Discuss ethical issues relating to selection of the social discount rate used in a CBA for climate change mitigation.
Question
Discuss ethical issues relating to selection of the social discount rate used in a CBA for climate change mitigation.
Solution
The social discount rate is a crucial factor in cost-benefit analysis (CBA) for climate change mitigation. It is used to compare the costs and benefits that occur at different points in time. However, the selection of the social discount rate raises several ethical issues.
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Intergenerational Equity: The social discount rate reflects the weight we give to the welfare of future generations. A high discount rate implies that we value future benefits less than present benefits. This could lead to underinvestment in climate change mitigation, which would disproportionately affect future generations. This raises questions about intergenerational equity and our responsibilities to future generations.
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Uncertainty: The social discount rate is often based on the rate of return on capital or the rate of economic growth. However, these rates are uncertain, especially over the long time horizons relevant for climate change. Using a high discount rate based on uncertain estimates could lead to underestimation of the future costs of climate change.
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Risk Aversion: The social discount rate also reflects society's attitude towards risk. A high discount rate implies a high level of risk aversion, which could lead to overinvestment in climate change mitigation. This raises questions about the appropriate level of risk aversion and the trade-off between current consumption and future climate stability.
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Distributional Equity: The social discount rate can also reflect distributional preferences. For example, a lower discount rate could be used to give more weight to the benefits accruing to poorer countries or future generations. This raises questions about the appropriate balance between efficiency and equity in climate change mitigation.
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Global vs. National Perspectives: The social discount rate can vary depending on whether a global or national perspective is taken. A global perspective might suggest a lower discount rate, reflecting the global benefits of climate change mitigation. However, this could conflict with national interests, especially for countries that are less vulnerable to climate change.
In conclusion, the selection of the social discount rate in a CBA for climate change mitigation involves complex ethical issues. These issues need to be carefully considered to ensure that the CBA provides a fair and accurate assessment of the costs and benefits of climate change mitigation.
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