Archive for October, 2009

Myopia: Too much discounting can lead to an unsustainable future

In reading a book on nuclear power recently, I came across this passage:

“The international scientific consensus is that a deep geologic repository is the best place to isolate plutonium and other long-lasting nuclear waste. If the DOE [US Department of Energy] can show that such a repository will be safe for ten thousand years, the ideas is that it will be the same for a hundred thousand. But, geologically, it’s hard to predict accurately beyond ten thousand years, which is why Congress mandated a few decades ago that the repository had to be able to isolate waste for that long. A federal appeals court judge ruled in 2003 that a high-level nuclear waste repository should be guaranteed for a hundred thousand years instead of ten thousand. In 2005, the Environmental Protection Agency (EPA), responding to another court ruling that ordered it to consider the fact that a few radionuclides would outlast that time frame, recommended that accountability extend to a span of one million years.” (p. 268. Cravens, Gwyneth. 2007. Power to Save the World: The Truth About Nuclear Energy. New York: Vintage Books.)

Now, this passage amazes and confuses me for a couple of reasons. First, how can we as a society be so concerned with the fate of generations millennia from now when it comes to them happening upon our nuclear waste, but when it comes to preserving a world with adequate resource stocks and a healthy environment for our progeny, we have a difficult time with it? Mainly, this comes down to discordance in discount rates.

Let me explain. Human beings are inherently myopic, or near-sighted and tending to care about the present more than the future. Of course, this makes sense. We are genetically wired to care more about ourselves than others and more about our current selves than our future selves. The existence of oneself is definite; you know your feelings, thoughts, beliefs, interests are real (at least to you) and they are exceedingly relevant because they are real. The interest of others is a less concrete fact, because we can’t really assess how anything will affect them – we can’t know absolutely what’s best for them. (And, from Richard Dawkin’s The Selfish Gene perspective, who cares about anyone else? As long as we survive, that’s all that matters.) The future is even more indefinite: who knows whether or not I or any one else will be here tomorrow?

Now, most of the time, we generally presume our own existence will continue, at least for a duration of 70 or so years. And, if we have children, we assume their existence will be of similar length, and our grandchildren, and so on. And, honestly, we are not completely myopic, because we do care when it comes down to it about our children and grandchildren. But after grandchildren, or in some cases, great grandchildren, it gets a little more indefinite. This is where the discount rate and future discounting comes in. According to neoclassical environmental economics, the present value of anything – be it dollars, a factory, a forest, or the well-being of our great grandchildren – is less than it’s future value. How much less is summed up by the discount rate. The higher the discount rate, the greater we discount the future, and the less the present value.

For instance, you can think about inflation as taking into account the discount rate of future dollars; so, a dollar in ten years buys you less than a dollar would today. Thus, a rational person offered $100 dollars today or a $100 guaranteed in two years should always take the $100 today. One hundred dollars today could be invested, and at an interest rate of five percent per year, would be worth $105 dollars next year, and worth $110.25 the year after that. Compare this to the alternative of receiving $100 dollars guaranteed in two years, and you can see why people prefer the present over the future. The discount rate, in the above example, is equal to 5% per year. Alternatively, one can compute the present value of $100 received in two years and compare this to $100 received today. One hundred dollars received in two years discounted at a rate of 5% is worth only $90.70*, which once again illustrates why one would rather have the $100 now than in the future.

The number that we give the discount rate (between 0 and 1) determines to what degree we discount the future. A higher discount rate means that we value the future less. A discount rate of 1 means that individuals are perfectly myopic, and the future is entirely discounted and doesn’t matter at all; thus, things in the future are worth next to nothing in present-value terms. A discount rate of 0 means that the future is worth exactly the same as today is, or future value of something equals the present value.

The neoclassical environmental economic application of discount rates and future discounting is to problems of environmental degradation. According to discount rate theories, humans are currently using nonrenewable natural resources at an unsustainable rate because we discount the future highly, and therefore, see little value in preserving resources for future generations to use. We mine ore and minerals, degrade arable lands, and pollute the air and water largely because the discount rates we currently perceive are high. If we were to assign lower discount rates, we would find that the present value of resources used in the future would be higher, and thus worth preserving.

What on earth has this to do with nuclear power and the aforementioned book excerpt? Recall that in the passage, the US Nuclear Regulatory Commission requires any long-term nuclear waste storage facility to be guaranteed safe, secure, and “accountable” for one million years. One million years. By saying this, they are saying that they value the safety of generations of humans living one millions of years from now to such a high degree (meaning, they assign a sufficiently low discount rate) that they believe it is worth a huge present effort to secure and guarantee such a waste storage facility that long.

One more fact: “The estimated cost to the United States of dealing with waste from decades of nuclear activities in ways that ensure the public would receive no more than a very low does for the next ten thousand years will probably total, in ballpark terms, in excess of $350 billion” (Cravens, 2007, p 268; italics mine). Three hundred and fifty billion dollars just to guarantee safety for the next ten thousand years. I don’t think I can even fathom the possible cost to guarantee a long-term nuclear waste repository for one million years.

Stop and digest those last few paragraphs for a moment: We do not value the future enough (the discount rate perceived is high) to preserve natural resources such as fossil fuels, minerals, even clean air and water, but we value generations a million of years in the future so highly (assign an exceedingly low discount rate) that we justify spending an exorbitant, nigh, unconscionable amount of money researching and developing a long-term nuclear storage site that will still be secure and impenetrable one million years from now.

I am not making any position statements about nuclear power here. I’ll save that for another post. I am merely making the point that there seems to be a discord here in the way we value the future. Our collective fear of nuclear power and radiation and its possible effects blinds us, precluding rational benefit-cost analysis. We demand our government make huge expenditures to secure a long-term nuclear repository, yet we do not demand that they make similar investments in strategies to prevent or at least curb climate change and its innumerable looming negative consequences. We damn nuclear power and proclaim the unacceptably (but largely unsubstantiated) high risks associated with nuclear reactor meltdown, terrorists obtaining weapons-grade nuclear material, and cancers due to radiation exposure, yet we barely bat an eye at the (empirically observable) smog generated from fossil-fuel dependent cars, or the smoke, carbon dioxide, and toxins belched from coal-fired power plants.

Human beings are largely myopic, yes. But we are also largely rational. We have been taught to properly weigh the pros and cons in rational decision-making, and choose the alternative where the pros outweigh the cons. However, sometimes in our policies, we can become blinded by our fears and special interests. With respect to the degradation of the environment, this is not only irrational, but also dangerous. With each passing year, we ignore the impending environmental crises, making token actions and statements, but never really facing up to the ecological limits of our planet. It is time to start looking at the costs and benefits again – this time, with the limits in mind -, reassess our priorities and our policies, and reexamine our discount rates. Only once we recognize the need to place greater value on the future – our own future – will we be able to craft policies for a sustainable world.

*For those of you interested in the math, the present value (PV) of anything is equal to the future value at time t (FVt) divided by the sum of the interest rate (r) plus one to the t power, where t is the number of years in the future:

PV = FVt/[(1+r)^t]

Conversely, the future value at time t of anything is equal to the present value times the sum of one plus the interest rate to the t power:

FVt = PV*[(1+r)^t]

For those of you exceedingly intrigued by the discount rate concept, the present value of an infinite future stream of benefits (PVi) is equal to the present value divided by the discount rate:

PVi = PV/r

For more information, the following is an excellent discussion on the concept of discounting:

Harris, J. M. 2006. Resource Allocation over Time. In Environmental and Natural Resource Economics: A Contemporary Approach, 2nd ed. (pp.90-105). Boston, Mass.: Houghton Mifflin Company.