefits in the future. Thus, discounting is an important part of the economic models, called "integrated assessment models," used to compare possible paths to the future. The path that optimizes the tradeoff between these costs and benefits calls for beginning now to slow global warming, but in a measured rather than panicked way.
Friendlier but longer version:
We all face choices between today and tomorrow. Should I buy an apple now, or invest the money and have enough to buy two apples in a few years? Should I throw a party, or save the money to help support future generations of my family? Should I pay off the dangerous person who has suggested that if I don’t pay him he will punch my teeth out, or put the money into the hot new investment that will make me so wealthy that false teeth will seem cheap?
Economists have built a powerful intellectual framework for dealing with questions of this sort. The topic is usually discussed as discounting.
You can think of discounting as a tool to estimate the value or cost today of various future events. This allows you, or society, to compare the future results of possible decisions you could make today, and so choose the path that is least expensive or most beneficial overall.
Starting on the next page, we explain discounting with a little math. Note that we do not require that you master the math, or use it to calculate anything, but we owe it to you to show you how it goes. (And, we have found that knowing the math often helps, in many ways.) We then will apply the results to climate change.
Enrichment
Want to learn more?
Read the enrichment titled Discount Rate.
We can choose to spend money now to head off future climate change. Or, we can ignore climate change and just go about our business, spending money on things we consume now, but also spending some money on investments for the future. Then, our descendants can use their great wealth from those investments to deal with the problems caused by climate change. We will find that the economically optimal path takes a middle road, spending some money to reduce climate change but investing some money to make our descendants wealthy and letting them deal with the problems of climate change. This raises many other questions, some of which we will address. But, hard-nosed economics recommends some actions now to head off climate change.