The economics behind long-term environmental hazards of climate change
Economists cannot agree on an imperative to assess long-term environmental risks. As a result, no consensus has been reached on an efficient public policy for the environment. To address this issue, the EU-funded LONG-TERM RISKS (Evaluation and management of collective long-term risks) project set out to evaluate and make policy recommendations for collective long-term risks. To achieve its aims, the project combined different approaches from modern decision and finance theories, and environmental and behavioural economics. It also turned broad notions such as sustainable development, corporate social responsibility and precautionary principle into effective guidelines for joint decision-making. Project partners tackled the debate among leading economists concerning the rate to be used to discount distant climate impacts in order to calculate the socially desirable price of carbon. Most literature shows that long-term benefits for mitigating climate are not linked to economic growth. This makes an argument for a minor (1 %-2 %) discount rate for far-off climate gains which produce a considerable social price of carbon. The LONG-TERM RISKS team argued that the economic success of future generations is unclear, thus warranting a long-term approach to the assessment of mitigation efforts. It justified adding a positive-risk premium to the risk-free discount rate, and demonstrated that this risk premium must have a cumulative term arrangement. Based on the findings, the anticipated climate benefits should be discounted at a 4 %-5 % rate. Results are in line with future uncertainties such as indefinite economic growth trends and economic disturbances. LONG-TERM RISKS proposed a way forward for approaching long-term environmental risks that should positively impact the welfare of future generations.
Keywords
Economics, climate change, environmental risks, LONG-TERM RISKS, carbon
