Wednesday, January 02, 2008


In a previous post, I mentioned that policies can be evaluated by the net benefits that they produce. Does this analysis consider the impact on future generations? How do we deal with situations in which costs are imposed on people in the future as a result of our actions today. Alternatively, how do we justify incurring costs today, for the benefit of future generations. ( both of these questions are relevant in the case of global warming).

The benefits of future generations are compared to the costs of current generations via the present value concept.

Example: If a policy implemented today (such as CO2 emissions caps) produces benefits equal to ‘x’ trillion dollars in the future, then we take the present value of ‘x’ billion dollars and compare it to the costs of the policy today. If the policy produces net benefits in present value terms then it may be a favorable pursuit.

Note, discounting future benefits back to today’s dollars does not imply that we are giving greater weight to our well being today vs. the well being of future generations. PV discounting only allows us to compare costs today with benefits tomorrow in ‘common units.’ It also recognizes that there are opportunity costs to devoting resources today to certain policy ends. ( i.e. often the appropriate discount rate used in PV analysis for public policy may be reflect the opportunity cost of capital. This is relevant because productive capital itself can have a mitigating effect on environmental problems such as global warming).

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