Using the content of Chapter 13-(Environment and International Trade) and the article, "Pricing the Priceless",

Assume that you are convinced that if something isn't done now, global warming is going to create extensive problems and damage by the end of this century.

a. If you were preparing a cost-benefit analysis of the impacts and had a 100 year horizon for your projections, would you use a 3% or an 8% discount rate? Why would you use a lower or higher present value? Explain this in terms of getting any environmental protections projects done now or later justified by their present value given a lower or higher discount rate.

b. In your own words explain the intergenerational question. Furthermore, explain how the discount rate you chose will positively or negatively affect those yet to be born.

"Pricing the Priceless"

BY LISA HEINZERLING AND FRANK ACKERMANMarch/April 2003Dollars and Sense

How strictly should we regulate arsenic in drinking water? Or carbon dioxide in the atmosphere? Or pesticides in our food? Or oil drilling in scenic places? The list of environmental harms and potential regulatory remedies often appears to be endless. In evaluating a proposed new initiative, how do we know if it is worth doing or not? Is there an objective way to decide how to proceed? Cost-benefit analysis promises to provide the solution-to add up the benefits of a public policy and compare them to the costs. The costs of protecting health and the environment through pollution control devices and other approaches are, by their very nature, measured in dollars. The other side of the balance-calculating the benefits of life, health, and nature in dollars and cents-is far more problematic. Since there are no natural prices for a healthy environment, cost-benefit analysis creates artificial ones. Researchers, for example, may ask a cross-section of the affected population how much they would pay to preserve or protect something that can't be bought in a store. The average American household is supposedly willing to pay $257 to prevent the extinction of bald eagles, $208 to protect humpback whales, and $80 to protect gray wolves.

Costs and benefits of a policy, however, frequently fail at different times. When the analysis spans a number of years, future costs and benefits are discounted, or treated as equivalent to smaller amounts of money in today's dollars. The case for discounting begins with the observation that money received today is worth a little more than money received in the future. (For example, if the interest rate is 3%, you only need to deposit about $97 today to get $100 next year. Economists would say that, at a 3% discount rate, $100 next year has a present value of $97.) For longer periods of time, or higher discount rates, the effect is magnified. The important issue for environmental policy is whether this logic also applies to outcomes far in the future, and to opportunities - like long life and good health - that are not naturally stated in dollar terms.

Why Cost-Benefit Analysis Doesn't Work

The case for cost-benefit analysis of environmental protection is, at best, wildly optimistic and, at worst, demonstrably wrong. The method simply does not offer the policy-making panacea its adherents promise. In practice, cost-benefit analysis frequently produces false and misleading results. Moreover, there is no quick fix, because these failures are intrinsic to the methodology, appearing whenever it is applied to any complex environmental problem.

It puts dollar figures on values that are not commodities, and have no price.

Artificial prices have been estimated for many benefits of environmental regulation. Preventing retardation due to childhood lead poisoning comes in at about $9,000 per lost IQ point. Saving a life is ostensibly worth $6.3 million. But what can it mean to say that one life is worth $6.3 million? You cannot buy the right to kill someone for $6.3 million, nor for any other price. If analysts calculated the value of life itself by asking people what it is worth to them (the most common method of valuation of other environmental benefits), the answer would be infinite. The standard response is that a value like $6.3 million is not actually a price on an individual's life or death. Rather, it is a way of expressing the value of small risks of death. If people are willing to pay $6.30 to avoid a one in a million increase in the risk of death, then the "value of a statistical life" is $6.3 million.

It ignores the collective choice presented to society by most public health and environmental problems.

Under the cost-benefit approach, valuation of environmental benefits is based on individuals' private decisions as consumers or workers, not on their public values as citizens. However, policies that protect the environment are often public goods, and are not available for purchase in individual portions. In a classic example of this distinction, the philosopher Mark Sagoff found that his students, in their role as citizens, opposed commercial ski development in a nearby wilderness area, but, in their role as consumers, would plan to go skiing there if the development was built. There is no contradiction between these two views: as individual consumers, the students would have no way to express their collective preference for wilderness preservation. Their individual willingness to pay for skiing would send a misleading signal about their views as citizens. lt is often impossible to arrive at a meaningful social valuation by adding up the willingness to pay expressed by individuals. What could it mean to ask how much you personally are willing to pay to clean up a major oil spill? If no one else contributes, the clean-up won't happen regardless of your decision. As the Nobel Prize-winning economist Amarrya Sen has pointed out, if your willingness to pay for a large-scale public initiative is independent of what others are paying, then you probably have not understood the nature of the problem.

It systematically downgrades the importance of the future.

One of the great triumphs of environmental law is that it seeks to avert harm to people and to natural resources in the future, and not only within this generation, but in future generations as well. Indeed, one of the primary objectives of the National Environmental Policy Act, which has been called our basic charter of environmental protection, is to nudge the nation into "fulfilling the responsibilities of each generation as trustee of the environment for succeeding generations." The time periods involved in protecting the environment are often enormous even many centuries, in such cases as climate change, radioactive waste, etc. With time spans this long, any discounting will make even global catastrophes seem trivial. At a discount rate of 5%, for example, the deaths of a billion people 500 years from now become less serious than the death of one person today. Seen in this way, discounting looks like a fancy justification for foisting our problems off onto the people who come after us.

It ignores considerations of distribution and fairness.

Cost-benefit analysis adds up all the costs of a policy, adds up all the benefits, and compares the totals. Implicit in this innocuous-sounding procedure is the assumption that it doesn't matter who gets the benefits and who pays the costs. Yet isn't there an important difference between spending state tax revenues, say, to improve the parks in rich communities, and spending the same revenues to clean up pollution in poor communities? The problem of equity runs even deeper. Benefits are typically measured by willingness to pay for environmental improvement, and the rich are able and willing to pay for more than the poor. Imagine a cost-benefit analysis of locating an undesirable facility, such as a landfill or incinerator. Wealthy communities are willing to pay more for the benefit of not having the facility in their backyards; thus, under the logic of cost-benefit analysis, the net benefits to society will be maximized by putting the facility in a low-income area. In reality, pollution is typically dumped on the poor without waiting for formal analysis. Still, cost-benefit analysis rationalizes and reinforces the problem, allowing environmental burdens to flow downhill along the income slopes of an unequal society.

Conclusion

There is nothing objective about the basic premises of cost-benefit analysis. Treating individuals solely as consumers, rather than as citizens with a sense of moral responsibility, represents a distinct and highly questionable worldview. Likewise, discounting reflects judgments about the nature of environmental risks and citizens' responsibilities toward future generations. These assumptions beg fundamental questions about ethics and equity, and one cannot decide whether to embrace them without thinking through the whole range of moral issues they raise. Yet once one has thought through these issues, there is no need then to collapse the complex moral inquiry into a series of numbers. Pricing the priceless just translates our inquiry into a different language, one with a painfully impoverished vocabulary.