18.104.22.168. Time Preferences and Discounting
Various reasons have been suggested for applying discounting or some alternative
form of time preference to determine the present cost/value to society of future
carbon removals/ emissions. Global warming initiates a change in the probability
of occurrence of droughts, floods, and other unwanted events, rather than causing
a one-time impact. If global warming impacts begin sooner rather than later,
the number of lives that would be lost between the "sooner" and the "later"
represents a net gain to be had from postponing global warming. Other arguments
for discounting include expectations of changes in the wealth of the population
suffering global warming impacts (wealthier people attributing less value to
a given amount of monetary loss) (Azar and Sterner, 1996). The opposite relationship
between wealth and value has been suggested for human life losses (Fankhauser
and Tol, 1997), although it also has been strongly contested (Fearnside, 1998).
Discounting is the mechanism by which a value for time is normally translated
into economic decisionmaking. Fearnside (1999b) has argued that postponing deforestation
is a valid mitigation measure even if the forests in question are later cut,
including cutting up to the theoretical maximum of clearing all forests in a
country. The credit for such a delay depends on two key parameters: time horizon
and discount rate (or another alternative time-preference scheme) (Fearnside,
2000b). From a carbon perspective, under some conditions postponing the clearing
of a given number of hectares for a year is equivalent to avoided emissions
by reduced combustion of fossil fuels.
Discounting can radically alter choices of energy sources and mitigation options
(Price and Willis, 1993; Fearnside, 1995, 1997; Marland et al., 1997).
Discounting is needed for comparison of energy and forestry mitigation options
and, within the forestry sector, to establish an equivalence between silvicultural
plantations and avoided deforestation.
The length of the time horizon has a strong effect on the importance of discounting.
As time horizons become longer, the distortions become greater if no discounting
is applied. In the case of forest sector options that can transfer carbon to
very long-term pools, these pools can dominate the results if very long horizons
are considered without discounting (Fearnside, 2000c). In the case of an infinite
time horizon, equilibrium conditions will apply. Slow buildup of carbon in very
slow turnover classes of wood products dominates the results at equilibrium
but occurs at such remote times that it has little bearing on present decisions
when discounting is applied. These problems also apply to calculations made
under the assumption that the shadow price of carbon increases at the same rate
as the discount rate for money, thereby allowing analysis without discounting
carbon (Fearnside, 1995).
Agreement on a discount rate or other time-preference weighting arrangement
for carbon facilitates comparison of forestry options with fossil fuel substitution
(Fearnside, 1995, 1999b). Interpretation would be greatly simplified if the
discount rate chosen were consistent with choices for global warming potentials
(e.g., Lashof and Ahuja, 1990). GWPs adopted for use in the Kyoto Protocol are
based on a time horizon of 100 years with no discounting (Section
22.214.171.124), which is a special case form of time preference. Discounting of
carbon need not be the same as for money, although some observers advocate that
the same rate should be applied (e.g., van Kooten et al., 1997). The
implications of discount rates as high as those for money are substantial for
the relative impacts of different activities (Fearnside, 1997). The discount
rates for other purposes-such as private investment decisions, public expenditures,
and public regulation of renewable natural resources management-all have independent
rationales. Because decisions are so sensitive to discount rate choices (e.g.,
the difference between a 3- and 6-percent annual discount rate is a factor of
20 over the course of a century), the consequences of allowing choices on global
warming decisions to be determined by discount rates that are derived in other
spheres could be severe.