Copyright
(c) 1999 The Columbia Law Review
Columbia
Law Review
May,
1999
99 Colum. L. Rev. 941
Environmental
Regulation, Cost-Benefit Analysis,
and the Discounting of
Human Lives
Richard L. Revesz
Introduction
The use of cost-benefit analysis has become
commonplace in environmental and other health-and-safety regulation. Such
analysis is now mandated by Executive Order 12,866 for all major regulations, n1 and may eventually be required by statute
if Congress passes one of the various regulatory reform bills that have been
pending for some time. n2 The primary
benefit of many important environmental statutes, as determined by the dollar
value assigned by cost-benefit analysis, is the human lives that are
saved. n3 Thus, in determining whether
a particular regulation can be justified on cost-benefit grounds, the central
questions revolve around [*944] the value assigned to the lives that would be
saved by the program. Probably the most vexing problem concerning these
valuations has been whether to discount the value of a life saved to account
for the fact that the loss does not occur contemporaneously with the exposure
to certain contaminants.
With
respect to this issue, two opposing camps have developed among regulators,
judges, and academics. A similar controversy has arisen in connection with
other regulatory programs, n4 as well
as with the provision of medical services.
n5 Supporters of discounting argue that the value of human life must be
treated in the same manner as the value of any other benefit or cost: because
other benefits and costs are normally discounted to present value when they
occur in the future, the value of life should be discounted as well. n6 In contrast, opponents of discounting
claim, generally by appeals to notions of ethics and morality, n7 that lives saved in the future are no less
valuable than lives saved in the present. As a result, they argue that discounting
is inappropriate. n8
[*945]
The debate, which is not confined to the United States, n9 has taken on a relatively high profile,
including discussion in the popular press.
n10 For example, the issue played a role in the Senate's scrutiny of the
unsuccessful nomination of Judge Douglas Ginsburg to the Supreme Court of the
United States in 1987, n11 and
attracted the attention of Vice President Albert Gore during the 1992
presidential campaign. n12
The
discussion of the propriety of discounting human lives often conflates two
different sets of problems. n13 In the
first, the benefits will not accrue until the future because the harm has a
latency period. For example, an individual exposed to a carcinogen faces an
increased probability of dying at some point in the future, perhaps twenty or
thirty years later. In the second, the benefits of controls accrue primarily to
future generations. Climate change caused by the presence of anthropo genic
gases in the atmosphere is a prominent example of this phenomenon.
[*946]
The question of how to value lives threatened by latent harms was
starkly posed in a regulatory proceeding that took place in the late 1980s in
connection with a partial ban on the use of asbestos promulgated by the
Environmental Protection Agency (EPA).
n14 The Office of Manage ment and Budget (OMB), which is responsible for
reviewing regulations to ensure their consistency with cost-benefit
principles, n15 strongly urged
discounting the value of human lives over the period of latency of the harm;
under its then-existing policy of discounting environmental bene fits at a 10%
discount rate, the value of saving a life would have been reduced to only about
$ 22,000. n16 EPA withstood OMB's
pressure and published final regulations that essentially rejected the concept
of dis counting. The EPA's regulation was invalidated by the Fifth Circuit,
partly for this reason. n17
A
recent article by Lisa Heinzerling shows how much rides on whether the value of
human lives is discounted over a latency period. n18 She shows that many environmental and
health-and-safety regulations promulgated since the 1970s have acceptable
cost-benefit ratios if the value of lives is not discounted, but fail cost-benefit
analysis if those values are discounted.
n19
Discounting
issues play an even more critical role in connection with harms to future
generations, particularly with respect to the effects of climate change.
Because of the long lag until many of the harmful effects of excessive
anthropogenic gases in the atmosphere are felt, how much our society is willing
to spend on measures to prevent climate change may well depend on how the
question of discounting is resolved.
n20
[*947]
Opponents of discounting adduce vivid statistics to illustrate what is
at stake. For example, Derek Parfit notes: "At a discount rate of five per
cent, one death next year counts for more than a billion deaths in 500
years." n21 Even economists who do
not oppose discounting acknowledge its striking effects: "When time
horizons are very long, all benefits are discounted to zero using any positive
discount rate, so that a death pre vented in the distant future is worth
nothing at the present time." n22
This
Article seeks to shed light on what has become a shrill and un productive
debate. The polar positions on both the latency and future generations issues
are analytically unsound and overlook important components of both problems.
Moreover, the latent harm and future generation situations are analytically
distinct: what one concludes with respect to discounting in one context says
little about the appropriate treatment of discounting in the other.
Part
I addresses the problem of latent harms. Because there are essentially no
empirical studies of the value of lives threatened by latent harms, regulatory
analyses must adapt valuations derived from threats of instantaneous death in
workplace settings. This Article argues that it is necessary to discount this
value, to reflect that the years lost occur later in a person's lifetime. It
also argues, however, that such discounting must be accompanied by
countervailing upward adjustments, to account for the involuntary nature of
exposure to environmental carcinogens, the dread such exposure causes, and the
higher income levels of the victims. By not performing these adjustments, OMB
may be undervaluing lives by as much as a factor of six, or even more for
particularly long latency periods. Correcting this undervaluation, as this
Article urges, could have an important impact on the regulatory process by
allowing more stringent regulations to satisfy the requirements of cost-benefit
analysis.
Part
II deals with harms to future generations. It shows that the use of discounting
in that case is ethically unjustified. As a result, it argues [*948]
that discounting approaches should not replace the principle of
sustainable development, which is used in the major international environmental
law agreements to measure our obligations to future generations. The discussion
shows, however, that the principle of sustainable development is also
problematic, and sets forth the principal elements of an attractive theory of
intergenerational obligations. The practical implications can be enormous: the
rejection of discounting may lead to a far more stringent response to
environmental problems, such as climate change, that have long time horizons.
The
Article underscores the extent to which discounting raises analytically
distinct issues in the cases of latent harms and harms to future generations, even
though these two scenarios have generally been treated as manifestations of the
same problem. n23 In the case of latent
harms, one needs to make intra-personal, intertemporal comparisons of utility,
whereas in the case of harms to future generations one needs to define a metric
against which to compare the utilities of individuals living in different
generations. The case of latent harms gives rise to a problem that is primarily
technocratic: determining how an individual trades off the utility derived from
consuming resources at different times in her life. In contrast, the case of
harms to future generations raise a difficult ethical problem. It is therefore
not surprising that the appropriateness of discounting would be resolved
differently in the two contexts.
The
Article does not address the role that cost-benefit analysis should play in
environmental regulation - a subject that has spawned a large academic
literature. n24 Rather, its goal is
more targeted. It assumes, consistent with current practice, n25 that an important set of environmental
and health-and-safety regulations will be evaluated under principles of
cost-benefit analysis, and that human lives will be valued as part of this
analysis. Given these practices, it seeks to determine the best way to ac count
for the fact that certain losses do not occur contemporaneously with the
exposure to a contaminant.
A
central goal of this Article is to move the regulatory process to wards a more
thoughtful valuation of human lives threatened by environ mental carcinogens,
and away from OMB's deeply flawed technique of taking valuations from the
workplace setting and reducing them by an inflated discount rate. n26 The Article also seeks to move the
discussion of how to treat future generations beyond a focus on discounting,
which is unlikely to provide an ethically defensible account of our obligations
to future generations.
[*949]
I.
Latent Harms
The discussion begins in Section A by
reviewing the central role that the debate over discounting played in the
Corrosion Proof Fittings case and the extent to which, despite the court's
resolution in that case, the issue remains unsettled in the public policy
arena. Section B explains that the valuations of human life in the economics
literature have been con ducted almost exclusively in the context of industrial
accidents, where workers face a probability of instantaneous death. In
contrast, as a result of understandable methodological complications, there
have been essentially no valuations of risks to life with a long latency
period, such as those posed by environmental carcinogens. Thus, it is necessary
to construct a second-best valuation of a life threatened by a contaminant with
a latency period, using as a starting point the valuations from the existing
empiri cal studies on instantaneous deaths.
Section
C begins the task of constructing a second-best valuation, relying on temporal
models that describe the value of life by reference to a stream of utilities
that individuals receive if they are alive in particular time periods. When an
individual faces a threat to life that manifests it self only after a latency
period, she loses fewer life-years than when the threat is instantaneous.
Moreover, on average, the loss of life-years occurs further into the future.
Downward adjustments to account for these two factors are therefore
appropriate.
Section
D examines the plausibility of the assumptions underlying the temporal models
explored in Section C. It also shows that the dis counting of future utilities
is conceptually different from the discounting of money flows.
Section
E turns its attention to three important upward adjustments that need to be
made when extrapolating from the case of instantaneous deaths to that of
carcinogenic harms. These adjustments are necessary as a result of the
relationship between an individual's income and the value that she places on
life, the involuntary nature of exposure to environmental carcinogens, and the
dread people suffer from carcinogenic risk.
Section
F focuses on the choice of an appropriate discount rate. It shows that the
emerging consensus in the economics literature calls for the use of a rate of
3% or less and takes issue with OMB's policy of pre scribing a 7% rate.
Section
G estimates the undervaluation of life that results from OMB's approach of
taking valuations from the workplace setting and, without further adjustment,
mechanically reducing them by an inflated discount rate. Over a twenty year
latency period, the OMB approach can lead to an underestimation by a factor of
about six, with a factor of about two being attributable to the choice of
discount rate.
Section
H argues that discounting the value of life in the context of latent harms does
not pose significant moral or ethical dilemmas that are distinct from those
raised by cost-benefit analysis in general and the valuation of human life in
particular. It is simply one defensible adjustment [*950]
in the process of constructing a second-best valuation, using workplace
valuations as a starting point. Discounting, however, cannot be the only such
adjustment.
Before
proceeding further, it is useful to underscore that Part I focuses on harms
that an individual suffers as a result of an earlier exposure to an
environmental contaminant. n27 The term
"latent" could be used to describe other phenomena as well: for
example one might think that an environmental exposure producing a harm to
future generations gives rise to a latent harm as well. As used throughout this
Article, however, the term "latent" is used to describe only
situations in which the exposure and the harm accrue to the same individual.
A.
The Debate Over Discounting
The appropriateness of discounting the value
of human lives first received sustained attention in the regulatory proceeding
that led to EPA's partial ban on the manufacture, importation, and processing
of asbestos under the Toxic Substances Control Act (TSCA), and the chal lenge to
this regulation in Corrosion Proof Fittings v. EPA. n28 The question was highly controversial
even before EPA's publication of the notice of proposed rulemaking in
1986. n29 As required by Executive
Order 12,291 (the Reagan Administration's predecessor of Executive Order
12,866), n30 EPA submitted the draft
rule to OMB for review before its publication in the Federal Register. In a
March 1985 letter to A. James Barnes, EPA's acting Deputy Administrator, OMB
raised questions about whether the benefits of the rule exceeded its
costs. n31 In performing a cost-benefit
analy sis, OMB used a value per cancer case avoided of $ 1 million and
discounted this amount at a rate of 4% for the length of the latency period. n32 (At the time, an OMB guidance document
provided for discounting of costs and benefits at a rate of 10%, n33 but OMB instead used the rate contained
in EPA's guidance document on cost-benefit analysis.) n34
[*951]
The following month, the propriety of discounting the value of human lives
became an issue in connection with Barnes's Senate confirmation hearings:
I
have a great deal of ethical difficulty with a concept of applying a discount
factor to human life. The lives of my three children are worth every bit as
much to me 10 years from now as they are now. I personally reject that notion.
I have talked to [EPA Administrator] Lee Thomas about it; I know that it is not
one that finds favor with him. n35
In
October 1985, a subcommittee of the U.S. House of Representatives chastised OMB
for its insistence on discounting the value of human lives. n36 It noted that discounting at OMB's 10%
discount rate over a forty year latency period would reduce the $ 1 million
value per life saved to just over $ 22,000.
n37 Thus, on cost-benefit terms, one could not justify a current
expenditure of over $ 22,000 to save a life forty years in the future. Even at
a 4% discount rate, the $ 1 million value of life would be reduced to about $
208,000. n38
The
subcommittee referred to the testimony of Don Clay, Director of EPA's Office of
Toxic Substances, that EPA "never had used discounting over the latency
period of a chronic hazard," and that, by reducing the value of benefits
to such an extent, OMB's approach would prevent EPA from regulating any
carcinogen with a long latency period.
n39 The subcommittee further reported that Clay "personally opposed
the discounting of lives in the asbestos case on ethical grounds." n40 It concluded that OMB's position with
respect to the discounting of the value of life was "simply an
outrage" and urged EPA to "reject the use of discounting over the
latency period of diseases caused by chronic hazards." n41
EPA
published the proposed rule on the asbestos ban in January 1986. n42 The proposal did not quantify the value
of life or undertake any [*952] discounting of this value over the length of
the latency period. n43 EPA took a
different approach, however, when it promulgated the final rule in July
1989. n44 It assigned a value to human
lives, but discounted it at a rate of 3% from the time of the promulgation of
the regulation until the time of the exposure to the carcinogen. n45
The
use of asbestos products does not necessarily result in immediate exposure;
instead, exposure occurs when the product containing the asbestos begins to
disintegrate. For example, some exposures occur when asbestos fibers are
released into the air from the weathering of air conditioning products. n46 Exposure is the first step of a process
that might later lead to the incidence of cancer and subsequently to a death
from cancer. EPA did not discount the value of human life from the time of
exposure until the carcinogenic death, as OMB had urged, or even until the
first manifestation of cancer.
In
its response to comments accompanying the final rule, EPA at tempted to defend
this decision. EPA noted that comments had been written on both sides of the
discounting issue:
Some commenters argued that EPA, in the
proposal, improperly failed to discount benefits to be derived from the rule,
and in support of documents for a final rule, only discounted benefits until
the time of the exposure that results in the cancer rather than until the
occurrence of the disease. Other commenters argued that EPA should not discount
benefits, stating that discounting the benefit of saving human life is
inappropriate methodology for this rulemaking.
n47
EPA's response revealed a degree of ambiguity
on this question and pro vided at best a lukewarm defense of its course of
action. It stated:
Arguments can be made that estimating benefits
without dis counting is preferable in cases like this one where the primary
benefits derived is [sic] the avoidance of human cancer cases. However,
arguments also can be articulated supporting the discounting of benefits. n48
EPA was more categorical in defending its view
that if discounting was appropriate at all, it was appropriate only until the
time of exposure:
Since the benefit of a regulation to control a
hazardous sub stance occurs at the time of the reduced exposure, EPA has
concluded that the appropriate period over which to discount is un til the time
of exposure reduction. This approach was used in this case after extensive
review of applicable literature and an
[*953] examination of the
inherent biases and features of other approaches. n49
This position has an important corollary for
environmental problems in which the regulation leads to an immediate decrease
in the exposure of individuals as is the case, for example, with airborne air
pollutants. For such pollutants, no discounting of the benefits of the
regulation would be performed under EPA's approach, except perhaps for
discounting from the time of the preparation of the cost-benefit analysis to
the implementa tion of the regulation.
Though
EPA's explanation is not a model of clarity, one can surmise that its approach
was not to discount for the period between the exposure and the death, when the
harm was latent. Instead, the discounting that was performed affected only the
period before the harm became latent.
In
October 1991, the Fifth Circuit vacated the regulation and remanded in
Corrosion Proof Fittings v. EPA, n50 in
part because of EPA's treatment of the discounting issue. The Fifth Circuit
took the position that discounting was necessary in order to provide for a fair
comparison of costs and benefits accruing at different times:
Although various commentators dispute whether
it ever is appropriate to discount benefits when they are measured in human
lives, we note that it would skew the results to discount only costs without
according similar treatment to the benefits side of the equation.... Because
the EPA must discount costs to perform its evaluations properly, the EPA also
should discount benefits to preserve an apples-to-apples comparison, even if
this entails discounting benefits of a non-monetary nature. n51
The Fifth Circuit went on to hold that EPA had
used an improper period for discounting, and that the value of human life
should have been discounted to the time of injury. n52 It noted:
[*954]
The EPA's approach implicitly assumes that the
day on which the risk of injury occurs is the same day the injury actually
occurs. Such an approach might be appropriate when the expo sure and injury are
one and the same, such as when a person is exposed to an immediately fatal
poison, but is inappropriate for discounting toxins in which exposure often is
followed by a substantial lag time before manifestation of injuries. n53
The court did not specify, however, whether it
considered the injury to be the first manifestation of cancer or the death from
cancer. The detection of carcinogenic cells is a serious injury, but if death
does not follow it is not clear why it would be appropriate to attach to this
injury the full value of life, rather than the value of the resulting
morbidity. n54
Finally,
the Fifth Circuit upheld EPA's choice of a 3% discount rate. It implicitly
assumed that the correct discount rate was the real rate of interest (the
nominal rate of interest minus the rate of inflation) and stated that,
historically, this rate has fluctuated between 2% and 4%. n55
Despite
the court's holding, the question of discounting the value of human life has
continued to be controversial. For example, the Senate Report accompanying the
Comprehensive Regulatory Reform Act of 1995,
n56 which would require the use of cost-benefit analysis in regulatory
proceedings, n57 contains a statement
by Senator Leahy railing against such discounting:
Cost/benefit analysis assumes that benefits
that occur in the future have very little value. After determining the value of
human life, cost/benefit analysis applies a "discount rate" to
benefits that will occur in the future. Benefits of the lives saved in the
future by a regulation are reduced by 6-7 percent per year.... This business
evaluation tool does not make sense when applied to the protection of human
life. n58
[*955] The regulatory debate over
the appropriateness of discounting of human lives, stated in conclusory terms
and virtually devoid of any sus tained analysis, fails to shed light on the
important issues underlying this question.
n59 After providing a brief overview of the economic approach to valuing
human life, the remainder of Part I seeks to fill this void.
B.
Valuations of Human Life
Since the 1970s, willingness-to-pay studies
have become the standard economic technique for placing a value on human
life. n60 By far the most common method
for performing such valuations focuses on the choices that workers make in
accepting risky jobs. n61 The approach
begins by de fining sets of jobs that require comparable skills and offer
comparable non-monetary amenities, except that one exposes the worker to a
higher risk than the other. n62
Presumably, a rational worker would not accept the riskier job unless she
obtained sufficient compensation for the additional risk. The resulting wage
differential is the compensation that the worker obtains for the additional
probability of death that she faces as a result of having taken the riskier
job. n63 An extrapolation, consisting
of dividing the wage differential by the additional probability of death, is
then per formed to determine the value of life. n64
[*956]
Willingness-to-pay studies of the value of human life have been con
ducted almost exclusively in the context of industrial accidents, where the
worker faces a risk of being either fatally injured by a piece of machinery and
dying instantaneously, or surviving unscathed.
n65 In any time period, there is a probability that a fatal accident
will occur. This probability is ascertained from industrial safety statistics. n66
One
could use the same approach to determine the willingness-to- pay to be free
from risks with long latency periods.
n67 As long as workers understood the additional probability of, say,
dying of cancer from a riskier job, and knew the length of latency period, they
could figure out how much additional compensation to demand in order to accept
the job with the higher risk. From this wage differential, one would
extrapolate to determine the value of the life. The fact that the harm would
accrue only in the future would be reflected in the wage differential. For
example, other things being equal, an individual with a comparatively high
discount rate would demand a comparatively low wage differential. We would then
have measured exactly what we wanted to see, and there would be no need to
perform any discounting.
It
is likely that such studies have not been conducted for three principal
reasons. First, the industrial statistics on deaths resulting from la tent
harms are not as extensive as those for instantaneous accidents. The federal
government became extensively involved in the regulation of [*957]
workplace and environmental safety only in the 1970s (and prior state
efforts in these areas were relatively modest). n68 For example, if the federal government
began to compile statistics on the risk of various work place settings in the
mid-1970s, it would have immediately had a data set on instantaneous accidents.
In contrast, for carcinogenic risks with a twenty-year latency period,
comparable statistics on such risks would not be available until the mid-1990s,
unless retrospective studies could be per formed. Moreover, while accidents on
the job are relatively easy to track, statistics on mortalities associated with
latent harms require much more difficult tracking of the health status of
individuals after they leave their jobs. Further, while the cause of on-the-job
accidents typically is relatively easy to identify, the causal link between
occupational exposure and fu ture harms from carcinogens can be difficult to
establish.
Second,
in order for willingness-to-pay studies to yield meaningful results,
individuals must be able to properly understand the nature of the risk;
otherwise, they cannot determine what sum of money properly compensates them
for the risk. Some commentators doubt that our cognitive capacities are
sufficiently developed to perform such valuations in the case of future
harms. n69
Third,
this problem is compounded by the fact that exposure to carcinogens may have a
differential impact depending on an individual's characteristics, including,
for example, whether she smokes. In order to decide how to respond to a wage
premium, individuals would need to understand not only the "pure"
carcinogenic risk of the job, but also the magnitude of any synergistic
interactions that might result from such characteristics.
In
summary, the task of directly performing a willingness-to-pay study of the
value of life in the case of latent harms is fraught with difficulties, perhaps
insurmountable ones. Instead, to obtain such a valuation, resort to a
second-best approach is necessary.
C.
Discounting as a Second-Best Approach
As
a result of the difficulty of obtaining a direct willingness-to-pay measure of
the value of a life threatened by a latent carcinogenic harm, economists have
devoted considerable attention to defining a relation ship between the value of
a life lost today and the value of a life lost years from now. Such temporal
models, also known as life-cycle models, study the distribution of an
individual's utility throughout her life.
n70
[*958]
The discussion that follows focuses, for illustrative purposes, on three
different valuations: first, the life of a 40-year old that is lost today, for
example, from an industrial accident; second, the life of a 60-year old, also
lost today; and third, the life of an individual who is currently 40 years old
but dies in twenty years as a result of exposure today to a carcinogen with a
twenty-year latency period. n71 For
this discussion, V[in'j,k'] denotes the value attached to the life of an individual
exposed to a harm at age j who dies at age k. Thus, the values of the three
lives described above can be expressed as V[in'40,40'], V[in'60,60'], and
V[in'40,60'], respectively. To keep the discussion simple, it assumes that
these individuals, if not exposed to the industrial or carcinogenic risk, would
die of natural causes at age 80. n72
The
three valuations differ in two important ways.
n73 First, the forty- year old dying immediately loses 40 years of life
whereas the sixty-year old dying immediately and the forty-year old dying in
twenty years lose only twenty years of life.
n74 Second, the individual exposed to the carcinogen does not lose these
twenty years of life immediately, but twenty years later. n75 Let u<l> denote the utility that
an individual derives in year l from living that year. So, for example, for the
forty-year old exposed today to the latent harm, u<60> is the utility
that the individual would derive in twenty years from living in the year
following her sixtieth birthday. In contrast, for the sixty-year old killed
today in an industrial accident, u<60> is the utility that the individual
would have derived this year if the accident had not occurred.
If
these utilities were simply monetary payments as opposed to the well-being that
comes from living, they could easily be compared with one another by
discounting the future stream of benefits by a means of a discount rate.
Discounting reflects the fact that it is more desirable to get a payment sooner
rather than later. It is important to stress that this preference is not a
function of the existence of inflation. In comparing monetary flows occurring
at different times, the effects of inflation can be adjusted by converting all
amounts to constant dollars. But even in an inflation-free world, it is best to
get a given amount of money as soon as possible. Having the money sooner gives
one the option of either spend
[*959] ing it immediately or saving
it for later, whereas getting it later (absent borrowing) rules out immediate
spending. The rate used to discount amounts in constant dollars is typically
known as a "real" discount rate.
n76
Given
a discount rate of r, the present value of a payment P that is paid t years
from now is [1/(1 + r)[su't']]P. n77 I
am not suggesting at this point that discounting to present value the utility
that an individual derives from living for a year is equivalent to discounting
a monetary payment, and will return to this issue later. n78 Instead, I am showing the relation ship
among the values of the three different lives if such discounting were
appropriate.
Then,
V[in'40,40']
= u<40> + [1/(1 + r)]u<41> + ... + [1/(1 + r)[su'38']]u<78> +
[1/(1 + r)[su'39']]u<79>
The
loss for the forty-year old killed by the industrial accident is the utility of
living in the year following the individual's fortieth birthday, plus the
utility of living one year later discounted for one year, plus the utilities of
living in all subsequent years until age 80 (when the individual would have
died anyway), with each utility discounted for the number of years elapsed
since the present.
In
turn,
V[in'60,60']
= u<60> + [1/(1 + r)]u<61> + ... + [1/(1 + r)[su'18']]u<78> +
[1/(1 + r)[su'19']]u<79>
Here,
the loss takes the same form, except that the first year of loss of utility is
the year following the individual's sixtieth birthday.
Finally,
V[in'40,60']
= [1/(1+r)[su'20']]u<60> + [1/(1 + r)[su'21']]u<61> + ... + [1/(1 +
r)[su'38']]u<78> +
[1/(1
+ r)[su'39']]u<79>
Only
years following the individual's sixtieth birthday are lost, and these losses
are discounted by the number of years from the present.
The
relationship between V[in'60,60'] and V[in'40,60'] should now become appar ent.
The latter value is simply the former discounted by twenty years. n79 In other words, both individuals lose
the same years of their lives - those following their sixtieth birthdays - but
the latter individual loses them twenty years later than the former. Thus,
V[in'40,60']
= [1/(1+r)[su'20']]V[in'60,60']
Under
this approach, the value that should be attached to the life of a forty-year
old who is exposed to a carcinogen with a twenty year latency period and who
dies at age 60 is equal to the value of the life of a sixty- year old who dies
instantaneously in an industrial accident, with the latter [*960]
value discounted for the twenty years that elapse before the
carcinogenic victim dies.
So
far, in fact, the discussion suggests that the OMB approach actually
overestimates the value of the loss resulting from exposure to latent risks.
The OMB procedure takes V[in'40,40'] and discounts it back to present value to
account for the latency period. n80 In
fact, the correct approach would be to discount V[in'60,60'] instead, n81 which is lower than V[in'40,40'] because
of the twenty fewer years of life loss.
n82 As explained later, however, this overvaluation is outweighed by the
substantial undervaluation that results from other elements of OMB's approach. n83
D.
Plausibility of the Model
The model presented in the previous section
relies on two important assumptions. First, it assumes that an individual's
utility function can be expressed as a sum of utilities over the various
periods comprising one's lifetime. Thus, one's enjoyment of life in one period
is not affected by the resources available for consumption in prior
periods, n84 but only by the resources
in that period. n85 Under the model, an
individual's utility in one period is not affected by the resources available
for consumption in prior periods. n86
So, for example, whether an individual was able to afford a quality education
in a prior period does not affect the utility that she derives from a given
level of consumption in subsequent periods. This assumption is clearly
debatable. Indeed, John Broome, in a related con text, terms the assumption
"dubious," n87 though he
acknowledges that it is commonly made in economic analysis. n88
[*961]
Moreover, an individual facing death from cancer may focus on the fact
of the death and on its cause, without paying particular attention to the
death's timing. One's willingness-to-pay to avoid the risk may then be
relatively unaffected by the length of the latency period. A number of studies
show that individuals of different ages exhibit different willing nesses-to-pay
to avoid instantaneous deaths, suggesting, consistent with the model, that
their valuations are indeed affected by the number of life- years that they
would lose. n89 It is possible,
however, that such behavior would not extend to carcinogenic risks as a result
of the dread associated with such deaths.
n90 As a result of the paucity of studies of the willingness- to-pay to
avoid carcinogenic risks, n91 it is not
possible to make empirically grounded claims concerning this hypothesis.
Second,
the model uses a constant discount rate.
n92 So, for example, the same rate would be used to discount the utility
of living twenty years in the future as would be used to discount the utility
of living next year. As Donald Shepard and Richard Zeckhauser put it, the model
assumes that "an individual's utility over lifespans of different length
can be represented as a weighted sum of period utilities, the weights declining
geo metrically with time." n93
Shepard and Zeckhauser label this assumption "heroic." n94
If,
for example, I did not currently value at all the utility of living beyond the
year 2010, I would be applying an infinite discount rate to the utilities that
I would derive if in fact I were alive beyond that year. The present discounted
value of those utilities would be zero. There is no mechanism by which I could
transfer any life-years beyond the year 2010 to someone with a lower discount
rate, in return for a higher present utility. In contrast, in the case of
financial flows, if I undervalued relative to the market the stream of payments
that I would receive on my Treasury bond after the year 2010, I could increase
my utility by selling that stream of payments at the market price. n95
[*962]
There is little attempt in the literature to validate the constant
discounting feature of the model through experiment or observation. n96 One study of the implicit discount rates
reflected in individuals' contingent valuation of the disutilities of various
illnesses led the authors to question whether the conventional discounting
model properly describes individual preferences. n97
These
problems with the assumptions underlying the temporal models for the valuation
of lives threatened by environmental carcinogens should not lead to the
conclusion that the models are inappropriate. At present, such models are the
state of the art in economic analysis. It is therefore proper to continue to
use them, absent a further refinement or an empirical falsification. But as the
regulatory process seeks to construct appropriate second-best valuations for
lives threatened by environmental carcinogens, it must pay further attention to
the plausibility of the assumptions underlying temporal models.
E.
Necessary Adjustments
It
is time now to scrutinize with more care some of the assumptions made
implicitly in the model described in Part I.C. Such scrutiny reveals, for
several reasons, that one cannot simply take an estimate of the value of life
from an industrial accident (whether V[in'40,40'] or V[in'60,60']), n98 discount it, and obtain a plausible
estimate of the value of life from exposure to an environmental carcinogen with
a latency period. n99 Many adjustments
need to be made for the estimate to be at all meaningful. These adjustments all
lead to assigning a higher value to the life lost.
This
section examines the principal adjustments that need to be per formed. It
focuses primarily on differences between the valuations for instantaneous and
latent harms that have been the subject of empirical examination.
1.
Impact of Income on the Valuations of Life. - In the temporal model presented
in Part I.C, the utility that an individual derives in a particular year is a
function of the level of resources available for consumption that year.
Economists have estimated that the elasticity of the value of life with respect
to earnings (the percentage change in the value of life for a one percent
change in earnings) is approximately one. Thus, for example, a [*963]
10% increase in income would lead to a 10% increase in the value of
life. n100 The impact of income on the
valuation of life calls into question several of the implicit assumptions made
in Part I.C.
a.
Increases in Income Over Time. - That model assumes implicitly that the
valuation of a particular year of life, say the year following one's
sixty-fifth birthday, is independent of the age of the individual making the
valuation. Thus, for example, u<65>, the utility of living in the year
fol lowing one's sixty-fifth birthday, is the same for both a forty-year old
and a sixty-year old. The only difference related to the valuation is that the
forty-year old discounts this utility for the twenty-five years that it will
take until this utility is realized, whereas the sixty-year old discounts the
utility for only five years.
A
correction needs to be made, however, if income adjusted for infla tion rises
over time. In comparing V[in'40,60'] with V[in'60,60'], one must account for
the fact that by the time the forty-year old is sixty, her income, in real
terms, will be higher than the sixty-year old's income is today.
If
income rises in real terms over time, the relationship between V[in'40,60'] and
V[in'60,60'] becomes different than that posited in Part I.C. n101 Let g be the yearly increase in the
individual's real income. Then,
V[in'40,60']
= [(1 + g)/(1 + r)][su'20']V[in'60,60']
Thus,
V[in'60,60'] now needs to be subjected to two adjustments. n102 First, it is increased by a factor of
(1 + g)[su'20'] to account for the fact that the years of lost life will occur
twenty years later for the forty-year old, and that for each of the years of
life lost, the utility lost twenty years from now to the individual who is
currently forty years old will be (1 + g)[su'20'] greater than for the
individual who is currently sixty years old. Second, it is decreased by a
factor of [1/(1+r)][su'20'] to discount to present value the utilities that the
current forty-year old would enjoy twenty years later. To a first
approximation, n103 the relationship
between V[in'40,60'] and V[in'60,60'] simplifies as follows:
V[in'40,60']
= [1/(1 + r - g)][su'20']V[in'60,60']
For
example, if the real discount rate is 3% but income is rising at a yearly rate
of 1% in real terms, then the effective rate at which V[in'60,60'] would be
discounted to arrive at V[in'40,60'] would be 2%. Moreover, if r and g were
equal, then V[in'40,60'] and V[in'60,60'] would be equal as well. n104 The increase in the [*964]
valuation of V[in'40,60'] to account for rising real incomes would
exactly counteract the decrease resulting from the time lag in the enjoyment of
utilities.
Table
I presents the changes between 1982 and 1996 in mean and median incomes for
workers fifteen years and over. The figures are presented in constant 1996
dollars. n105
[SEE
TABLE IN ORIGINAL]
The table reveals that median and mean income
grew at compound rates of 0.95% and 1.01% per year, respectively. n106
b.
Age-Dependent Nature of the Valuation. - A different issue is raised by
life-cycle changes in levels of income. For example, Donald Shepard and Richard
Zeckhauser analyze the valuations of a typical individual who enters the work
force at age twenty, sees steadily rising income up to age 50, then experiences
a small decrease in income until age 65, and loses all income as a result of
retirement at age 65. n107 The
economics literature assumes that people value their lives as a function of
their current income (and resulting consumption), not on the basis of
projections of [*965] future income. n108 Richard Zeckhauser has labeled this
phenomenon as "temporal myopia."
n109
Shifts
in an individual's income across time would not make a differ ence to the
valuations of life if borrowing were available to equalize the amounts
available for consumption. Typically, however, there are serious roadblocks to
borrowing based on the expectation of higher incomes in the future. n110 And, to the extent that such borrowing
is possible, for ex ample through credit cards, the interest rates are
prohibitively high.
Shepard
and Zeckhauser calculate the impact of age on a person's valuation of life for
two different scenarios, to which they attach "Robin son Crusoe" and
"Perfect Markets" labels. In both cases, the individual supports her
consumption from her own income and wealth, and has no heirs or dependents. In
the Perfect Markets scenario, the individual can borrow in the capital markets,
in order to support a higher level of con sumption earlier in life, and can
purchase annuities to insure against variability in her lifespan. In contrast,
in the Robinson Crusoe scenario, ac cess to these two markets is
unavailable. n111
The
authors show that in the Robinson Crusoe model an individual's valuation of
life reaches its peak at age forty. A forty-year old values her life 2.5 times as
highly as a 20 year old (that is, returning to the notation previously used,
V[in'40,40'] = 2.5V[in'20,20']). At first glance, this result might appear
counterintuitive. After all, the twenty-year old loses twenty more years of
life than the forty-year old. The reason that the forty-year old's valuation is
higher, however, is that her income is more than three times higher, and this
effect more than counteracts the shorter remaining life. n112
In
turn, in the Robinson Crusoe world, the forty-year old values her life almost
twice as highly as a sixty-year old (V[in'40,40'] = 1.98V[in'60,60']). n113 Two different effects are at play here.
Most obviously, the sixty-year old has fewer years to live. But another factor
is depressing the sixty-year old's valuation of her life. Beyond age forty,
income continues to rise until age fifty, but consumption begins to fall. The
reason is that at age forty, the individual begins to save for retirement and
therefore has fewer resources available for current consumption. Indeed, even
though income at age [*966] sixty is comparable to income at age forty,
consumption is about 25% lower. n114
The
situation is more straightforward under the Perfect Markets scenario. There,
the valuation of life is highest at age 20, and then falls continuously through
the life cycle. In this model, the forty-year old's valuation is about
two-thirds higher than that of the sixty-year old. n115 Here, the difference between
V[in'40,40'] and V[in'60,60'] is attributable exclusively to the different
number of years of remaining life.
To
the extent that the assumptions underlying the Robinson Crusoe model are at
least partly realistic, n116 one needs
to worry about the procedure described in Part I.C in which the sixty-year
old's willingness-to-pay to avoid an immediate death, V[in'60,60'], was used as
a proxy (and then dis counted) for a forty-year old's willingness to pay to
avoid a death twenty years later, V[in'40,60']. Given the levels of income and
savings analyzed by Shepard and Zeckhauser, using V[in'60,60'] as a proxy for
V[in'40,60'], as was done in Section I.B, will result in an undervaluation of
the willingness to pay to avoid death of about 25% (as a result of the lower
level of consumption at age 60). n117
This
undervaluation, however, may have decreased over time. Shepard and Zeckhauser
relied on data from the late 1970s.
n118 Certain legal changes since that decade, particularly the end of
mandatory retirement and the strengthening of protections against age
discrimination, are likely to have affected the impact of age on income. In
particular, it is possible that the peak income is received later in life and
that the assumption that individuals receive no income after the age of
sixty-five is now unrealistic. These changes would result in increasing the
ratio of the sixty-year old's consumption relative to that of the forty-year
old and thereby diminishing the difference in the valuations of V[in'40,40']
and V[in'60,60'] in a Robinson Crusoe economy.
In
summary, the discussion in this subsection is presented only to illustrate the
underlying methodological issues that must be resolved to obtain a plausible
estimate of the value of life. More work needs to be done to determine the
plausibility of the Robinson Crusoe model and the effects of changes in
workplace patterns and legal protections since the 1970s.
c.
Distribution of Income Across Occupations. - Individuals who take risky jobs
generally have lower-than-average income.
n119 Thus, there is a [*967] problem in extrapolating from the
willingness-to-pay studies conducted in high-risk occupations to the broader
population affected by environ mental carcinogens.
One
threshold issue concerns the definition of the population af fected by the
different environmental programs. In principle, for every environmental
regulation, one could attempt to determine the identity, age profiles, and
economic characteristics of the affected population. One could then construct
program-specific valuations of life that took into account the distribution of
ages and incomes of the affected population, as well as of the latency period
of the carcinogen subject to the regulation.
There
are good reasons why one might not want to undertake such an evaluation. First,
the informational requirements are likely to be daunting. For every
environmental program, in addition to estimating the number of affected
individuals, one would need to determine their demographic and economic
characteristics. n120
Second,
an effect of particularized valuations based on levels of in come would be to
justify, on cost-benefit grounds, more stringent regulation when the affected
population is wealthier. Such a policy would be inconsistent with the central
tenet of the increasingly influential environ mental justice movement, which
calls for environmental regulation to be no less (if not more) responsive to
the needs of communities that are disproportionately poor, or
disproportionately populated by people of color than to the needs of wealthy,
white communities. n121
As a
result, it is reasonable for EPA to use uniform valuations of life across
environmental programs. These valuations would be based on representative
characteristics of the population of the United States. n122 Thus, to the extent that the subjects of
the empirical studies involving
[*968] industrial accidents have
relatively low incomes, an upward adjustment in their valuations of life must
be performed before translating these figures to the environmental context.
The
U.S. Census provides median and mean earnings for all workers and for various
occupational categories. n123 The
category including operators, fabricators, and laborers might be a good proxy
for workers in risky occupations who are the subjects of empirical studies
concerning the value of life. In 1996, the median and mean earnings of all
workers 15 years of age and over were $ 20,716 and $ 27,366, respectively. n124 The corresponding figures for
operators, fabricators, and laborers were $ 16,883 and $ 19,981. n125 Thus, the overall median earning is
22.7% higher than the median for workers in risky occupations, and the overall
mean is 36.8% higher.
2.
Involuntary Nature of the Harm.
a.
Comparative Valuations of Voluntary and Involuntary Risks. - There is an
extensive literature suggesting that individuals assign greater value to
avoiding risks that are thrust upon them involuntarily than risks that they
incur voluntarily. n126 As Richard
Zeckhauser points out, "this ten dency would introduce a downward bias in
the implicit life valuations of those who voluntarily assume risks." n127
The
risk assumed by individuals who take risky jobs and subject themselves to a
non-trivial possibility of industrial accidents is generally thought of as a
risk assumed voluntarily. n128 In contrast,
the risk of expo sure to environmental carcinogens, for example, as a result of
toxic air pollution, is generally thought of as involuntary. n129
[*969]
As a result, there will be a systematic undervaluation if one takes the
willingness-to-pay to avoid voluntary harms and imports that figure into the
context of environmental regulation. Determining the extent of the
undervaluation, however, is complicated.
The
economics profession strongly favors "revealed preference"
valuations, under which the value assigned to a good can be observed through a
market transaction. Willingness-to-pay studies of wage differ entials needed to
compensate individuals for accepting a risk of death are a prominent example of
a revealed preference technique. n130
Revealed preference approaches are poorly suited for determining the valuation
of involuntary harms because they are based on the existence of market
transactions, and such transactions are generally seen as voluntary. n131
Thus,
in order to estimate how the valuations of involuntary and voluntary risks
differ, one needs to resort to a different approach. In recent years, a great
deal of attention has been devoted to the implicit valuations of human life
derived from dividing the total cost of an environmental program by the number
of lives saved. The result, for environmental pro grams that do not have
significant other benefits, is the implicit value that the regulatory program
has assigned to each life. The range of implicit valuations for regulatory
programs is enormous, from around $ 100,000 per life to a number in the
billions of dollars. n132 To reach any
worthwhile conclusions from these implicit valuations, one would need to make
the [*970] heroic assumption that social expenditures in
fact are reflective of public preferences.
Thus,
a more promising alternative is to directly question individuals about the
relative value that they attach to avoiding voluntary and involuntary
harms. n133 In the most comprehensive
study of this type, Maureen Cropper and Uma Subramanian conducted a nationwide
telephone sur vey of 1,000 households, asking interviewees to compare an
environmental program and a public health program designed to address a
particular risk, such as respiratory illness or cancer. n134 The interviewees were first told that
the two programs would cost the same amount of money and save the same number
of lives, and were asked to determine which pro gram was best for society. n135 Then, they were told that the program
that they had found less attractive would in fact save x times more lives than
its counterpart. The authors computed the number of lives saved by each program
that made the median respondent indifferent between the two programs.
The
interviewees were also told to describe some qualitative characteristics for
the risk addressed by each of the programs, and, for each characteristic, to
place the risk on a ten-point scale. One of these characteristics was the ease
with which the risk could be avoided,
n136 which is a measure of the risk's voluntariness. n137 In each case, the public health risk
was deemed to be more voluntary than the environmental risk. n138
For
the purposes of this Article, the most relevant pair examined by the
researchers was radon control in homes and a pesticide ban on fruit. Radon
control, like workplace hazards, is a paradigmatic voluntary risk: an
individual can avoid the risk by making a monetary sacrifice. In con trast,
pesticide control, like other environmental risks, generally cannot [*971]
be addressed effectively absent some level of social coordination. For
this reason, the risk should be regarded as involuntary. n139
The
respondents were asked to assess, on a ten point scale, the ease with which the
respective risks could be avoided. The mean ratio of the ease with which the
radon risk could be avoided to the ease with which the pesticide risk could be
avoided was 1.31. n140 When respondents
were told that the two programs would save the same number of lives (and cost
the same), 72% chose the pesticide ban and only 28% opted for the radon
control. n141 The median respondent was
indifferent between saving 100 lives by means of the pesticide ban and 213
lives through radon con trol. n142
Thus, the median respondent implicitly found the life saved imperiled by the
involuntary risk to be twice as "valuable."
More
generally, the authors found, across the six pairs of risks that they studied,
a consistent, statistically significant preference for addressing the less
voluntary risk. n143 Moreover, a
significant minority of respondents - between 20 and 30% - always preferred
addressing the involuntary risk, regardless of how many more lives would be
saved by transferring the resources to addressing the voluntary risk. n144
b.
Unrepresentativeness of the Population Exposed to Workplace Risks. - Another
type of adjustment needs to be made when using valuations of life in workplace
settings as a second-best measure of the appropriate value of life for
environmental programs. Individuals who take relatively risky jobs have a
comparatively low willingness-to-pay to avoid the risk. n145 Indeed, individuals with higher
valuations would demand greater wage differentials to take a riskier job over an
otherwise comparable job that was less risky. The employers, however, would not
need to pay this higher premium if they could fill their jobs with workers who
had lower valuations.
This
concept can be illustrated by reference to an auction. The employer with the
risky jobs offers a low wage premium and sees how many workers are willing to
take the positions. If it does not fill all the vacancies, it offers a somewhat
higher premium, and continues this process
[*972] until it is able to fill
all the jobs. Any workers who place a higher value on avoiding the risk end up
not getting the job.
As a
result, the willingness-to-pay valuations derived from the study of risky jobs
are not the valuations of the mean or median member of society. Instead, they
are the valuations of a relatively small subgroup with a disproportionate
tolerance for risk.
In
contrast, environmental risks in general affect a far broader sector of
society. Moreover, because they are involuntary, there is no easy mechanism for
individuals to self-select for such risks based on their lower- than-average
valuations of risk. n146 Thus, an
appropriate correction needs to be made when extrapolating from the workplace
to the environmental arena. No empirical literature, however, sheds light on the
magnitude of this correction.
3.
Dread Nature of the Harm. - There is also an important difference in the nature
of deaths resulting from industrial accidents on the one hand and from
environmental exposures to carcinogens on the other. The former occur
instantaneously and without warning. The latter often occur following a long
and agonizing ordeal. As Cass Sunstein pithily notes: "All deaths are bad.
But some deaths seem worse than others."
n147
A
far greater level of social expenditures is devoted to combating toxic risks
like cancer than risks of instantaneous deaths. A recent, admirably
comprehensive study by Tammy Tengs and a number of co-authors compares the
cost-effectiveness of various risk reduction regulations. n148 The authors first determine the cost
per life saved by dividing the direct costs of the regulation by the number of
lives saved. Then, they divide this cost per life saved by "the average
number of years of life saved when a premature death is averted" to obtain
the cost per life-year saved. n149
The
comparison of costs per life-year saved reveals enormous disparities. The
median medical and toxin control measures cost $ 19,000 and $ 2,800,000 per
life-year, respectively; the overall median is $ 42,000 per life-year. n150 The authors also found a wide disparity
in occupational in terventions depending on the nature of the death. The median
occupational intervention designed to avert a fatal injury costs $ 68,000 per
life- year, whereas the median occupational intervention involving the control
of toxins costs $ 1,400,000 - more than twenty times as much. n151
But
as in the case of the comparison between voluntary harms and involuntary harms,
one cannot draw strong conclusions from these dis [*973]
parities because public expenditures may well not reflect people's preferences. n152 Instead, a more direct measure of the
difference in valuations is preferable.
A
study by George Tolley, Donald Kenkel, and Robert Fabian at tempts to quantify
the values attached to the avoidance of unforeseen, instantaneous deaths on the
one hand and carcinogenic deaths on the other.
n153 For each of these risks, the authors define a low estimate, a
medium estimate, and a high estimate, and present their figures in 1991
dollars. For unforeseen, instantaneous deaths, the respective estimates,
derived from a survey of willingness-to-pay studies, are $ 1 million, $ 2 mil
lion, and $ 5 million, respectively.
n154
Because,
as indicated earlier, there are no willingness-to-pay studies estimating the
value of life lost from a disease with a long latency period, n155 the procedure used by the authors for
estimating the value of carcinogenic deaths is more complicated. As their
starting point, the au thors use the estimates for instantaneous deaths. Then,
for their low estimate, they add a component for the value of the morbidity
period pre ceding the death. n156 This
value is derived primarily from contingent valuation rather than revealed
preference approaches. n157
As
the authors note, this estimate is conservative for two reasons. First, it
understates the value of morbidity preceding mortality because conditions that
eventually become fatal are more serious than nonfatal, chronic conditions.
Second, it does not account for the dread aspects of carcinogenic deaths. n158 The authors account for these two
components in their medium and high estimates, relying primarily on a survey of
how individuals compare deaths from cancer to deaths from other causes, n159 and on contingent valuations of periods
of severe limitations of activity preceding death. The authors' low, medium,
and high estimates of the value attached to a life threatened by cancer are $
1.5 million, $ 4 million, and $ 9.5 million, respectively. Thus, the medium
valuation of life in the [*974] case of carcinogenic exposure is twice as
high as the corresponding valua tion for an unforeseen, instantaneous
death. n160
F.
Choice of a Discount Rate
Parts of the preceding discussion have already
hinted as to why the choice of the discount rate used in connection with the valuation
of lives is more complicated than merely picking the discount rate used for
monetary flows. n161 I can invest $ 100
today at a 3.5% interest rate and have about $ 200 in twenty years. I cannot
invest the utility that I derive from living a year at present and obtain,
twenty years later, the utility that I would then derive from living two
years. n162 Similarly, I can sell the
right to get a payment of $ 200 in twenty years for a present payment of about
$ 100. I cannot engage in a comparable transaction with respect to the utility
that I would derive from living in twenty years. As W. Kip Viscusi notes,
"One cannot trade health ... across time .... If we value our health at
forty-five but do not at twenty-five, then we cannot simply shift health status
across time in the same way that we would shift monetary resources." n163
This
section undertakes two separate tasks. First, it reviews empirical evidence
suggesting that, despite the conceptual difference between the two, there is no
statistically significant difference between the discount rate that individuals
apply to future health risks and the discount rate that financial markets apply
to flows of money. Second, it criticizes OMB's approach with respect to
discounting, especially as applied to future health risks, showing that OMB
employs a rate that is inappropriately high.
1.
Discounting Health Risks v. Discounting Financial Flows. - Thought ful analysts
have recognized that the discount rates applied to financial flows cannot be
applied mechanically to the discounting of the utility that comes from living
in the future. n164 The most extensive
empirical work in this area is that of Michael Moore and W. Kip Viscusi, who
seek to deter [*975] mine whether the rates of discount for health
risks differ from the financial rates of time preference. n165
In
their most recent article on the subject, Moore and Viscusi estimate the
implicit discount rate exhibited by workers facing a probability of
instantaneous death as a result of job risks.
n166 They employ a temporal model that assumes that all life years are
valued equally, n167 and attempt to
determine the relationship between wage premiums and job risks as a function of
the remaining years of workers' lives (and other relevant characteristics). n168
For
example, consider two workers who have the same life expectancy and are
otherwise also identical, but who demand different wage premiums for
undertaking a risky occupation. The worker with the higher valuation (who
therefore demands the higher wage premium) has a lower discount rate and
therefore values more highly than her counter part the years that she will lose
in the future. Alternatively, if two workers who have different life
expectancies but are otherwise identical were to demand equal wage premiums,
the worker with the shorter life expectancy will be exhibiting a lower discount
rate: she will be valuing the future years more highly than the other
individual.
On
the basis of an empirical study of 1463 workers, Moore and Viscusi calculate a
real discount rate of 2%. n169 The
authors note that this real rate "accords roughly with financial market
interest rates for the period, once these nominal rates are adjusted for
inflation." n170 Their results,
therefore, "provide no empirical support for utilizing a separate rate of
discount for the health benefits of environmental policies." n171
[*976]
Moore and Viscusi reach this conclusion despite their earlier studies,
which had found discount rates in the 10-12% range. n172 They maintain that the confidence
limits around these estimates were sufficiently large that the results should
be thought of as "quite similar."
n173 The authors conclude:
In
each case the confidence intervals for the discount rate esti mates overlap
available market rates of return. Moreover, since the point estimate of the
discount rate falls short of the market rate in one case and exceeds the market
rate in two cases, we find no clear evidence of systematic differences between
dis count rates for health and financial rates of time preference. n174
With respect to the control of environmental
carcinogens, it is relevant that the authors found that education has a large
effect on the discount rate. In a study that found an overall real discount
rate of 11%, the rates for workers with eight years of schooling and
college-educated workers were 15% and 5.5%, respectively. n175 Thus, to the extent that workers in
risky occupations have a lower-than-average level of educational attainment, a
downward adjustment on the discount rate would need to be made. For
environmental carcinogens, this factor strengthens the authors' conclusion that
the discount rate exhibited by financial markets is appropriate. n176
[*977]
To conclude, it is worth noting that the methodology used to estimate
the rate at which individuals discount future utilities may lead to an
overstatement of this rate. Recall that Moore and Viscusi assume that all life
years are valued equally. n177 This assumption is consistent with the
standard approach in life-cycle models, in which the utilities derived from
living in particular years are a function solely of the level of consumption
available in those years. n178 It is
plausible, however, that such utilities are affected also by one's age, and
that they fall (for a given level of consumption) with increasing age, as a
result of the deterioration of one's physical capacity.
For
example, at age fifty, one might not be able to engage in the full range of
pleasurable activities that one could have undertaken at age thirty. Thus, the
choices on how to convert consumption resources into utility at age fifty would
be more constrained. n179 If this were
the case, part of the lower valuation attributed to later years in one's life
would result from the lower utility derived from living during those years,
rather than from discounting to reflect the passage of time. As a result, the
discount rate estimated from a model in which utilities are constant across
time (or a function only of the magnitude of resources available for
consumption) would overestimate the actual discount rate.
2.
Selecting an Appropriate Rate. - The choice of a discount rate is a key
variable in the cost-benefit analysis of many environmental regulations.
Because the costs of regulatory programs are typically borne around the time
that the regulations go into effect but the benefits, in the case of latent
harms, do not accrue for decades into the future, the higher the discount rate,
the less desirable the regulation will seem. Re call, for example, that in the
Corrosion Proof Fittings case, the present discounted value of the benefits
would have been approximately ten times greater under a 4% discount rate than
under a 10% discount rate. n180
[*978]
The OMB policy on discount rates does not address specifically the issue
of how to discount health risks. n181
Thus, these risks are discounted at the rates used in the evaluation of
government projects in general, and government regulation in particular.
Until
1992, OMB employed a discount rate of 10% pursuant to a policy contained in its
Circular A-94. n182 In 1992, OMB
amended this cir cular to mandate a real discount rate of 7%. n183 OMB justifies this rate as "the
marginal pretax rate of return on an average investment in the pri vate sector
in recent years." n184
The
OMB policy, however, uses a different discount rate for cost- effectiveness
analysis - that is, to determine which of several programs yielding identical benefits
has the lowest cost in present discounted terms. For this purpose, OMB employs
the real return on long-term government debt - the interest rate on long-term
government bonds minus the rate of inflation.
n185 In recent years, this figure has fluctuated between 3% and 4%. n186
The
use of different rates for cost-benefit and cost-effectiveness analysis can
produce perverse results. For example, consider two policies that have the same
benefits, which are designed to address a future risk. Policy A costs $ 700,000
at present whereas Policy B costs $ 1,200,000 in ten years (the figures are in
constant dollars). At a 3% discount rate, the present discounted value of the
cost of Policy B is higher than $ 700,000, and thus Policy A would be preferred
on cost-effectiveness grounds. On the other hand, at the discount rate of 7%,
which would apply to cost- benefit analysis, Policy B would be more attractive.
Cost-effectiveness
analysis can be used as a short-cut to cost-benefit analysis where the benefits
of two policies are the same. But logic compels that the policy with the most
attractive cost-benefit ratio also be the most cost-effective. This consistency
requirement can be violated when the discount rates used for cost-benefit and
cost-effectiveness analysis are different. Otherwise a trivial difference, say
of one dollar, in the benefits of the two policies (so that cost-benefit
analysis rather than cost-effective ness analysis must be used) would alter the
choice between two policies that are essentially identical.
More
fundamentally, however, there appears to be a growing consensus in the
economics literature that the appropriate real discount rate for [*979]
government projects is the real return on long-term government debt -
the interest rate on long-term government bonds minus the rate of inflation.
The underlying issues are quite complex, but can be simplified considerably for
the purposes of this discussion. n187
When
the government undertakes a regulatory project, it is trading costs and benefits
on behalf of its citizens. As Frank Arnold notes, "it then seems
reasonable to discount the future benefits to the present using the same rate
that the affected citizens would use, for it is on their behalf that the
project is undertaken." n188 This
rate, often referred to in the literature as the "consumption" rate
of interest, n189 is generally taken to
be the after-tax rate of return, adjusted for inflation, n190 on relatively risk-free financial
instruments, n191 such as government
bonds. In recent years, the economics literature has generally called for the
use of a real discount rate of 2-3%.
n192
There
is a complication, however. Consider initially two environ mental projects
undertaken directly by the government, one financed by taxes and the other by
borrowing. In the case of the project financed by taxes, the taxes will reduce
the consumption of goods, so discounting the benefits at the consumption rate
of interest is the appropriate procedure: individuals are simply trading off
less consumption now, as a result of the taxes, for future benefits flowing
from the project. n193
The
situation is potentially different if the government finances the project
through borrowing. In a closed economy, with no capital flows into the country,
the borrowing would displace money available for private investment. Because
the returns from this investment yield taxes, its displacement would produce a
loss to the government, equal to the fore gone taxes. n194
An
analytically analogous situation is posed by environmental regulation that
imposes costs on firms, if these costs cannot be shifted to con [*980]
sumers. In a closed economy, such investments would displace other private
sector projects. n195
The
appropriate discount rate under these circumstances is the mar ginal pre-tax
rate of return on private investment - the rate used by OMB. n196 After this return is taxed by the
government, the remaining return must be sufficient to cover the consumption
rate of interest. If the return on the government's project was lower, social
welfare would be enhanced by not undertaking the government project and thereby
not displacing the private investment.
n197
In
summary, traditionally, the literature on cost-benefit analysis inquired as to
whether the project under consideration displaced consumption or private
investment. It used the consumption rate of interest in the former case and the
rate of return on capital in the latter.
n198
In
recent years, however, the assumptions underlying this bifurcated approach have
been called into question. In particular, increasing globalization has led to
the integration of capital markets and the open ing of the U.S. economy to
foreign investment. n199 As a result,
our econ omy can no longer realistically be viewed as closed. In an open
economy, the level of taxable investments is unaffected by environmental
regulation because no capital projects are displaced; the government therefore
does not lose the corresponding tax revenues. Under these conditions, the consumption
rate of interest is the appropriate discount rate. n200
Consistent
with this view, the consumption rate of interest is currently used as the
discount rate by the General Accounting Office (GAO) and the Congressional
Budget Office (CBO). n201 Even EPA,
which must submit its proposed and final regulations to OMB for review
under [*981] Executive Order 12,866, has used a 3%
discount rate in connection with a proposed regulation designed to address
lead-based paint hazards. n202 Other
agencies, however, have explicitly linked their discount rate to OMB's. n203
G.
Estimating the Undervaluation of Lives Under OMB's Policy
Section E explains the nature of the
corrections that need to be made to intelligently translate the existing
valuations of life from industrial accidents to appropriate valuations for
environmental harms in general and carcinogenic harms in particular. Section F
discusses how to choose an appropriate rate to discount the utility of
life-years saved at the end of a latency period. The purpose of this section is
to obtain a rough estimate of the underestimation of the value of human life
that results from the OMB approach of taking valuations from workplace settings
and mechanically reducing them by an inappropriately high discount rate over
the length of the latency period. Because of OMB's role as the arbiter of
regulatory analysis under Executive Order 12,866, this undervaluation has
important public policy consequences.
Once
again, the focus is on comparing the valuation of two different forty-year
olds: one who faces a probability of instantaneous death in an industrial
accident, V[in'40,40'], and the other who faces a probability of death at age
60 from an environmental carcinogen with a twenty-year latency period,
V[in'40,60']. Recall the two factors that make V[in'40,60'] smaller. n204 First, assuming for the sake of
simplicity that these individuals would otherwise die at age 80, the number of
life-years lost from the carcinogenic risk is only half. Second, the years lost
from the carcinogenic harm occur later, and discounting is therefore
appropriate; at a discount rate of 3%, the discount factor is 0.55. So, using
round numbers, if these two corrections were the only relevant ones,
V[in'40,60'] would be about one-quarter of V[in'40,40'], reflecting reductions
of about one-half each on the account of the discounting and the difference in
the life-years saved, respectively.
One
should not overlook, however, the corrections on the other side, particularly
those resulting from the involuntary nature of the environmental harm compared
to the voluntary nature of the workplace harm, and the dread nature of deaths
from environmental carcinogens compared to the non-dread nature of deaths from
instantaneous industrial accidents. With respect to the first adjustment, the
Cropper and Subramanian study, which compares deaths from voluntary and involun
tary harms, suggests that an adjustment by a factor of two is appropri [*982]
ate. n205 As to the second
adjustment, the study by Tolley, Kenkel, and Fabian finds that avoiding deaths
from cancer is valued twice as much as avoiding instantaneous deaths. n206
There
is a question about how to combine the results of these two studies. It is not
completely clear that the correction from the Tolley, Kenkel, and Fabian study
is based only on the dread nature of the harm, and is not also affected by
different degrees of voluntariness of the harm. If the carcinogenic and
non-carcinogenic harms compared by these authors shared the same level of voluntariness,
then it would be reasonable to multiply the two factors of two, and conclude
that an adjustment by a factor of four is necessary to account for the
differences in voluntariness and dread.
In
contrast, if the carcinogenic harm considered in their estimate is less
voluntary than the non-carcinogenic harm, such a correction would be excessive.
It is clear that the difference in valuations comes in part from the morbidity
that precedes carcinogenic deaths - one component of the dread nature of cancer. n207 Moreover, nothing in the survey on
which this study relied for the remainder of the correction focused the
attention of the respondents on differences in the level of voluntariness. n208 Thus, it seems unlikely that this issue
would have played a large role in the valuations. n209
While
further research on these matters is clearly needed, to a first approximation
it is reasonable in light of the designs of the two studies to treat the two
factors as multiplicative. Thus, other things being equal, the value of
avoiding a death from an involuntary, carcinogenic risk should be estimated as
four times as large as the value of avoiding an instantaneous workplace
fatality. This upward adjustment thus cancels the two downward adjustments
resulting from the fewer number of life-years lost and the discounting for the
latency period.
Moreover,
other upward adjustments are necessary as well. n210 First, as indicated above, the median
salary for all wage earners is about 23% higher than the median salary for
operators, fabricators and laborers, the U.S. Census category most likely to
contain the subjects of willingness-to- pay studies in the context of
industrial accidents. n211 Thus, the
valuation [*983] of lives threatened by environmental carcinogens
should be the subject of an upward adjustment of another 23%.
Second,
economic growth must be accounted for. As a result, based on the 1982-1996
period, the discount rate used in making the down ward adjustment necessary to
account for the fact that the life-years would be lost in the future should be
reduced by about 1%. n212 Thus,
accounting for economic growth leads to an upward adjustment of the valuation
of life of 22%. n213
As
indicated above, the OMB approach is to take the valuations of life from
workplace settings and discount them for the length of the latency period at a
rate of 7%. n214 While this approach
does not reduce the valuation to reflect the smaller number of life-years
saved, n215 using a 7% discount rate
instead of a 3% rate over a twenty-year latency period leads to a downward
adjustment of the valuation by a factor of about four, rather than by a factor
of about two. n216 One would arrive at
the same downward adjustment by a factor of four, however, if one took account
of the smaller number of life-years saved and discounted at a 3% rate.
Moreover,
the OMB approach neglects to perform any of the necessary upward adjustments.
Thus, over a twenty-year latency period the approach may undervalue human life
by a factor of about six. n217 For
contaminants with longer latency periods, the undervaluation would be even
greater. n218
Finally,
this estimate of the undervaluation that results from the OMB approach is
probably a lower bound. The true figure may well be higher because the
calculation is based only on those differences between instantaneous deaths
from workplace accidents and deaths from environ mental carcinogens that can be
quantified on the basis of plausible empirical studies. The preceding
discussion has identified two additional possible sources of undervaluation,
but the quantification of the impact of these sources is not possible as a
result of the lack of relevant empirical analysis. First, and probably most
importantly, the population exposed to
[*984] workplace accidents has a
comparatively low willingness-to-pay to avoid death, as a result of a
disproportionate tolerance for risk.
n219 Second, to the extent that, for a given level of resources
available for consumption, the utility of being alive at a particular age falls
with increasing age, the estimates in the literature of the rate at which
individuals discount their future consumption would be higher than
warranted. n220
H.
Recasting the Debate
It
is now worth highlighting that this Article's approach to discounting in an
intragenerational setting does not pose significant ethical issues that are
distinct from those raised by cost-benefit analysis in general or the valuation
of human life in particular. n221 In
principle, one could directly ascertain, through willingness-to-pay studies,
the value of lives threatened by latent harms. Because practical problems stand
in the way of obtaining such valuations, a second-best measure, constructed in
part by means of discounting future utilities, must be used instead. n222 The use of such a proxy, however, does
not give rise to ethical issues other than those that might exist if the
measurement were done directly.
The
reason for discounting in the case of latent harms is not that a regulator or
some other outsider determines that life in the future is less valuable than
life in the present. n223 Instead,
discounting simply reflects the fact that the individual who is valuing her own
life derives less utility from living a year in the future than in the
present. n224 Discounting is therefore
necessary to provide an accurate value of the utility that the individual loses
in the present as a result of a premature death that might occur in the future.
At
the same time, however, discounting is only one of many necessary adjustments
that need to be made when valuations in the context of industrial accidents are
used as the starting point to construct a value of human life for the purpose
of regulating environmental carcinogens. It has no greater call for legitimacy
than any of the other adjustments analyzed in Part I.E. As the various
empirical estimates show, it is not even dominant in terms of magnitude. n225 Thus, the failure of the regulatory
process to make other adjustments, principally as a result of OMB's approach to
the matter, leads to a substantial undervaluation of human life. n226
[*985]
The preceding discussion views discounting in this intrapersonal
situation raised by the presence of latent harms as an essentially technocratic
procedure, which must be undertaken in conjunction with other adjustments of
the value of life from instantaneous industrial accidents, in order to obtain a
second-best estimate of the value of a human life threatened by latent
environmental contaminants. This characterization of the problem may give rise
to two types of concerns. Neither, however, calls for a reevaluation of the
ethical status of discounting in the case of latent harms.
First,
one might worry that an individual's decisions today do not sufficiently
protect the person that the individual might become in several decades. This
perspective views the individual as a succession of "multiple
selves." n227 Its concern is that
the individual's current self would make decisions that undervalued the interests
of the individual's future self by choosing a discount rate that was too high.
This formulation gives rise to a typical externality problem and converts a
technocratic intrapersonal problem into an ethically-laden quasi-interpersonal
one.
The
objection, however, would not be confined to the role that discounting plays as
a step toward a second-best valuation of human life threatened by latent harms.
Precisely the same objection could be lodged against an attempt to measure this
value directly through willing ness-to-pay studies. One would worry in this
context that the wage premiums demanded by an individual would be too low
because the future costs would be borne not by her current self but by a future
self. The complaint would thus not be attributable to the specific role played
by discounting but, more generally, to the process of valuing life itself.
Thus, as a formal matter, the objection does not disprove my claim that
discounting in an intragenerational setting poses no significant ethical issues
that are distinct from those raised by cost-benefit analysis in general or the
valuation of human life in particular.
n228
Moreover,
such a criticism of revealed preference approaches to the valuation of threats
to human life would not be confined to latent harms. Take, for example, an
instantaneous industrial accident in which an individual faces probabilities of
both death and serious morbidity. The individual's current self might not have
sufficient empathy towards a future self confined to a wheelchair, and might
therefore demand too low a wage premium.
[*986]
More broadly, most decisions that we make have future consequences.
Every time that we borrow money, we reduce the resources that will be available
to us in the future. Similarly, every current expenditure affects the amount
that will be available for future expenditures. To find an externality in each
decision with future consequences as a result of the presence of multiple
selves would open the door to government regulation of essentially every
financial decision that we make. Such an approach would therefore constitute a
serious affront to individual autonomy.
Interfering
with individual preferences in this manner might be appropriate in the face of
fairly egregious myopia. For example, in the somewhat analogous context of
social welfare policy, Bruce Ackerman and Anne Alstott note:
The aim of liberal policy is not to
second-guess [individuals'] choices by supposing that everybody 'ought' to save
a lot for retirement if they are to maximize their happiness over their life
times. Its mission is more modest but more fundamental. It is to protect
elderly citizens against the worst consequences of their earlier psychological
myopia. The watchword is not utility maximization but the assurance of dignified
existence in old age. n229
It
would be unwarranted, however, to attack this Article's approach to the problem
of latent harms by deploying the machinery of "multiple selves"
analysis. Recall that the approach advocated here is to use the after-tax
return on riskless investments - a rate that currently stands at between 2 and
3%. n230 If this rate were to be
trumped as insufficiently protective of the future, one would need to trump
every decision to borrow money at market rates of interest. Then, governmental
regulation of individual choices in the face of any decision with future
consequences would become the norm, rather than a relatively rare club to be
wielded only in the face of egregious lack of foresight.
A
different type of objection might be raised to the claim that, in the context
of latent harms, discounting is a technocratic exercise that does not give rise
to difficult ethical choices. Different individuals have different discount
rates, but the social decision of how to control latent environmental harms
needs to be based on a single rate. Thus, in choosing the rate on which to base
social policy, one needs to make some type of interpersonal comparison. Such
comparisons, which are highly value laden, are inevitable, even if they are
made implicitly by using a common rule of thumb such as basing the policy on
the median discount rate.
Because
environmental quality is a public good, once the govern ment acts, individuals
will enjoy a uniform level of quality regardless of their individual discount
rates. Thus, individuals with low discount rates would be exposed to more
latent harms than they would have preferred,
[*987] and individuals with high
discount rates will be exposed to harms that are lower than they would have
preferred (and consequently, perhaps, would have to face too high a current
financial sacrifice to fund the policy).
This
objection, again, is not particular to the role played by discounting future
utilities in the case of latent harms, but can be raised more generally against
both cost-benefit analysis and the valuation of human lives. Under cost-benefit
analysis, public policy is chosen on the basis of the aggregate valuations of
the benefits. Thus, individuals with particularly high valuations have to
accept a policy that is laxer than they would have preferred, whereas
individuals with a particularly low valuation face the opposite problem.
Similarly, in the case of public policy decisions taken to prevent even
instantaneous deaths, individuals who value their lives particularly highly
(perhaps because they are unusually wealthy or have a particularly low
tolerance for risk) will face a policy that is laxer than they would have
preferred.
In
summary, to the extent that the valuation procedures discussed in Part I give
rise to ethical objections, these objections should be leveled either against
cost-benefit analysis generally or against the valuation of life in
particular. n231 If these two
techniques survive ethical scrutiny, no substantial independent ethical argument
should be raised against the role played by discounting in an intragenerational
setting. More generally, it is not defensible to argue that the value assigned
by the regulatory process to a human life should be independent of when an
individual's life-years are lost, regardless of how the timing affects the
individual's own valuation.
II.
Harms to Future Generations
As
indicated at the outset of this Article, discounting at a rate of re turn
comparable to that earned by financial investments turns the utilities of
generations living a few hundred years from now into a negligible present
discounted value. n232 Under such
conditions, practically no current expenditure for the benefit of relatively
distant generations could be jus tified within a cost-benefit framework.
Because many of the consequences of climate change will not manifest themselves
for a long time, n233 the consequences
of discounting at the rate of return of financial instruments may well be to
make any plausible expenditure to address climate change fail a cost-benefit
test.
[*988]
The emphasis of many economists on the use of constant discounting
models stands in stark contrast to the approach of international environmental
law, which has given its unqualified endorsement to an alter native concept to
guide intergenerational allocations: the principle of sustainable development.
Indeed, the concept of sustainable development figures prominently in the most
important agreements concerning international environmental law, n234 including the Stockholm
Declaration, n235 the Rio
Declaration, n236 and the Framework
Convention on Climate Change. n237
Section
A shows that models of discounting harms to future generations cannot be
justified merely through appeals to logic. Section B re views the empirical
literature concerning how individuals would discount benefits to future
generations. The results reveal a strong intuition against the use of constant
discounting models. Section C analyzes the serious shortcomings of discounting
models when they are used in an intergenerational context. Section D discusses
the role of opportunity costs; even if future utilities are not discounted,
expenditures for environ mental projects might nonetheless be postponed if
other investments can yield higher returns. Section E analyzes the principle of
sustainable development and shows why it too suffers from serious shortcomings.
Finally, Section F presents the outlines of an attractive theory of intergener
ational obligations with respect to the environment.
A.
Discounting and Appeals to Logic
Some proponents of discounting the benefits to
future generations justify their position through appeals to logic, invoking a
set of absurd consequences that would inexorably follow if discounting was not
per formed. Their arguments in this regard are unpersuasive.
1.
No Environmental Projects Will Be Undertaken Unless One Discounts at a Market
Rate. - Some commentators argue that unless environmental benefits are
discounted at the rate of return on other investments, environmental
expenditures would always be deferred into the future and ultimately would
never be undertaken. For example, Susan Putnam and John Graham state:
If
a smaller discount rate were to be applied to health than to money, it would
always make sense to postpone adoption of public health programs that invest
money now for deferred health improvements. In short, society would continually
delay [*989] risk reduction into the future and impose the
burdens on future generations. n238
Similarly, according to Emmett Keeler and Shan
Cretin:
The discounting of costs but not benefits ...
has a paralyzing effect on a decisionmaker.... For any attractive program,
there is always a superior delayed program which should be funded first. The
result is that no program with a finite starting date can be selected. n239
The idea behind this position is that, instead
of undertaking the environ mental program, one could invest the funds in an
alternative project, watch the investment grow, and then address the
environmental problem at some time in the future. At this future time,
moreover, one would engage in the same calculus and decide to postpone the
environmental expenditure once more.
Environmentalists
have traditionally favored low discount rates be cause the costs of
environmental protection generally must be borne well before the benefits begin
to accrue. n240 Thus, a low discount
rate makes a given expenditure seem more desirable. The argument that no
environmental programs would be undertaken absent discounting at a market rate
turns this view on its head: lack of discounting becomes environ mentally
undesirable.
There
are several responses to the justification of the discounting of environmental
benefits by an appeal to a seemingly logical claim that any alternative would
lead to the indefinite postponement of environmental expenditures. To begin,
regardless of whether one discounted the environmental benefits at the market
rate, it would always be desirable to undertake environmental investments that
yielded a market rate of re turn. So, the claim has to be somewhat more modest:
that only environ mental investments yielding at least a market rate of return
would be undertaken. Other environmental projects, in contrast, would be
delayed forever because they would always look more attractive in the future,
after the funds that would have been allocated to these projects earned a
higher rate of return elsewhere. n241
There
is then a seemingly inescapable logic to discounting environmental benefits at
the rate of return earned by other investments. If one used a lower discount
rate for environmental benefits, environmental remediation projects could pass
a cost-benefit inquiry even though the resources would be best spent elsewhere.
The use of a discount rate [*990] equal to the rate of return on other projects
ensures that only desirable projects pass a cost-benefit test. n242
Even
with this reformulation, however, the appeal to logic assumes implicitly that the
costs and benefits of the environmental program will remain unchanged over
time; n243 it is because of this
invariance that delaying expenditures in order to invest at the market rate of
return seems attractive. This assumption, however, is inconsistent with the
structure of many environmental problems.
For
example, in the case of the remediation of hazardous waste sites under the
Superfund program, the damages caused by the contamination are likely to
increase significantly over time if the problem is left unattended. n244 If addressed early, a cleanup can take
place before the hazardous waste has seeped down to an aquifer, affecting the
quality of the groundwater. At this stage, the cost of remediation is comparatively
modest and the damage from the contamination (and therefore the benefit of
undertaking a remediation) is comparatively modest as well.
A
few years or decades later, however, the pollutants may have worked their way
down to the aquifer. n245 Then, the
damage may be far higher, since the pollutants could have destroyed important
sources of drinking water. In turn, the costs of remediation would be far
higher as well. n246
Alternatively,
certain environmental problems may become irreversible. Once that occurs, any
finite expenditure on abatement, no matter how high, will fail to remedy the
problem. The costs of abatement will effectively have increased to infinity.
Thus,
in deciding whether to undertake an environmental project now, one cannot
merely perform a static calculation of the magnitude of costs and damages on a
particular date. One needs also to look at the problem dynamically and
determine how the costs and damages would vary over time if the problem were
left unattended.
Consider
the following simple example. We could remove some soil from the site and
incinerate it now at a cost of $ 110,
n247 and the damage from the current contamination is $ 100, reflecting
a small increase in the cancer risk of certain residents in neighboring areas.
If one looked at these figures statically, one would decide, on cost-benefit
grounds, not to [*991] undertake the cleanup. If the problem is left
unattended, however, in 10 years the remediation cost would be $ 500, as a
result of the need to pump and treat groundwater, and damage from the
contamination would be $ 600. At that point, the cleanup would be justifiable
on cost-benefit grounds. For any plausible discount rate, however, it would be
better to spend the $ 110 upfront to remove and incinerate the contaminated
soil, thereby addressing the current $ 100 damage problem as well as prevent
ing it from becoming a $ 600 damage problem in the future.
Thus,
the situation described above presents three policy options: remediate now,
remediate later, or do not remediate. It is desirable to remediate now not only
when the current damage is greater than the current cost of addressing this
damage, but also when the future damage is greater than the future cost of
addressing it, and the increase in costs in the intervening period is greater
than the rate of return on other investments.
n248
These
features concerning the structure of environmental benefits and costs are no
less an issue for climate change than they are for Superfund problems. n249 Certain climate change problems may be
irreversible, n250 and in such cases
delaying investment in the environmental project is not an option. More
generally, to make intelligent policy choices one needs to know, for example,
not only the costs and damages at the time that carbon dioxide loadings in the
atmosphere are doubled relative to some baseline, but also how the damage
changes over time and the extent to which this damage can be reduced by means
of particular policy measures. n251
In
addition, in the case of climate change, there is the possibility of
catastrophic consequences. n252 In the
face of such consequences, risk aversion would justify undertaking projects
even if their expected return was lower than that of other projects. n253
Moreover,
the view that before addressing environmental programs we should exhaust
higher-yielding investments in other areas overlooks important difficulties
concerning the transfer of resources across
[*992] projects. n254 Say, for example, that initially the
greatest returns to a given investment would be to improve the educational
system of particularly poor developing countries. n255 Over the first twenty years, resources
in vested in this manner earn a greater return than if they had been placed in
an environmental project. Moreover, over this period, the costs of
environmental remediation are increasing at a rate lower than the return on the
educational investment.
After
twenty years, however, the calculus changes. The costs of the environmental
project, though less than the resulting benefits, begin to rise at a rate
higher than the rate of return to education in the developing country. At that
point, it is desirable to take the proceeds of the educational investment and
transfer them to the environmental investment.
There
is good reason to be skeptical about the feasibility of this transfer. Part of
the returns from the educational investment may have been consumed by its
beneficiaries, and may therefore no longer be available to fund the
environmental project. Other resources may be sunk in long- term investments,
such as infrastructure, from which they could not feasibly be extricated.
The
transfer of even liquid investments may raise problems. The developing
countries (or whatever interest group benefits from the initial allocation) might
object to having the resources transferred to address a problem that they
attribute to developed countries. Absent their con sent, there might be no
clear mechanism for effecting the transfer. Of course, one could attempt to
deal with this problem ex ante by contracting between the provider of the funds
and the temporary recipient. Nonetheless, there are likely to be difficulties
enforcing the rights under such a contract.
In
summary, the resort to logic must fail. Perhaps the argument could be further
recast to state that environmental expenditures should not be undertaken if
other projects have a higher return, if the costs and damages associated with
leaving the environmental problem unattended do not rise too fast, if the
potential for catastrophic environmental consequences in the absence of
immediate measures is sufficiently low, and if the difficulties of transferring
resources across projects are not insur mountable. Then, of course, the claim
made by supporters of discounting would have lost all their bite and would have
become essentially tautological.
2.
Failure to Discount Would Lead to the Impoverishment of the Current Generation.
- A different argument maintains that not discounting the [*993]
value of benefits to future generations makes it desirable for us to
impoverish ourselves down to subsistence levels for the benefit of future
generations. As Tyler Cowen and Derek Parfit describe the argument (to which
they do not subscribe):
We
clearly need a discount rate for theoretical reasons. Other wise any small
increase in benefits that extends far into the future might demand any amount
of sacrifice in the present, be cause in time the benefits would outweigh the
cost. n256
The logic is not limited to our generation. In
turn, subsequent generations face the same incentive, and they become
impoverished as well. Thus, "failure to discount would leave all
generations at a subsistence level of existence, because benefits would be
postponed perpetually for the future."
n257
There
are two serious problems with the argument. First, it assumes implicitly that
the objective of the decisionmaker is to maximize a social welfare function
that adds up the interests of all generations. Then, deferring consumption now
makes additional resources available for the future, when more people are
around to derive utility from them. The question of whether it is appropriate
to determine our obligations to future generations by reference to an aggregate
social welfare function can not be resolved as a matter of logic. Instead, it
must be defended by means of an ethical theory. n258 The argument that all generations will
be impoverished unless we discount environmental benefits assumes away the hard
ethical choice, n259 and then notes
that an absurd conclusion would follow absent discounting.
Moreover,
the argument for discounting as a way to avoid impoverishment takes a truncated
and fundamentally misleading view of the manner in which one generation affects
the welfare of subsequent generations. One component, to be sure, is through
its consumption of renewable and nonrenewable resources. Thus, one way in which
we could attempt to impoverish ourselves is by foregoing the consumption of
such resources.
[*994]
But to a large extent the standard of living of future generations will
depend on current investments in areas such as technological knowledge,
educational attainment, and productive capacity. n260 Would our generation make those
investments if it was wholly deprived of the resulting benefit? The answer,
presumably, must be negative - that the level of effort that we bring to the
business of making investments with long-term consequences is a function of the
benefits that we can realize from those investments.
As a
result, a requirement that we impoverish ourselves to leave more resources for
future generations could actually decrease, rather than in crease, the
resources available in the future. One might respond by saying that our
generation has an obligation to provide the level of invest ment that it would
have provided under a regime in which it could at least share in the fruits of
its labors. That may well be a plausible argument, but it derives from an
ethical judgment. Thus, the appeal to logic fails here as well.
In
summary, the failure to discount does not inexorably lead to the impoverishment
of all generations; it does so only if one makes two ethical judgments: that
the appropriate social welfare function adds up the utilities of all
generations, and that the current generation has an ethical obligation to
invest in a stock of activities affecting long-term well-being even if it
cannot keep any of the resulting benefits.
B.
Intuitions About Discounting
Before proceeding further, it is worth
reviewing some empirical studies seeking to determine how individuals think
about long-term discounting issues. A caveat is appropriate at the outset. If
individuals in the cur rent generation indicate that they would discount the
benefits of future generations, one should not automatically conclude that the
decision reflects an honest ethical judgment. Instead, the judgment of these
individuals might be compromised by self-interest. On the other hand, it would
be relevant if members of the current generation, despite their self-interest
to the contrary, were prepared to make social decisions protective of future
generations. Their generosity might be indicative of an ethical in tuition that
the benefits accruing to future generations should not be discounted very much,
or perhaps not at all.
Most
of the empirical studies in this area use a similar methodology. Typical of the
approach is the questionnaire prepared by Maureen Cropper, Sema Aydede and Paul
Portney, which states:
Without new programs, 100 people will die this
year from pollution and 200 people will die 50 years from now. The government
has to choose between programs that cost the same, but [*995]
there is only enough money for one .... Which program would you choose? n261
In
their surveys, the authors varied the number of lives that would be saved in
the future (but kept constant at 100 the number of lives saved in the present).
They also varied, between 5 years and 100 years, the time at which the future
lives would be saved. n262 From the
responses, they computed the discount rates that the respondents assigned to
future consequences. The mean of the respondents' discount rates was 8.6%,
6.8%, and 3.4%, for time horizons of 25, 50, and 100 years, respectively. n263 A similar study, conducted in Sweden,
calculated discount rates of about 25%, 12%, and 8%, for time horizons of 20,
50, and 100 years, respectively. n264
More
strikingly, another Swedish study sought to compare the seriousness of a
leakage of spent nuclear fuel at times ranging between one thousand and almost
two million years into the future. Almost one third of the respondents did not
discount the future consequences at all. Among those who did, the mean discount
rate attached to an accident in the year 10,000 was less than one-hundredth of
one percent - practically zero. n265
The
studies reveal an essentially unanimous opposition to the core component of the
traditional discounting model: that future consequences should be discounted at
a constant rate and that the rate of discounting should be set by reference to
the rate of return on particular investments.
n266 Instead, the studies show a consistent pattern under [*996]
which the discount rate falls as the time horizon gets longer. n267 More over, the discount rate with
respect to very long time horizons is well under the rate of return on
investments in financial markets. n268
C.
Discounting in a Global Utilitarian Calculus
Thus, at this point the argument has
established that the propriety of discounting the benefits to future
generations cannot be resolved by appeals to logic. Moreover, empirical studies
reveal a moral intuition op posed, over the long-term, to constant discounting
at a rate of return comparable to that generated by financial markets. It is
now time to focus directly on the propriety of discounting.
Most
economic formulations of discounting in an intergenerational context posit a
social welfare function that aggregates the utilities of individuals in the
different generations. n269 For each
time period, the utility is multiplied by a rate of pure time preference, which
is a measure of the difference in importance attached to current utility as
compared to utility in the future. n270
This rate could be zero (the utilities of current and future generations have
the equal importance) or positive (the utilities of earlier generations are
privileged). n271 The goal of the
decisionmaker is to maximize the aggregate utility function. n272
[*997]
In this framework, the discount rate that maximizes aggregate utility
can be written as follows:
d =
[rho] + [THETA] g where d is the discount rate, [rho] is the rate of pure time
preference, [THETA] is the absolute value of the elasticity of marginal utility
(a measure of the relative effect of a change in income on utility), and g is
the growth rate of per capita consumption.
n273
The
pure rate of time preference, [rho] , reflects the fact that if the social
welfare function gives less weight to the utilities of later generations, then
those utilities must be discounted in order to make them comparable to the
utility of the current generation. The term composed of the product of [THETA]
and g has a less direct genesis. Most economic models of discounting assume
that individuals in the future will enjoy higher rates of consumption than
individuals in the present: more specifically, the level of consumption will
increase at a rate of g. n274 The
models also assume that individuals exhibit a declining marginal utility of consumption
- that is, that a unit of consumption has a greater effect on the utility of an
individual with a lower level of consumption than on one with a higher level of
consumption. n275
As a
result, if later generations will enjoy a higher level of consumption as a
result of economic growth, social welfare can be increased by allocating some
additional resources to earlier generations. The [THETA] g term represents the
amount of discounting that must be performed, in order to maximize social
welfare, on account of the higher levels of consumption of later generations.
The
following subsections deal specifically with each of the two components of the
discount rate.
1.
Pure Rate of Time Preference. - Exemplifying the position of many economists,
Victor Fuchs and Richard Zeckhauser take a strong position in favor of
discounting at the rate of return on financial instruments. They maintain:
Most policy planning discussions assume full
altruism - future citizens are given equal weight with present citizens - and
discount solely for the time value of money. Given this ethical premise, the
value of life years to future generations should be discounted at the
time-value-of-money rate. n276
[*998]
Terming this approach "full
altruism" is somewhat contrived. In fact, it privileges the interests of
the current generation to a very large extent.
Recall
that, at a time-value-of-money rate of 5%, this approach equates the loss of
one life today with the loss of a billion lives in 500 years. n277 Stated somewhat differently, assume
that the population of the world remains constant at about 6 billion people
over the next 500 years. Under a model of time discounting, what would be the
maximum current expenditure that could be justified in order to prevent the
death of every living individual in 500 years? Placing a value of life of $ 5
million, in constant dollars, the maximum current amount that we could justify
spending now to avert the destruction of the human race in 500 years would be $
30 million. (At the OMB rate of 7%, this amount would be only about $ 10!) More
conventional definitions of altruism would presumably call for a different
result.
Indeed,
the discount factors are simply the weights used to compare the value attached
to the utilities of individuals in different generations. A pure rate of time
preference of zero is equivalent to giving the utility of persons living at
different points in time the same weight in the social welfare calculus. n278 Any positive rate simply reflects the
preferences of a social welfare evaluator to depreciate the utilities of future
generations. n279
The
ethically compromised status of discounting for time preference at a constant
rate can perhaps be best illustrated by the following exam ple. Consider an
exceedingly simple economy with 100 units of re sources. Two individuals, with
identical utility functions, live in this economy: one from year 1 to year 50
and the other from year 51 to year 100. There is no possibility for productive
activity; thus, the individuals will be able to derive utility only from the
existing 100 units of resources. n280
In
the absence of discounting for time preference, each individual would be
allocated 50 units of resources. In the face of a positive rate of time
preference, however, even a relatively modest one, the first individual would
get the bulk of the resources. It would be difficult to construct an attractive
ethical theory that privileged the first individual in this manner merely
because she lived fifty years earlier than the second individual.
The
possible justifications for discounting for time preference at a positive rate
are not compelling. First, one might posit that if discounting for time is
appropriate intragenerationally, it should be acceptable in [*999]
tergenerationally as well. There is a fundamental difference, however,
between the two situations.
Intragenerational
discounting affects the timing with which a partic ular individual decides to
expend a fixed amount of resources. It is merely a reflection of the
individual's preferences and, as discussed in Part I.H, does not raise any
significant ethical questions. n281 In
contrast, intergenerational discounting affects the quantity of resources
available to each individual.
In
an intergenerational context, one must initially decide how to al locate resources
to individuals in different generations - a societal decision with ethical
underpinnings. Then, each individual must decide how to time the consumption of
resources across her lifetime - a personal decision with no ethical
ramifications, n282 other than a weak
concern about excessive myopia. n283
Some
economic models that purport to analyze intergenerational problems construct
their utility function by reference to an individual who lives forever. n284 Models of this type collapse the intergenerational
and intragenerational aspects of the optimization across generations. n285 Thus, they overlook an important
dimension of the problem. One simply cannot avoid making ethical judgments
about intergenerational transfers by mechanically importing to this endeavor
the intragenerational framework. n286
[*1000]
The second possible justification is that time discounting does not show
lesser regard for future generations because even though it under values the
interests of a particular generation relative to an earlier generation, it
overvalues its interests relative to a later one. According to this claim, each
generation is treated in a comparable way: somewhat worse than its predecessors
and somewhat better than its successors.
The
claim is not an affirmative argument for discounting. Instead, its ambition is
far narrower: it merely responds to one possible argument against discounting.
It does not carry the day, however, even in this limited respect. Absent
economic growth, as would be the case for example in economies with high levels
of consumption, constant discounting for time preference would lead to the
progressive impoverishment of subsequent generations. Given the choice between
consuming resources in the present and leaving them for future generations one
would choose the former because the utilities derived from these resources by
later generations would be heavily discounted.
It
is true that if discounting actually threatened to impoverish future
generations additional resources would be allocated to these generations as a
result of the declining marginal utility of consumption, which would make the
poorer generations value a unit of consumption more. This phenomenon, which is
a feature of growth discounting at a negative rate of growth, could mitigate
some of the harshness that would otherwise result. The existence of such a
safety valve, however, is hardly a ringing endorsement of discounting for the
pure rate of time preference.
Yet
another argument for discounting for time preference focuses on the greater
affinity that the current generation feels for itself and for the generations
that immediately follow it. As Kenneth Arrow and several co-authors note, the
rate of time preference "may represent discounting for empathetic distance
(because we may feel greater affinity for generations closer to us)." n287 By its terms, the statement purports to
make a descriptive claim rather than a normative judgment: it does not explain
why a social welfare function that reflects such judgments is ethically
defensible. n288
Moreover,
this argument for discounting is suspect even as a descriptive claim, as the
empirical evidence discussed in Part II.B shows quite [*1001]
clearly. n289 It is plausible
that we would like to favor ourselves over future generations, and that with
respect to future generations we would like to privilege the generations of our
children and grandchildren, and per haps even great-grandchildren, over
subsequent generations. n290 But discounting
at a constant rate implies that our decreasing regard for subsequent
generations continues forever. For example, it seems unlikely that, on this
account, we would value the loss of one billion lives 1000 years no more than
the loss of one life 500 years from now, as would be the case if we used a
discount rate of 5%. n291
Other
commentators justify discounting by reference to the probability that some
catastrophe in the future will result in the destruction of human
civilization. n292 The point then is
that if we are not sure that a future generation will exist, we should allocate
more resources to earlier generations, which are more likely to be around to
enjoy the re sources. This argument could well justify discounting at a
constant rate, but it is very unlikely that the rate would be more than
infinitesimal. n293
Also
embedded in the claim is an ethical issue. To some extent, the survival of
humanity is imperiled by actions of our generation, and of a few generations
immediately preceding ours. The consequences of nu clear war are one such
example. Over the long run, climate change itself may result in a catastrophic
scenario. n294 If we are contributing
to the probability of humanity's extinction, should we then invoke this
possible outcome as an argument to allocate more resources to ourselves? A
quite plausible principle is that the current generation should not benefit in
this manner from its externalizing behavior.
Finally,
time discounting is sometimes justified on the grounds that over time some kind
of countermeasures or cures for environmental problems may be devised. n295 If, indeed, there were a scientific
basis to support such an assumption, a welfarist framework would call for
reducing the harm by the probability that ultimately the harm will not in fact
accrue. To the extent that the harm was potentially a catastrophic one,
however, risk aversion would mitigate that reduction. n296 More funda mentally, it would be an
exceedingly unusual coincidence if the
[*1002] probability that an environmental
problem would self-correct just happened to equal the interest rate on
financial instruments for every problem and for every length of time. n297 Thus, in its general formulation, this
argument for discounting must be rejected as devoid of any factual basis. n298
In
summary, the arguments for discounting as a result of the pure time preference
are not compelling. n299 The confusion
surrounding the issue stems, at least in part, from equating intragenerational
discounting, which ought not to be considered particularly controversial, n300 with intergenerational
discounting, n301 which raises a
different set of issues. n302 [*1003]
To conclude, it is worth noting that even though discounting for time
preference is a relatively standard technique in economics, there is a long and
respectable tradition, traced to an article published in 1926 by Frank Ramsey,
that rejects such discounting in intergenerational contexts. n303
2.
Growth in Levels of Consumption Over Time. - It is time to turn to the question
of discounting as a result of the growth in levels of consumption over time.
Recall that the argument in favor of such discounting rests on the predicted
additional wealth of future generations and the decreasing marginal utility of
consumption. n304 Given these
conditions, growth discounting leads to the maximization of the social welfare
function. n305
Before
evaluating the argument for such discounting, it is worth pausing to consider
the magnitude of what is at stake. As explained above, the discount rate for
growth that maximizes social welfare is the product of g, the growth rate of
per capita consumption, and [THETA] , the abso lute value of the elasticity of
marginal utility. Arrow and his co-authors indicate that most empirical
estimates of this elasticity place it in the range between one and two; thus
they use the mid-point, 1.5, in some of their calculations. n306 With respect to long-term per capita
growth, the central estimate of the Intergovernmental Panel on Climate Change
placed it at 1.6%. n307 Thus, the rate
of discount for growth would be 2.4%. This amount is far from inconsequential.
It implies, for example, that we would be indifferent between saving one life
now and 10.7 lives in 100 years, or between saving one life now and 141,247
lives in 500 years.
This
type of discounting gives rise to two important concerns. First, to the extent
that subsequent generations are wealthier, they will value the benefits of
environmental protection more highly. The standard economic models calculate
the environmental damage on the basis of the valuation of the current
generation: economic growth implies that later generations will have higher
valuations. n308 Standard estimates of
the benefits of climate change measures include a reduction in the loss of
lives. n309 As shown above, the
elasticity of this valuation with respect to levels of consumption is
approximately one. n310 Thus, this
valuation [*1004] should be expected to rise at the rate of
economic growth. n311 Similarly,
valuations of environmental amenities and natural resources are closely linked
to levels of income, n312 and will rise
with rising income. n313 If the
valuation of all the components of the damage of climate change in creased at
the rate of economic growth, this factor would either completely cancel out any
discounting as a result of greater wealth (when [THETA] is equal to one), or
greatly reduce the extent of such discounting (when [THETA] is somewhat greater
than one).
More
fundamentally, the growth discounting account assumes implicitly that the
benefits of environmental activities are distributed in the same manner as the
costs. Then, because the benefits accrue to individuals who are wealthier than
those who bear the costs, the beneficiaries have a lower marginal utility of
consumption, and discounting is necessary to maximize social welfare. This
implicit assumption is highly questionable. Most studies of the impact of
climate change show that the damages will be suffered disproportionately by
individuals in poor developing countries: Bangladesh, for example, is likely to
be particularly affected by sea level rises.
n314 In contrast, the contribution to the global warming problem lies to
a large extent with the developed countries, and financial responsibility for
mitigation measures will be borne primarily by these countries. n315
Currently,
the United States and Bangladesh have per capita gross national products (GNP)
of $ 26,980 and $ 240, respectively.
n316 The figures differ by a factor of about 112. It is quite unlikely
that in 100 years or so Bangladesh and the United States will have the same per
capita GNP. Thus, to the extent that the United States is paying for the
environmental measures and Bangladesh is benefiting from them, the kind of
growth discounting contemplated in the standard economic models is clearly
inapposite. In order to maximize the social welfare function, a lower factor
would have to be used to reflect the fact that even when the [*1005]
benefits of climate change measures begin to accrue, Bangladesh will be
poorer than the United States.
It
is quite possible that even in a hundred years Bangladesh's per capita GNP, in
constant dollars, will be lower than the per capita GNP in the United States is
now. Then, in order to maximize the social welfare function, one would have to
apply a negative discount rate. Such a rate would justify spending more now
than the benefits in the future because the benefits in the future would accrue
to individuals with lower levels of consumption, and hence higher marginal
utilities of consumption.
One
might object to this line of argument on the grounds that citizens of the
United States have no obligation to improve the lot of Bangladesh. Such a
position is certainly debatable, but it resides outside the domain of
utilitarianism, where the concept of discounting future utilities has its
intellectual home. In the example described above, where in constant dollars
the per capita GNP in Bangladesh in 100 years is lower than the current per
capita GNP in the United States, a negative discount rate does maximize the
social welfare function and is the policy that should be chosen on utilitarian
grounds.
This
discussion points to an obvious anomaly. If we are prepared to be serious about
utilitarianism in the intergenerational context, why do we not take it
seriously in the intragenerational context? Doing so would imply a large
increase in the aid from developed to developing countries, where the marginal
utility of consumption is far higher as a result of the much lower per capita
GNP.
One
can, to be sure, construct a plausible ethical theory under which greater
current foreign aid is not compelled but mitigation measures for climate change
are. The depressed economic status of developing countries might not be the
direct consequence of any actions by the developed countries, although the
issue is not uncontroversial. In contrast, any damages that might affect
developing countries as a result of climate changes are caused to a large degree
by energy consumption patterns in the developed countries. n317 So, the developed countries might have
an obligation to mitigate a problem that they caused and yet not have a similar
obligation to reduce a level of inequality that they did not cause.
It
is difficult, however, to reconcile such an ethical theory with welfarist
approaches. Whether the lower level of per capita GNP in developing countries
is caused by climate change or not, it still results in a higher marginal
utility of consumption. If the purpose is to transfer re sources to where they
will produce the greatest increase in utility, the cause of the inequality
simply does not matter. Moreover, the selective rejection of utilitarianism to
justify the current low levels of foreign aid
[*1006] would call into question
its selective invocation to justify discounting in some fashion the benefits to
future generations of environmental measures.
n318
Alternatively,
one might argue that utilitarianism calls for maximizing only the aggregate social
welfare function of the relevant polity. With respect to the analysis of
foreign aid, the relevant polity might be each individual nation. Foreign aid
would then be justified only to the extent that donors in a wealthy country
derive utility from helping recipients in a poorer country, not on the basis of
the utility derived by the recipients.
In
the context of climate change, given the global nature of the problem, it would
be paradoxical to decide on a nation's obligations merely by reference to that
nation's aggregate social welfare function. Indeed, the standard economic
formulation of discounting aggregates across a global social welfare function
and no commentator that I am aware of argues for a more constrained view.
Perhaps one could construct a defensible theory under which the relevant polity
changed with the nature of the problem, but it could not be derived solely from
utilitarian principles and would have to be grounded on some
nonconsequentialist ethical norm.
Growth
discounting also inappropriately merges the decision con cerning the
desirability of a project with distributional considerations. Under
cost-benefit analysis, projects are undertaken based on the aggregate
willingness-to-pay of the beneficiaries. Because the government un dertakes
large numbers of projects and regulatory initiatives, the losers with respect
to one governmental intervention may well become winners with respect to
another. It therefore does not make sense to suffer social welfare losses with
respect to an individual project simply to obtain a more desirable distribution
of resources.
After
aggregating all projects, however, the set of policies that maximizes net
social welfare across the population as a whole might impose significant net
costs on a subset of the population. To the extent that such inequities
persist, the government can effect redistribution intragenerationally through
the income tax system. Such an approach generally gives rise to fewer
distortions and is therefore more desirable than compromising the social
welfare consequences of individual projects.
n319
In
contrast, under growth discounting, the amount invested in an environmental
project will be less than that justified by reference to the [*1007]
aggregate willingness-to-pay of the beneficiaries. Thus, the efficiency
of each individual project would be compromised in order to effect
redistribution.
It
is true, of course, that intergenerational redistribution is more dif ficult to
achieve than its intragenerational counterpart. For example, if we allocate
more to the current generation in order to improve the aggregate social welfare
but feel that such a policy imposes net costs on future generations, there is
no easy means to compensate future genera tions. In theory, we could tax
ourselves to create a trust fund that future generations could tap into at
predetermined times, but there is a high likelihood that the money would become
an attractive target in the future for our generation, or for intervening
generations. Thus, the durability of the arrangement over the long-term could
not be assured.
A
different problem would arise if social welfare were to be maximized by
allocating resources to future generations in a manner that imposed
unacceptably high net costs on the current generation - the phenomenon that
underlies the growth discounting approach. There is no obviously desirable
mechanism by which we could tax future generations in order to compensate
ourselves. n320 While we could consume
suboptimally high levels of renewable and nonrenewable resources, such
consumption imperils social welfare in a way that is avoided by redistribution
through the tax system. A better alternative is to finance measures that
benefit the current generation through long-term debt, the burden of which would
eventually fall on future generations.
These
difficulties suggest that the benefits of intragenerational redistribution
through the tax system will not be fully available intergenerationally.
Nonetheless, these difficulties do not necessarily call for conflating the
resource allocation and distribution inquiries, as growth discounting does.
Instead, one needs to ascertain, as one typically does in the intragenerational
context, whether bifurcating the inquiry and per forming the redistribution
through a different mechanism would reduce undesirable distortions.
D.
Role of Opportunity Costs
My
argument should not be read to imply that discounting has no role to play in
the intergenerational context. For example, consider a harm that could be
averted either now or in the future. In this scenario, assume that if the
problem were addressed in the future, funds could be invested now in other
projects and then transferred at a later time to avert the harm. The most that
it would be worth paying to avert the future harm now is the present discounted
value, at the rate of return generated by these alternative projects, of the
amount that would be needed if the problem were addressed in the future.
Regardless of the nature of [*1008] our obligation to future generations, it
makes no sense to spend more when we can achieve the same result for less.
A
similar result could attach even to an irreversible environmental problem.
Consider an environmental harm that can be remedied only through a current
expenditure: if the problem is not addressed now, it cannot be successfully
addressed in the future. Even if the objective were to transfer resources to a
future generation, it might nonetheless be preferable to leave the problem unattended
if alternative investments would yield a higher rate of return. Then, the
future generation would have to face the environmental harm but would enjoy,
for example, the fruits of greater investments in technological innovation. n321
The
substitutability of environmental and non-environmental benefits can be seen
most clearly from the vantage point of a utilitarian perspective. The
utilitarian objective is to deploy society's resources in whatever way
increases aggregate utility by the largest amount, not to pre vent specific
environmental harms. Suppose that aggregate utility would increase by
transferring current resources to a future generation. If a given investment of
resources would yield a larger return in a non-environmental project, the utilitarian
calculus would favor this investment over an environmental investment yielding
a lower return.
One
might conclude at first glance that my disagreement with advocates of
discounting the utilities of future generations is only semantic. It might appear,
indeed, that taking account of opportunity costs in deciding whether to
undertake environmental projects for the benefit of future generations leads to
the same results as discounting the utilities of those generations.
Indeed,
consider the following two procedures. Under the first procedure, one
undertakes any project for which the current cost (in fore gone utility for the
current generation) is greater than the present discounted value of the
utilities of the future generation that the project is intended to benefit.
Under the second procedure, one does not discount the utilities of future
generations, but undertakes the project only if the rate of return of the
investment is greater than the rate of return of alter native investments
(otherwise, even if resources are worth transferring into the future, the
alternative investments will be preferable).
As
is almost self-evident, these two procedures will yield the same results in
certain cases. These procedures, however, are conceptually different and can
yield different results in other cases.
Most
importantly, discounting the utilities of future generations is a means for
determining our obligations to those generations. It is the objective function
of a specific ethical theory. In contrast, paying attention to opportunity
costs does not imply the choice of any particular theory. It [*1009]
is simply a way of ensuring that society furthers its chosen theory,
whatever that theory may be, in the most cost-effective way possible.
For
example, suppose that a societal goal is in fact to prevent certain types of
irreversible environmental harms, as may be the case under formulations of the
principle of sustainable development.
n322 We would still defer expenditures for environmental projects if
alternative uses of the funds could have a higher rate of return over a given
period. But at the point at which such a harm was about to become irreversible,
we would undertake the environmental expenditure to prevent this outcome
regardless of the rate of return on other projects. Moreover, in deciding how
long to delay the expenditure, one would have to consider whether funds
invested in other projects could easily be transferred at a later time to the
environmental project. n323 In
contrast, if the social objective were to maximize a discounted social welfare
function, the expenditure would never be undertaken if the present discounted
value of the benefits was lower than the costs.
Similarly,
under a corrective justice approach, countries responsible for environmental
degradation would have an obligation to mitigate the adverse effects of such
degradation. It would nonetheless be appropriate to delay expenditures if
alternative interim investments were to yield a higher rate of return. But, at
some point, the mitigation would have to be tackled. In contrast, the approach
of discounting the utilities of future generations could provide a different
prescription altogether.
E.
Intergenerational Obligations and Sustainable Development
There is virtual agreement that the central
function of the principle of sustainable development is to guide
intergenerational allocations. n324
Because this principle is strongly endorsed in international environmental law
agreements, n325 it is important to
ascertain the extent [*1010] to which it sets forth an attractive theory
of intergenerational obligations. n326
Before
turning to this task, however, one must at least attempt to convert what is
still quite an amorphous concept, which suffers from the lack of a uniform definition, n327 into a tool that can actually guide
decisions. The starting point to most discussions in this area is the language
in Our Common Future, the 1987 report of the World Commission on Environment
and Development (often referred to as the Brundtland Report, after its chair,
the then Prime Minister of Norway).
n328 This report defines sustainable development as development that
"meets the needs of the present without compromising the ability of future
generations to meet their own needs."
n329 This statement, however, leaves open wide room for disagreement.
Perhaps
the two most influential perspectives on what obligations to future generations
are encompassed by the principle of sustainable development are those of Edith
Brown Weiss and Robert Solow, which are rooted in the traditions of
international law and of economics, respectively. n330
Weiss
equates sustainable development with intergenerational equity, which she
defines by reference to three principles.
n331 First, the principle of conservation of options requires each
generation to preserve the natural and cultural resource bases so that the
options available to future generations are not unduly restricted. Second, the
principle of conservation of quality requires each generation to prevent a
worsening of the planet's environmental quality. Third, the principle of
conservation of [*1011] access requires each generation to provide
its members with equitable rights of access to the legacy of past generations,
and to conserve this access for the benefit of future generations. n332
In
contrast, according to Solow, sustainability requires that each future
generation have the means to be as well off as its predecessors. He gives
content to this principle by proposing a modification to the traditional
measure of a nation's economic activity. From Net National Product (NNP) -
Gross Domestic Product (GDP) minus the depreciation of fixed capital assets -
he would subtract the value of expended nonrenewable resources and
environmental assets like clean air and water.
n333 Solow argues that each generation must use its nonrenewable and
environmental resources in a way that does not detract from the ability of
future generations to have a similar standard of living. n334 He admits that certain unique and
irreplaceable resources, like certain national parks, should be preserved for
their own sake, n335 but maintains that
the con sumption of non-unique natural and environmental resources ought to be
permissible as long as they are replaced by other resources such as equipment
or technological knowledge.
The
two formulations share important characteristics. First, they de fine the
primary obligation to future generations in terms of a constraint that
specifies how much must be left to a subsequent generation. n336 Second, Weiss and Solow would both
allow some level of destruction of most natural resources, as long as future
generations are compensated in an other way, such as by technological development. n337 Third, they both regard certain natural
resources as irreplaceable and would require that such resources be protected
for subsequent generations. n338
[*1012]
In essence, then, under both formulations, every generation must provide
the subsequent generation with the means to do at least as well as it did. So,
for example, sustainable development would be consistent with the current
generation seeking to maximize its own utility, as long as this maximization is
subject to a constraint resulting from the need to leave sufficient resources
to future generations.
There
are, of course, daunting challenges ahead in providing further specificity to
the principle. For example, additional work needs to be done to determine how
to value the increase in knowledge or the negative long-term environmental
effects of economic activity. n339
Also,
throughout history, there has been a progressive increase in standards of
living. Should the constraint defining one generation's obligation to its
successors thus provide for a progressive increase in well- being, so that this
pattern may continue? On what basis would that in crease be determined? What
would be the ethical underpinnings for such a requirement?
Moreover,
the link between sustainable development and population policy is not well
articulated. n340 The population in any
generation is a function of decisions of prior generations. n341 For example, one might argue that if
the current generation's actions were to lead to an increase in population, it
would have an obligation to provide additional resources so as not imperil the
level of well-being of an average person in the next generation. n342
[*1013]
Many commentators also believe that the concept of sustainable de
velopment contains a precautionary principle, which prescribes that sci entific
uncertainties be resolved in favor of environmental controls. n343 As discussed above, there is some
possibility that catastrophic events would materialize in the future if the
climate change problem is left unat tended.
n344 The precautionary principle would presumably call for avoid ing
such consequences. In fact, given that technological advances may greatly
contribute to the wealth of future generations, it may be that the
precautionary principle will do most of the work in justifying climate change
expenditures.
Left
unanswered in the academic discussions concerning the precautionary principle,
however, are important questions about its scope. For example, what probability
of a catastrophic event is sufficiently high to trigger the operation of the
principle? Similarly, what is a sufficiently harmful consequence? n345 Spending the resources needed to avoid
a low- probability, catastrophic outcome might interfere with the ability to
make resources available to subsequent generations. How should this tradeoff be
resolved?
This
background on the scope of the principle of sustainable development is
sufficient to permit an evaluation of the extent to which the principle can
form the basis for a desirable theory of intergenerational obligations with
respect to environmental matters. At a very general level, the principle
appropriately underscores that the current generation, which has control of
vast decisionmaking authority concerning the resources that will be available
in the future, should not simply ignore the interests of future generations.
Beyond
this level of generality, however, the principle suffers from severe
shortcomings. Most importantly, in practice it is likely to impose too limited
an obligation on the current generation. Say, for example, that the current
generation, for a comparative small sacrifice, can prevent a very large harm to
a subsequent generation. Perhaps an expenditure of only $ 1 at the present
would lead to averting harm of several hundred billion dollars in 100 years.
Even if the future benefit were discounted at a high level, the present
discounted value of the benefit would greatly exceed the corresponding cost.
[*1014]
The principle of sustainable development, however, would not re quire
this expenditure if the subsequent generation would, despite the harm, be
better off than the current one. Thus, if the next hundred years can be
expected to bring sufficiently rapid technological progress, the environmental
expenditure would not need to be undertaken. In fact, because the rate of
technological progress is currently so high, the principle of sustainable
development could in fact remove from the current generation any obligation to
undertake environmental measures for the benefit of future generations.
Conversely,
while this issue is of less direct practical importance, the principle of
sustainable development could, in theory, demand excessive sacrifice from the
current generation. Say, for example, that absent some intervention, the
generation living 100 years from now would be $ 1 poorer than the current
generation, and that for an expenditure of several hundred billion we could
confer upon that generation an extra $ 1. The principle of sustainable
development would require the expenditure, despite the obvious waste in
resources. n346
These
shortcomings of the principle of sustainable development serve to underscore
the relative attractiveness of utilitarian approaches. Consistent with such
approaches, in an intragenerational context, the social decisionmaker would
seek first to undertake all projects that have desirable cost-benefit ratios.
Then, if the resulting distribution of re sources was unattractive, the social
decisionmaker would require redistribution. In a utilitarian framework,
redistribution is justified as a result of the fact that poorer individuals
have a higher marginal utility of consumption; total utility is therefore
increased by redistributing from rich to poor.
n347
The
costs of effecting redistribution (whether in the form of transaction costs or
perverse incentives) play an important role in determining how much
redistribution is socially desirable. Indeed, sufficiently high costs could
dominate the benefits that would come from transferring re sources from
wealthier individuals, with a lower marginal utility of consumption, to their
poorer counterparts.
In
an intergenerational context, the inquiry could be essentially the same: pick
projects with good cost-benefit ratios and redistribute as guided by reference
to the relative marginal utilities of consumption and by the costs of effecting
redistribution. In contrast, the principle of sustainable development requires
expenditures with unattractive cost-benefit ratios, fails to require
expenditures with attractive cost-benefit ratios, and is oblivious to the costs
of effecting redistribution.
[*1015]
F.
Toward a Theory of Intergenerational Obligations
The articulation of a complete theory of
intergenerational obligations with respect to environmental matters is beyond
the scope of this Article. Nonetheless, the preceding discussion can be
crystallized into a set of principles setting forth the backbone for such a
theory.
First,
the mechanical importation of discounting for time preference at the rate used
intragenerationally is wholly unjustified: how one individual decides to time
her expenditure of a fixed set of resources over her lifetime is a
fundamentally different question from how society allocates a given set of
resources among individuals in different generations. n348 Intergenerationally, discounting for
time preference unjustifiably underval ues the interests of future generations.
Second,
discounting for economic growth is also fraught with problems. Most
importantly, the formula used in the standard economic models ignores the fact
that the primary contributors to international environmental measures are far
wealthier than the primary beneficiaries of such measures. In fact, even in the
future, when the benefits of measures undertaken now actually accrue, these beneficiaries
are likely to be poorer than the contributors to such measures are now. Under
these circumstances, any positive discounting for economic growth would be
inappropriate. To the contrary, given the decreasing marginal utility of
consumption, a utilitarian framework would call for environmentally protective
measures even if the current costs are somewhat greater than the future
benefits. n349
Third,
a theory of intergenerational obligation must play close attention to
opportunity costs. Even though it is inappropriate to discount the utility
functions of future generations, it does not make sense to under take
environmental expenditures for the benefit of future generations if the
investment can yield higher benefits elsewhere, and if no ethical obligations
are compromised by delaying expenditures.
Fourth,
consistent with the principle of sustainable development, n350 an attractive theory of
intergenerational obligations should seek to pre vent catastrophic harms and
the destruction of unique natural resources. Admittedly, however, the dividing
line between the use of everyday re newable and nonrenewable natural resources,
and the destruction of unique resources may be hard to draw in particular
circumstances.
Fifth,
proper attention needs to be given to distributional issues. As in the
intragenerational context, one should not compromise the efficiency of a
particular environmental policy in the name of distributional concerns, but one
should be prepared to redistribute if the aggregate effects of such policies
lead to unattractive distributional outcomes. In [*1016]
the intergenerational context, the mechanisms for redistribution are
more cumbersome, n351 but the issue
nonetheless merits attention.
Sixth,
an attractive theory of intergenerational obligations is likely to contain a
corrective justice component. Within a traditional utilitarian framework, one
cannot explain the moral intuition that industrialized nations have a
responsibility to mitigate the adverse effects of climate change, but not to
effect massive current redistributions of wealth to poorer countries. n352 To the extent that the current pattern
of expenditures and concern on the part of industrialized countries derives
from a moral intuition concerning differential levels of responsibility for the
two situations, n353 this intuition
should be an element of a theory of intergenerational obligations.
Conclusion
This Article shows that the lack of a proper
understanding of discounting has led to bad regulatory decisions in the case of
latent harms and to an undesirable skewing of the debate in the case of harms
to fu ture generations.
If
two individuals of the same age are exposed to a latent harm from an
environmental carcinogen and to a risk of instantaneous death, respectively,
the person exposed to the carcinogen stands to lose fewer life- years and to
lose them later in life. Discounting is an appropriate technique for taking
account of the latter factor. The use of discounting, however, will lead to
misleadingly low valuations of life unless it is coupled with significant
upward adjustments to account for the dread and involuntary nature of
environmental carcinogens, as well as for higher income levels of the victims.
Unfortunately, the regulatory regime has failed to recognize the need for such
adjustments.
With
respect to harms to future generations, the Article shows that the use of
discounting is ethically unjustified. It privileges the interests of the
current generation without a defensible foundation.
The
misguided approach to discounting in the two contexts may be attributable in
part to a fairly generalized failure to take proper account of the differences
between the cases of latent harms and harms to future generations. For the
former, discounting raises no significant ethical objections that are
independent of those that could be raised against cost- benefit analysis in
general and the valuation of human lives in particular. For the latter, in
contrast, discounting gives rise to daunting ethical issues.
This
Article aims to effect two important public policy changes. With respect to
latent harms, it seeks to provide an impetus for correcting the substantial
undervaluation of environmental benefits that comes from [*1017]
the regulatory system's approach of mechanically taking valuations of
life from the workplace setting and discounting them at an artificially high
rate, without performing any of the necessary upward adjustments. With respect
to harms to future generations, it seeks to move the debate away from discounting
and towards more attractive alternatives.
FOOTNOTES:
n1.
Exec. Order No. 12,866, 3 C.F.R. 1993, p.638, reprinted in 5 U.S.C. 601 (1994).
This order replaced a similar Executive Order, promulgated by President Reagan.
See Exec. Order No. 12,291, 3 C.F.R. 1981, p.127, formerly in 5 U.S.C. 601.
Given its legal status, however, it cannot displace contrary statutory
provisions.
For
discussion of the practice of OMB review, see Environmental Policy Under
Reagan's Executive Order: The Role of Benefit-Cost Analysis (V. Kerry Smith
ed., 1984); Thomas O. McGarity, Reinventing Rationality: The Role of Regulatory
Analysis in the Federal Bureaucracy (1991); Richard H. Pildes & Cass R.
Sunstein, Reinventing the Regulatory State, 62 U. Chi. L. Rev. 1 (1995).
n2.
Currently, a bill sponsored by Senator Carl M. Levin, Democrat of Michigan,
which enjoys bipartisan co-sponsorship, is pending before the Senate. S. 746,
106th Cong. (1999). It mandates the preparation of a cost-benefit analysis for
major rules. See id.
623(b)(2). The bill does not preclude an
agency from promulgating regulations that fail a cost-benefit test but imposes
seemingly tough hurdles to such regulations. See id.
623(d)(2). Legislative efforts to require that
essentially all important regulations satisfy a cost-benefit test, began in
earnest with the 104th Congress "Contract with America." See Cass R.
Sunstein, Congress, Constitutional Moments, and the Cost-Benefit State, 48
Stan. L. Rev. 247 (1996); see infra text accompanying notes 56-58 (views of
Senator Leahy on S. 343). The House passed a bill during the Congress' second
month, Sunstein, supra, at 275-76, but a companion bill in the Senate failed to
move forward when cloture was defeated, id. at 277-82.
n3.
For example, Richard Morgenstern explains: "The value of fatality risk
reduction figures prominently in assessment of environmental benefits. In the
case of air pollution, the reduced risk of death often accounts for the largest
single component of the dollar value of environmental benefits." Richard
D. Morgenstern, Conducting an Economic Analysis: Rationale, Issues, and
Requirements, in Economic Analyses at EPA: Assessing Regulatory Impact 25,
41-42 (Richard D. Morgenstern, ed., 1997); see James K. Hammitt,
Stratospheric-Ozone Depletion, in id. at 131, 151-52 (value of averted skin
cancer mortality comprises 98% of the benefits of the regulations implementing
the Montreal Protocol). More generally, for all health-and-safety regulations,
one recent estimate is that "about 60 percent of the total benefits
results from reduction in the risk of death, disease, and injury." Robert
W. Hahn, Regulatory Reform: What Do the Government's Numbers Tell Us?, in
Risks, Costs, and Lives Saved: Getting Better Results from Regulation 208, 219
(Robert W. Hahn ed., 1996).
Moreover,
even in cases in which there are other benefits, EPA's calculation of the
magnitude of the benefits focuses on human health effects. See Lisa
Heinzerling, Reductionist Regulatory Reform, 8 Fordham Envtl. L.J. 459, 461-62
(1997). For examples, see id. at 495 (asbestos ban); Ronnie Levin, Lead in
Drinking Water, in Economic Analyses at EPA, supra, at 205, 227 (corrosion
control). The same failure to quantify benefits other than those related to
human health effects and mortality are also present with regard to agricultural
pesticides, worker protection and primary air quality standards for ozone
depletion. Louis P. True Jr., Agricultural Pesticides and Worker Protection
303, 318. However misguided such a policy might be, it magnifies the importance
of the discounting issues analyzed in this Article.
n4.
See Thomas O. McGarity & Sidney A. Shapiro, OSHA's Critics and Regulatory
Reform, 31 Wake Forest L. Rev. 587, 629 (1996) (discussing occupational
safety).
n5.
Compare Emmett B. Keeler & Shan Cretin, Discounting of Life-Saving and
Other Nonmonetary Effects, 29 Mgmt. Sci. 300, 303-05 (1983) (favoring
discounting), I. Steven Udvarhelyi et al., Cost-Effectiveness and Cost-Benefit
Analyses in the Medical Literature, 116 Annals Internal Med. 238, 239 (1992)
(same), and Milton C. Weinstein & William B. Stason, Foundations of
Cost-Effectiveness Analysis for Health and Medical Practices, 296 New Engl. J.
Med. 716, 719-20 (1977) (same) with Alan L. Hillman & Myoung S. Kim,
Economic Decision Making in Healthcare: A Standard Approach to Discounting
Health Outcomes, 7 PharmacoEconomics 198, 198 (1995) (rejecting automatic
discounting but arguing for "thoughtful adjustments" to reflect
period of latency) and Michael Parsonage & Henry Neuburger, Discounting and
Health Benefits, 1 Health Econ. 71 (1992) (opposing discounting).
For
discussion of different methods for discounting the benefits of medical
interventions, see Magnus Johannesson, On the Discounting of Gained Life-Years
in Cost- Effectiveness Analysis, 8 Int'l J. Tech. Assessment in Health Care 359
(1992).
n6.
See, e.g., U.S. Office of Management and Budget, Regulatory Program of the
United States Government, April 1, 1991-March 31, 1992, at 147-48 (1991); Susan
W. Putnam & John D. Graham, Chemicals Versus Microbials in Drinking Water:
A Decision Sciences Perspective, J. Am. Water Works Ass'n, March 1993, at 57,
60; W. Kip Viscusi, Equivalent Frames of Reference for Judging Risk Regulation
Policies, 3 N.Y.U. Envtl. L. J. 431, 436 (1995); infra notes 28-55 (discussing
Corrosion Proof Fittings case).
n7.
See Michael B. Gerrard, Demons and Angels in Hazardous Waste Regulation: Are
Justice, Efficiency, and Democracy Reconcilable?, 92 Nw. L. Rev. 706, 743
(1998) ("[The] protection of future generations is not merely a matter for
accountants. The Constitution was adopted in part to 'secure the Blessings of
Liberty to ourselves and our Posterity.'"); Lisa Heinzerling, Regulatory
Costs of Mythic Proportions, 107 Yale L.J. 1981, 2044 (1998) ("the decision
to discount lives saved in the future involves a choice about values, as to
which reasonable people may disagree"); A. Dan Tarlock, Now, Think Again
About Adaptation, 9 Ariz. J. Int'l & Comp. L. 169, 173 (1992)
("Speculation about discount rates becomes a disguised debate about our
ethical duties toward future generations.").
n8.
See Gerrard, supra note 7, at 742-43 ("If a human life is considered to be
worth $ 8 million, and a ten percent discount rate is chosen, then the present
value of saving a life one hundred years from now is only $ 581.... Neither I
nor anyone else uses this kind of argument...."); McGarity & Shapiro,
supra note 4, at 629 ("The practice of discounting future benefits to
present value ... biases cost-benefit analysis against future generations. A
high discount rate clearly biases the analysis against future benefits, even
though 'it is not clear why the later-born should have to pay interest to
induce their predecessors not to exhaust [depletable resources.]'").
n9.
The government of the United Kingdom, for example, has rejected the concept of
discounting in connection with the health benefits of medical interventions.
See Hillman & Kim, supra note 5, at 198.
n10.
See What Price Posterity?, Economist, Mar. 23, 1991, at 73.
n11.
See John K. Horowitz & Richard T. Carson, Discounting Statistical Lives, 3
J. Risk & Uncertainty 403, 412 n.2 (1990).
n12.
See Al Gore, Earth in the Balance: Ecology and the Human Spirit 190-91 (1992).
Gore takes a negative view toward discounting:
The accepted formulas of conventional economic
analysis contain short-sighted and arguably illogical assumptions about what is
valuable in the future as opposed to the present; specifically, the standard
'discount rate' that assesses cost and benefit flows resulting from the use or
development of natural resources routinely assumes that all resources belong to
the present generation.... In the words of Herman Daly, "There is
something fundamentally wrong in treating the earth as if it were a business in
liquidation."
Id.
n13.
See, e.g., Peter S. Burton, Intertemporal Preferences and Intergenerational
Equity Considerations in Optimal Resource Harvesting, 24 J. Envtl. Econ. &
Mgmt. 119, 119 (1993) ("Standard discounting practices confuse two issues:
(1) intertemporal discount rates of members of the society and (2)
intergenerational equity considerations."); Harold P. Green, Legal Aspects
of Intergenerational Equity Issues, in Equity Issues in Radioactive Waste
Management 189, 192 (Roger E. Kasperson ed. 1983) (noting that most of the
statutes governing conservation of land and water resources and wildlife
preservation "do not distinguish between benefits accruing in the
short-term future to members of the current generation and longer-term benefits
to future generations"); Heinzerling, supra note 7, at 2043-56 (not
distinguishing the analysis of carcinogenic risks to the current generation and
of risks to future generations); Magnus Johannesson & Per-Olov Johansson,
The Discounting of Lives Saved in Future Generations: Some Empirical Results, 5
Health Econ. 329, 329 (1996); Putnam & Graham, supra note 6, at 60
(equating delays in the adoption of public health problems with burdens on
future generations).
n14.
See infra text accompanying notes 28-55 (providing more detailed analysis of
the proceedings).
n15.
See Exec. Order 12,866, supra note 1, 2(b), 6(b) (responsibilities of OMB's
Office of Information and Regulatory Affairs (OIRA)).
n16.
See infra text accompanying notes 32-38.
n17.
See Corrosion Proof Fittings v. EPA, 947 F.2d 1201, 1218-19 (5th Cir. 1991).
n18.
See Heinzerling, supra note 7.
n19.
See id. at 1984-85. Heinzerling does not ultimately take a position on the
propriety of discounting. See id. at 2055-56 ("More case-by-case attention
needs to be given to the question of whether the future benefits of health and
environmental regulation should be discounted at all, and if so, at what
rate."). In passing, however, she makes arguments that reveal a deep
animosity toward discounting. See id. at 2043-54. The legal literature contains
one other sustained discussion on the discounting of environmental benefits.
See Daniel A. Farber & Paul A. Hemmersbaugh, The Shadow of the Future:
Discount Rates, Later Generations, and the Environment, 46 Vand. L. Rev. 267
(1993). The authors urge that, both intra- and intergenerationally, benefits
should be discounted at the long-term real rate of return on riskless
investments, which they take to be "in the neighborhood of one
percent." See id. at 280, 303-04.
n20.
See Christopher D. Stone, Beyond Rio: "Insuring" Against Global
Warming, 86 Am. J. Int'l L. 445, 476 (1992) ("Any variations in policy
that might be implied from defensible attitudes toward risk may well be swamped
by the implications of defensible discount rates, and, indeed, of how one
resolves the philosophical conundrums of valuing the welfare of future
generations."); Tarlock, supra note 7, at 173 ("The selection of the
[discount] rate determines the strategy.").
n21.
Derek Parfit, Reasons and Persons 357 (1984). For other examples, see Gerrard,
supra note 7, at 742-43 ("If a human life is considered to be worth $ 8
million and a ten percent discount rate is chosen, then the present value of
saving a life one hundred years from now is only $ 581."); McGarity & Shapiro,
supra note 4, at 629 ("At a discount rate of 10%, a dollar's worth of
benefits fifty years from now is worth slightly less than a penny
today.").
n22.
Clifford S. Russell, "Discounting Human Life" (Or, the Anatomy of a
Moral- Economic Issue), Resources, Winter 1986, at 8, 8; see Frank S. Arnold,
Economic Analysis of Environmental Policy and Regulation 193 (1995) ("When
the delay between the present and the time the benefits of a regulatory action
are enjoyed is very large, say hundreds of years, using virtually any positive
discount rate will render the present value of the benefits almost nil.");
Robert C. Lind, Reassessing the Government's Discount Rate Policy in Light of
New Theory and Data in an Economy with a High Degree of Capital Mobility, 18 J.
Envtl. Econ. & Mgmt. S-8, S-20 (1990). ("The basic arithmetic of
exponential growth applied in a cost-benefit analysis implies that, regardless
of how small the cost today of preventing an environmental catastrophe that will
eventually wipe out the entire economy, it would not be worth this cost to the
present generation if the benefits in the future are sufficiently
distant.").
n23.
See supra text accompanying note 13.
n24.
See, e.g., Environmental Policy Under Reagan's Executive Order, supra note 1;
McGarity, supra note 1, at 29-59, 174-76, 239-61; Pildes & Sunstein, supra
note 1; Sunstein, supra note 2.
n25.
See supra text accompanying notes 1-4.
n26.
See infra Part I.G.
n27.
A similar set of issues arises where current expenditures can prevent future
harms to individuals now alive, even though the harm is not a latent disease.
The analysis in Part I is therefore relevant to this situation as well.
n28.
947 F.2d 1201 (5th Cir. 1991); see Russell, supra note 22, at 9 (noting that before
this proceeding, "'discounting of human lives' had not yet become an issue
in the public debate"). For discussion of the case, see Rita L. Wecker,
Case Comment: A "Hard Look" at a Soft Analysis, Corrosion Proof
Fittings v. Environmental Protection Agency, 4 B.U. Pub. Int. L.J. 145 (1994).
n29.
51 Fed. Reg. 3738 (1986).
n30.
See supra text accompanying notes 1-4.
n31.
See Letter of Robert P. Bedell, Deputy Administrator, Office of Information and
Regulatory Affairs to A. James Barnes, Acting Deputy Administrator,
Environmental Protection Agency (March 27, 1985), reprinted in Peter S. Menell
& Richard B. Stewart, Environmental Law and Policy 104 (1994).
n32.
See id.
n33.
See infra text accompanying note 182.
n34.
See Letter of Robert P. Bedell, supra note 31, at 104.
n35.
Subcomm. on Oversight and Investigations of the House Comm. on Energy and
Commerce, EPA's Asbestos Regulations: Report on a Case Study on OMB
Interference in Agency Rulemaking, reprinted in Menell & Stewart, supra
note 31, at 111. The Barnes comment does not deal specifically with the problem
of latent harms, but it reflects a general antipathy to discounting the
valuations of human life.
n36.
Some members of Congress took a strident position against discounting. For
example, Representative Bob Eckhardt noted that "'it was difficult to say
whether that kind of approach was more callous or more foolish'" and
Representative James Florio called OMB's approach "ghoulish[ ]." See
Russell, supra note 22, at 9.
n37.
See Subcomm. on Oversight and Investigations, supra note 35, reprinted in
Menell & Stewart, supra note 31, at 109.
n38.
See id.
n39.
See id. at 110; Sidney A. Shapiro & Thomas O. McGarity, Not So Paradoxical:
The Rationale for Technology-Based Regulation, 1991 Duke L.J. 729, 735
("In cases of toxic substance exposure, where the onset of disease can be
delayed by as much as thirty years, [discounting] effectively ignores the risk
altogether.").
n40.
Subcomm. on Oversight and Investigations, supra note 35, reprinted in Menell
& Stewart, supra note 31, at 111.
n41.
Id.
n42.
51 Fed. Reg. 3738, 3757-59 (1986).
n43.
See id. at 3748; 54 Fed. Reg. 29,460, 29,487 (1989).
n44.
54 Fed. Reg. 29,460, 29,483 (1989).
n45.
See id. at 29,485.
n46.
See id.
n47.
Id. at 29,487.
n48.
Id.
n49.
Id.
n50.
947 F.2d 1201 (5th Cir. 1991).
n51.
Id. at 1218. Lisa Heinzerling criticizes the Fifth Circuit's position:
"One worries about 'preserving an apples-to-apples comparison,' however,
only if one is dealing only with apples. In the asbestos case, the costs were
dollars and the benefits were lives. These costs and benefits are the same only
if dollars and lives are the same." Heinzerling, supra note 7, at 2053.
Both positions overlook an aspect of the problem. The Fifth Circuit misses the
fact that the intertemporal choices of individuals do not necessarily reflect
discounting at the rates used by financial markets (though in fact empirical
studies show no statistically significant differences). See infra Part I.F.1.
In turn, Heinzerling's rhetorical device fails to acknowledge that the
cost-benefit calculus in the case required the valuation of the life, and that
the question whether this amount should be discounted is one that depends on
how individuals compare the utilities derived from living in the present to the
utilities derived from living in the future. See infra text accompanying notes
223-224.
n52.
See Corrosion Proof Fittings, 947 F.2d at 1218-19, 1229-30. The court's
analysis revealed confusion. It relied primarily on the following example:
Suppose two workers will be exposed to
asbestos in 1995, with worker X subjected to a tiny amount of asbestos that
will have no adverse health effects, and worker Y exposed to massive amounts of
asbestos that quickly will lead to an asbestos- related disease. Under the
EPA's approach, which takes into account only the time of the exposure rather
than the time at which any injury manifests itself, both examples would be
treated the same.
Id. at 1218. In fact, if worker X would never
get cancer, the regulation would have no benefit with respect to this worker.
With zero benefits, there would be nothing to discount. What the court might
have meant is that if workers X and Y had been exposed to asbestos at the same
time, and worker Y was injured before worker X, the EPA would treat both cases
in the same way (and presumably the Fifth Circuit would have wanted to treat
them differently).
n53.
Id.
n54.
For related discussion, see infra text accompanying notes 155-157.
n55.
See Corrosion Proof Fittings, 947 F.2d at 1218 n.19. For further discussion of
discount rates, see infra Part I.F.2.
n56.
S. 343, 104th Cong. (1995).
n57.
See id. at 623 ("[no] final rule ... shall be promulgated unless the
agency finds that ... the potential benefits from the rule ... justify the potential
costs of the rule"); id. at 621-622 (dealing with the preparation of
cost-benefit analyses); see generally supra text accompanying notes 1-4
(discussing regulatory reform).
n58.
S. Rep. No. 104-90, at 153 (1995) (supplemental views of Senator Leahy).
n59.
The only two sustained treatments of the question of discounting in the legal
academic literature were those of Farber & Hemmersbaugh, supra note 19, and
Heinzerling, supra note 7. See supra note 19 (discussing their positions).
While the economics literature has focused on isolated nuances, it has not
taken a broad look at the problem or connected the various strands that are
necessary to a sophisticated analysis of the public policy choices.
n60.
See W. Kip Viscusi, The Valuation of Risks to Life and Health: Guidelines for
Policy Analysis, in Benefits Assessment: The State of the Art 193, 193 (Judith
D. Bentkover et al. eds., 1986) [hereinafter Viscusi, Valuation]. For a more
recent survey, see W. Kip Viscusi, The Value of Risks to Life and Health, 31 J.
Econ. Literature 1912 (1993) [hereinafter Viscusi, Value]. The technique is
generally traced to Thomas C. Schelling, The Life You Save May Be Your Own, in
Problems in Public Expenditure Analysis 127 (Samuel B. Chase, Jr. ed., 1968),
and E.J. Mishan, Evaluation of Life and Limb: A Theoretical Approach, 79 J.
Pol. Econ. 687, 695-705 (1971).
Before
the ascendancy of willingness-to-pay studies, the human capital approach was
prevalent. This approach valued life in terms of lost earnings. See Viscusi, Valuation,
supra, at 198. The technique is subject to the obvious criticism that earnings
provide that "individual well-being goes far beyond its financial
implications." Id.; accord W.B. Arthur, The Economics of Risks to Life, 71
Am. Econ. Rev. 54, 54 (1981); Lewis A. Kornhauser, The Value of Life, 38 Clev.
St. L. Rev. 209, 212 (1990).
n61.
See Viscusi, Valuation, supra note 60, at 200.
n62.
See id. at 199-200.
n63.
Such workers might also face a higher probability of nonfatal risks. Some
studies estimate the portion of the wage differential that is attributable to
such non-fatal risks. The residual wage differential is then attributed to
fatal risks. See Viscusi, Value, supra note 60, at 1919. Some studies, however,
do not separate the wage differential into these two components. See id.
n64.
For criticism of the approach, see McGarity, supra note 1, at 147-48; Steven
Kelman, Cost-Benefit Analysis and Environmental, Safety, and Health Regulation:
Ethical and Philosophical Considerations, in Cost-Benefit Analysis and
Environmental Regulations: Politics, Ethics, and Methods 137, 143-45 (Daniel
Swartzman et al. eds., 1982); J. Paul Leigh, Compensating Wages, Value of a
Statistical Life, and Inter-industry Differentials, 28 J. Envtl. Econ. &
Mgmt. 83, 94-95 (1995); McGarity & Shapiro, supra note 4, at 628-29.
An
alternative methodology consists of surveying individuals and asking them how
much they would be willing to pay for a particular risk reduction. See Viscusi,
Valuation, supra note 60, at 204-05. The disadvantage of this contingent
valuation method is that the responses are to hypothetical situations and have
no economic consequences. See V. Kerry Smith & William H. Desvousges, An
Empirical Analysis of the Economic Value of Risk Changes, 95 J. Pol. Econ. 89,
93-94 (1987).
n65.
See Maureen L. Cropper & Frances G. Sussman, Valuing Future Risks to Life,
19 J. Envtl. Econ. & Mgmt. 160, 160 (1990) ("The empirical literature
on valuing risks to life has focused almost exclusively on valuing mortality
risks that occur today - the risk of accidental death a worker faces during the
coming year or the risk of dying this month in an auto accident.");
Horowitz & Carson, supra note 11, at 405 ("Virtually all the empirical
work on the value of risk reductions has considered risks that occur entirely
in the present...."); Shapiro & McGarity, supra note 39, at 734
("most wage premium studies ... are based on safety hazards, not health
risks"). Of course, to the extent that there is a probability of a non-fatal
accident, the resulting morbidity risk could also be measured using a
willingness-to-pay approach.
n66.
See Leigh, supra note 64, at 86-87; Viscusi, Valuation, supra note 60, at 200.
Of course, in some cases, industrial accidents result in long-term disability
rather than death.
n67.
One ongoing attempt to derive a willingness-to-pay valuation of human lives
threatened by carcinogens is reflected in John R. Lott, Jr. & Richard L.
Manning, Have Changing Liability Rules Compensated Workers Twice for
Occupational Hazards?: Earnings Premiums and Cancer Risks (June 28, 1998)
(manuscript on file with the Columbia Law Review). For a contingent valuation
study inquiring how individuals value risk reductions from hazardous waste
sites, see Smith & Desvousges, supra note 64.
n68.
Both the Occupational Safety and Health Administration (OSHA) and EPA were
established in 1970. See Sidney A. Shapiro & Thomas O. McGarity,
Reorienting OSHA: Regulatory Alternatives and Legislative Reform, 6 Yale J. on
Reg. 1, 1 n.1, 2 n.9 (1989).
n69.
See Cropper & Sussman, supra note 65, at 166 n.8. Moreover, certain risks
may be poorly understood even by experts. See Smith & Desvousges, supra
note 64, at 108-09.
n70.
See Sherwin Rosen, The Quantity and Quality of Life: A Conceptual Framework, in
George Tolley et al., Valuing Health for Policy: An Economic Approach 221
(1994).
n71.
One commentator estimates that "the average age of the workplace accident
fatality is about 41" whereas "the average age of the workplace
cancer victim is likely to be 55, 65, or even higher." John M. Mendeloff,
The Dilemma of Toxic Substance Regulation: How Overregulation Causes
Underregulation at OSHA 48 (1988).
n72.
Additional complications are introduced when the length of the person's life is
uncertain. See Rosen, supra note 70, at 236-45. No important insights are lost,
however, as a result of this simplification. In practice, of course, an
individual who would have died of cancer at the end of the latency period may
die earlier of other causes. See Lester B. Lave, The Strategy of Social
Regulation: Decision Frameworks for Policy 43 (1981).
n73.
See Maureen L. Cropper & Paul R. Portney, Discounting and the Evaluation of
Lifesaving Programs, 3 J. Risk & Uncertainty 369, 376 (1990).
n74.
A more complicated situation arises when an individual is exposed to a
carcinogen over a long period of time and the harm resulting from the exposure
is cumulative.
n75.
See Cropper & Sussman, supra note 65, at 172-73.
n76.
See W. Kip Viscusi, Discounting Health Effects for Medical Decisions, in
Valuing Health Care: Costs, Benefits, and Effectiveness of Pharmaceuticals and
Other Medical Technologies 125, 129 (Frank A. Sloan ed., 1995). In contrast, a
nominal rate is used to discount current dollars. The real rate is the nominal
rate minus the rate of inflation.
n77.
See Edith Stokey & Richard Zeckhauser, A Primer for Policy Analysis 161-65
(1978).
n78.
See infra Part I.F.1.
n79.
See Cropper & Sussman, supra note 65, at 165-66.
n80.
See supra text accompanying note 71 (hypothesizing that the worker exposed to
the risk of instantaneous death is forty-years old).
n81.
See Cropper & Portney, supra note 73, at 378 n.12.
n82.
See Cropper & Sussman, supra note 65, at 172 ("This fact ... is often
ignored in risk-benefit analyses.").
n83.
See infra Part I.G.
n84.
See Robert F. Bordley, Making Social Trade-Offs Among Lives, Disabilities, and
Cost, 9 J. Risk & Uncertainty 135, 138 (1994).
n85.
See Cropper & Portney, supra note 73, at 371-72; Rosen, supra note 70, at
222-23.
n86.
A similar issue arises in the literature on QALYs, or quality-adjusted life
years, which are a means for adjusting the utility that an individual gets in a
period by the quality of her health in that period. So, for example, an
individual derives greater utility from a year in which her health is excellent
than in one in which she is disabled. See Richard Zeckhauser & Donald
Shepard, Where Now for Saving Lives?, Law & Contemp. Probs., Autumn 1976,
at 5, 12-13. In the context of QALYs, separability implies that the utility
that a person derives from the quality of her life in a particular year is
independent of the qualities of her life in past years. See John Broome, QALYs,
50 J. Pub. Econ. 149, 151-52 (1993).
n87.
Broome, supra note 86, at 151-52. Broome applies this label to a separability
model in the context of QALYs. See supra note 86.
n88.
See Bordley, supra note 84, at 138.
n89.
See infra Part I.F.1.
n90.
See infra Part I.E.3.
n91.
See supra text accompanying notes 65-69.
n92.
See Bordley, supra note 84, at 138; Michael J. Moore & W. Kip Viscusi,
Discounting Environmental Health Risks: New Evidence and Policy Implications,
18 J. Envtl. Econ. & Mgmt. S-51, S-54 (1990); Rosen, supra note 70, at 224.
n93.
Donald S. Shepard & Richard J. Zeckhauser, Survival Versus Consumption, 30
Mgmt. Sci. 423, 424 (1984).
n94.
Id. at 424; see also Joseph Lipscomb, Time Preference for Health in Cost-
Effectiveness Analysis, 27 Med. Care S233, S237 (1989) (asking whether
individuals evaluate multiperiod health outcomes "in accordance with
constant-rate discounting").
n95.
See W. Kip Viscusi & Michael J. Moore, Rates of Time Preference and
Valuations of the Duration of Life, 38 J. Pub. Econ. 297, 297-98 (1989)
("Although money is readily transferable across time, health status is
not."). Part I.F.1, infra, explains more generally why discounting health
risks is analytically different from discounting financial flows.
n96.
There have been attempts to estimate the rate at which individuals discount
their utilities, but they have been conducted on the basis of constant
discounting models. See Moore & Viscusi, supra note 92, at S-54. There also
are empirical estimates of how discount rates depend on the period over which
the discounting is performed, but these studies are intergenerational, or at
the very least interpersonal. See infra Part II.B.
n97.
See Donald A. Redelmeier & Daniel N. Heller, Time Preference in Medical
Decision Making and Cost-Effectiveness Analysis, 13 Med. Decision Making 212,
216 (1993); id. at 214-15 (finding that rates for temporally proximate events
were larger than for more distant events); infra Part II.B (same finding in
intergenerational models).
n98.
See supra text accompanying notes 36-38.
n99.
See Cropper & Portney, supra note 73, at 377.
n100.
See Shepard & Zeckhauser, supra note 93, at 437 n.18; Viscusi, supra note
76, at 130. But see Glenn Blomquist, Value of Life Saving: Implications of
Consumption Activity, 87 J. Pol. Econ. 540, 555 (1979) (finding lower
elasticity).
n101.
See supra text accompanying notes 78-80.
n102.
See Viscusi, supra note 76, at 130; Richard Zeckhauser, Procedures for Valuing
Lives, 23 Pub. Pol'y 419, 437 (1975).
n103.
See William D. Nordhaus, To Slow or Not to Slow: The Economics of the
Greenhouse Effect, 101 Econ. J. 920, 925-26 (1991); Viscusi, supra note 76, at
130.
n104.
Farber & Hemmersbaugh, supra note 19, state that "the discount rate
even for economic benefits cannot significantly exceed the expected long-term
rate of economic growth; otherwise, we would discount even the destruction of
most future Gross Domestic Product to a low present value over periods of only
decades." Id. at 296. The authors appear to be making a pragmatic argument
for keeping the effective discount rate low. There is, however, no plausible
normative argument for linking the two rates in this manner.
n105.
U.S. Census Bureau, Historical Income Tables - Persons, Table P-44 (visited
June 22, 1998) <http://www.census.gov/hhes/income/histinc/p44.html>.
n106.
Over the longer run, the rate has been higher. See William R. Cline, The
Economics of Global Warming 251 (1992) (estimating that "real per capita
income in the United States has grown at about 1.7 percent annually over the
past century").
n107.
See Donald S. Shepard & Richard J. Zeckhauser, Life-Cycle Consumption and
Willingness to Pay for Increased Survival, in The Value of Life and Safety 95,
120-27 (M.W. Jones-Lee ed., 1982) [hereinafter Shepard & Zeckhauser,
Life-Cycle Consumption]; Shepard & Zeckhauser, supra note 93, at 432-36.
n108.
See Zeckhauser, supra note 102, at 437.
n109.
Id. at 438.
n110.
In general, one's credit suitability for loans is evaluated on the basis of
one's present income. There are some exceptions, however, such as student loans
to finance post-secondary education.
n111.
See Shepard & Zeckhauser, Life-Cycle Consumption, supra note 107, at
107-15. There is potentially a logical inconsistency in believing that
individuals cannot process the fact that they will have higher incomes in the
future in order to value their lives accordingly, but positing that individuals
will borrow money in the expectation of higher income in the future.
n112.
See id. at 125.
n113.
See id.
n114.
See id. at 121.
n115.
See Shepard & Zeckhauser, supra note 93, at 434.
n116.
See id. at 435 (noting that "the real world lies somewhere in
between" the two models).
n117.
See supra text accompanying note 114.
n118.
See Shepard & Zeckhauser, supra note 93, at 433.
n119.
See Viscusi, Value, supra note 60, at 1942-43 ("the population of exposed
workers ... generally have lower incomes than the individuals being protected
by broadly based risk regulation").
n120.
EPA should, however, vary its valuations of life on the basis of the age
profile of the affected population, to account for the different numbers of
life-years at stake in various regulatory programs.
n121.
For discussion of environmental justice, see Vicki Been, Coming to the Nuisance
or Going to the Barrios? A Longitudinal Analysis of Environmental Justice
Claims, 24 Ecology L.Q. 1 (1997); Vicki Been, Locally Undesirable Land Uses in
Minority Neighborhoods: Disproportionate Siting or Market Dynamics?, 103 Yale
L.J. 1383 (1994); Robert D. Bullard, Anatomy of Environmental Racism and the
Environmental Justice Movement, in Confronting Environmental Racism: Voices
from the Grassroots 15 (Robert D. Bullard ed., 1993); Richard J. Lazarus,
Pursuing "Environmental Justice": The Distributional Effects of
Environmental Protection, 87 Nw. U. L. Rev. 787 (1993).
n122.
An ethical objection to such particularization would be an attack on
cost-benefit analysis in general and to the use of a willingness-to-pay
methodology for valuing lives in particular. See Guido Calabresi & Philip
Bobbitt, Tragic Choices: The Conflicts Society Confronts in the Allocation of
Tragically Scarce Resources 32 (1978) (referring to "the external costs -
moralisms and the affront to values, for example - of market determinations
that say or imply that the value of a life or of some precious activity
integral to life is reducible to a money figure"). Nonetheless, using
differential valuations of life based on income levels is likely to prove
objectionable to some supporters of cost-benefit analysis, and to magnify the
objections adduced by opponents of this approach.
n123.
See U.S. Census Bureau, Historical Income Tables - Persons: Table P-36: Occupation
of Longest Job - Workers (Both Sexes Combined) by Median and Mean Earnings
(visited June 22, 1998) <http://www.census.gov/hhes/income/
histinc/p36.html>.
n124.
See id.
n125.
See id.
n126.
See Paul Slovic, Perception of Risk, 236 Science 280 (1987).
n127.
Zeckhauser, supra note 102, at 445 n.27.
n128.
Cass Sunstein cogently explains that "the question whether a risk is run
voluntarily or not is often not a categorical one but instead a matter of
degree." Cass R. Sunstein, Bad Deaths, 14 J. Risk & Uncertainty 259,
272 (1997). Sunstein would place risks on a voluntariness/involuntariness
continuum based on three factors: whether the worker has adequate information
about the risk; whether the worker is compensated for the risk; and whether the
compensation package does not appear unfair, even if voluntarily chosen by the
parties, as a result of background inequality between the employer and
employee. See id.; see also Shapiro & McGarity, supra note 39, at 734
("Unfortunately, low-paid workers in hazardous industries where there are
no (or weak) unions may act more out of desperation than choice.").
n129.
See Maureen L. Cropper & Uma Subramanian, Public Choice Between Lifesaving
Programs 6 (World Bank Policy Research Working Paper 1497, 1995). Of course, if
an individual is exposed to a toxic air pollutant, she could move somewhere
else. Sunstein would nonetheless classify the risk as involuntary because the
individuals are not in a contractual relationship with the producer of the risk
and cannot avoid the risk except at great cost, in this case by moving to
another area. See Sunstein, supra note 128, at 271.
Moreover,
in many cases, individuals may lack sufficient information about environmental
risks to make informed choices. Even if they had such information, risks that
are uniformly distributed throughout the country could obviously not be avoided
by moving elsewhere. For further discussion of the difference between voluntary
and involuntary risks, see Richard H. Pildes & Cass R. Sunstein, Democrats
and Technocrats, Journees d'Etudes Juridiques Jean Dabin (forthcoming 2000)
(manuscript on file with the Columbia Law Review).
n130.
See supra text accompanying notes 60-62.
n131.
Even studies of how the price of a house in an area with high concentrations of
this pollutant compares to the price of an otherwise similar house in an area
with better air quality do not capture the value of involuntary risk. While
such hedonic price studies are a commonly used revealed preference tool for
economic valuations, see Ronald G. Cummings et al., General Methods for
Benefits Assessment, in Benefits Assessment, supra note 60, at 171-76, the
participants in these housing markets are individuals attempting to decide
where to live. They are making a choice about whether to live in one area
rather than another. As a result, it would be a stretch to regard their
"choice" as involuntary. Rather, the involuntary label is better used
for individuals who have lived in an area for a long time, have strong personal
ties to the area, and lack the resources to move.
n132.
An extensive list of such references is provided in Heinzerling, supra note 7,
at 1983 n.1, 2. The genesis for these studies is a table prepared in the 1980s
by John Morrall, an OMB official. See John F. Morrall III, A Review of the
Record, Regulation, Nov./Dec. 1986, at 25, 30 tbl.4. Heinzerling notes,
however, that the regulations with numbers at the high end were never
promulgated. Moreover, she argues that the remaining differences would be less
stark if Morrall had not discounted the benefits of environmental regulation or
reduced the estimates of risk prepared by the agencies. See Heinzerling, supra
note 7, at 1984-85.
n133.
There has been strong criticism to valuations based on survey responses. See
Richard B. Stewart, Liability for Natural Resource Injury: Beyond Tort, in
Analyzing Superfund: Economics, Science, and Law 219, 234-38 (Richard L. Revesz
& Richard B. Stewart eds., 1995). Nonetheless, a panel of distinguished
economists, co-chaired by Nobel Prize winners Kenneth Arrow and Robert Solow,
which had been empaneled by the National Oceanic and Atmospheric Administration
(NOAA), gave qualified endorsement to the use of contingent valuation
techniques. See 58 Fed. Reg. 4601, 4610 (1993). Clearly, revealed preference
valuations would be preferable, but, as indicated above, such valuations cannot
be used for involuntary harms. See supra text accompanying notes 130-131.
n134.
See Cropper & Subramanian, supra note 129, at 2.
n135.
See id. at 16-18.
n136.
See id. at 3-7.
n137.
The remaining characteristics were the extent to which the affected population
was to blame for the risk, the seriousness of the risk, and whether the risks
affected respondents personally. In addition to these four risk
characteristics, the respondents were also asked to assess four program
characteristics: the efficacy of the program, the appropriateness of government
intervention, the fairness of the funding mechanism, and the time before the
program begins to save lives. See id. at 39.
n138.
See id. at 40.
n139.
A labeling program, designating food to be free of pesticide, could work
effectively if the claims were in fact truthful and adequate information was
conveyed to prospective buyers. But social coordination would be necessary to
set up the labeling program and to police its integrity.
n140.
See Cropper & Subramanian, supra note 129, at 40.
n141.
See id. at 41.
n142.
See id. at 48.
n143.
See id. at 24, 41.
n144.
See id. at 4-5.
n145.
See McGarity, supra note 1, at 146-49; Kelman, supra note 64, at 144; Viscusi,
Value, supra note 60, at 1928.
This
effect is discussed even though it has not been the focus of empirical study,
see supra text accompanying notes 99-100, because it flows in part from the
difference between the voluntary nature of workplace harms and the involuntary
nature of environmental harms.
n146.
Some self-selection can take place with respect to reasonably local risks, such
as those that result from proximity to hazardous waste sites. With respect to
more regional risks, such as regional air pollution, however, such
self-selection is far more difficult.
n147.
See Sunstein, supra note 128, at 259.
n148.
See Tammy O. Teng et al., Five-Hundred Life-Saving Interventions and Their
Cost-Effectiveness, 15 Risk Analysis 369 (1995).
n149.
See id. at 370.
n150.
See id. at 371.
n151.
See id.
n152.
See supra text accompanying notes 131-133.
n153.
George Tolley et al., State-of-the-Art Health Values, in Tolley et al., supra
note 70, at 323, 339-44.
n154.
See id. at 339-40.
n155.
See supra text accompanying notes 64-68.
n156.
But cf. Sunstein, supra note 128, at 269 (an extended period before death can
contain benefits, since it allows grief and adjustment).
n157.
See Tolley et al., supra note 153, at 329-32, 340; supra note 133 and
accompanying text.
n158.
See Tolley et al., supra note 153, at 340.
n159.
See id. at 340-41; see also Michael W. Jones-Lee et al., The Value of Safety:
Results of a National Sample Survey, Econ. J., March 1985, at 49, 58-60. For a
more recent study finding a higher willingness-to-pay to avoid carcinogenic
harms, see Ian Savage, An Empirical Investigation into the Effect of
Psychological Perceptions on the Willingness-to- Pay to Reduce Risk, 6 J. Risk
& Uncertainty 75, 77, 85 (1993).
n160.
For intuitions supporting a higher valuation for dreaded harms, see Mendeloff,
supra note 71, at 48; Shapiro & McGarity, supra note 39, at 734 n.29.
n161.
See Lave, supra note 72, at 44 ("Discounting future health effects at the
standard rate makes sense only if there is a fixed transformation rate between
dollars and health."); John Mendeloff, Measuring Elusive Benefits: On the
Value of Health, 8 J. Health Pol., Pol'y & Law 554, 568 (1983)
("discount rate for health effects should largely be based upon
individuals' time preferences"); supra note 51 and accompanying text;
infra Part I.F.1. But see Victor R. Fuchs & Richard Zeckhauser, Valuing
Health - A "Priceless" Commodity, 77 Am. Econ. Rev. 263, 264 (1987)
(suggesting that life years should be discounted in the same manner as cash
flows).
n162.
See Farber & Hemmersbaugh, supra note 19, at 287.
n163.
Viscusi, supra note 76, at 131-32.
n164.
See John A. Cairns, Valuing Future Benefits, 3 Health Econ. 221, 221 (1994)
("Little is known about individual time preferences with respect to future
health, and in particular whether they differ from preferences with respect to
future wealth."); Putnam & Graham, supra note 6, at 60 ("Instead
of choosing a standard discount rate ... the rate should be based on the ...
preferences of citizens.").
n165.
See Moore & Viscusi, supra note 92, at S-61 ("One should also be
cognizant of the ultimate objective of our study, which is to ascertain whether
systematic differences exist between rates of time preference for health and
financial rates of return.").
n166.
See id. at S-52-S-55.
n167.
See id. at S-53.
n168.
See id. at S-57. These studies follow a revealed preference approach, which
consists of observing the prices at which market transactions take place. See
supra text accompanying notes 130-131.
n169.
See Moore & Viscusi, supra note 92, at S-59, S-61.
n170.
Id. at S-59; see also supra text accompanying note 55; supra note 76
(discussing difference between real and nominal rates).
n171.
Moore & Viscusi, supra note 92, at S-61; see also id. at S-52.
It
is worth thinking about how the regulatory system ought to react if, contrary
to the findings by Moore and Viscusi, one found that individuals discounted
health risks at a very high rate, even when they were well informed about these
risks. In such situations, it might be appropriate for the government to act in
a paternalistic fashion and make social policy on the basis of a lower discount
rate. The rationale would be somewhat analogous to the rationale for the usury
laws, which prohibit lending at an overly high interest rate.
The
utility of an individual with an unusually high discount rate would increase if
she were allowed to borrow at a rate up to her discount rate in order to
transfer consumption from the future to the present. The usury laws, however,
prevent her from doing so because of concern that she might later experience
excessive regret. Similarly, in deciding how stringently to regulate future
environmental risks, the government could be skeptical of discount rates for
health risks that are high compared to the rates at which money gets
transferred through the financial markets.
Empirical
findings of high discount rates would at the very least be troubling and raise
difficult questions as to how social policymakers should react. The Moore and
Viscusi studies, showing an equivalence between the rates at which individuals
discount health risks and the rates at which the market discounts flows of
money, make it unnecessary to face this issue.
n172.
See id. at S-61. The earlier studies are Michael J. Moore & W. Kip Viscusi,
Models for Estimating Discount Rates for Long-Term Health Risks Using Labor
Market Data, 3 J. Risk & Uncertainty 381 (1990); Michael J. Moore & W.
Kip Viscusi, The Quantity- Adjusted Value of Life, 26 Econ. Inquiry 369 (1988);
Viscusi & Moore, supra note 95.
n173.
See Moore & Viscusi, supra note 92, at S-61.
n174.
Id.
n175.
See Viscusi & Moore, supra note 95, at 314.
n176.
The issue is not entirely free of doubt. For example, a more recent study by
Viscusi and a different co-author, using a similar methodology, found real
discount rates ranging from 11-17%, in the context of automobile safety. See
Mark K. Dreyfus & W. Kip Viscusi, Rates of Time Preference and Consumer
Valuations of Automobile Safety and Fuel Efficiency, 38 J.L. & Econ. 79,
84, 99 (1995). The authors note that the riskless rate of interest, which they
estimate in the 2-5% range, is outside the confidence limit of their estimates.
See id. at 99. They note, however, that in many cases consumers face interest
rates that are far higher than the riskless rate, and that their estimated
discount rate was not statistically different, at a 95% confidence interval,
from the real rates for the financing of automobile purchases (8.5% and 11.0%
for new and used cars, respectively). See id. at 99-100.
Individuals
also exhibit inordinately high discount rates with respect to purchases having
an effect on energy conservation. Thus, they have not been willing to pay much
of a premium on the purchase of products such as air conditioning or heating
units in return for lower energy costs in the future. See Jeffrey A. Dubin,
Will Mandatory Conservation Promote Energy Efficiency in the Selection of
Household Appliance Stocks?, 7 Energy J. 99, 109-13 (1986); Jerry A. Hausman, Individual
Discount Rates and the Purchase and Utilization of Energy-Using Durables, 10
Bell J. Econ. 33, 50-52 (1979); Douglas A. Houston, Implicit Discount Rates and
the Purchase of Untried, Energy-Saving Durable Goods, 10 J. Consumer Res. 236,
236-37 (1983).
These
studies, which are discussed in Dreyfus & Viscusi, supra, at 83-84, affect
only financial flows and do not raise the question of how to discount future
health risks. The problem here may well be that consumers lack clear
information on energy savings benefits or cannot properly process this
information if they have it, see Wesley A. Magat & W. Kip Viscusi,
Informational Approaches to Regulation 5 (1992), or that they violate some of
the postulates of rational theory, see George Loewenstein & Richard H.
Thaler, Intertemporal Choice, 3 J. Econ. Persp. 181, 182-83, 192 (1989).
n177.
See supra text accompanying note 167.
n178.
See Rosen, supra note 70, at 224; supra text accompanying notes 99-100.
n179.
In fact, the situation may be even more complicated. Children, for example, may
increase one's utility. See Richard A. Epstein, Justice Across Generations, 67
Tex. L. Rev. 1465, 1472 (1989). Then, for a given level of consumption, after
one has children one's utility might be higher than before.
n180.
See supra text accompanying notes 36-38.
n181.
See Circular No. A-94, 57 Fed. Reg. 53,519 (1992).
n182.
See Robert C. Lind, Discounting for Time and Risk in Energy Policy 5-6 (1982).
For criticisms, see Daniel A. Farber, Risk Regulation in Perspective: Reserve
Mining Revisited, 21 Envtl. L. 1321, 1349-50 (1991); Farber & Hemmersbaugh,
supra note 19, at 278 & n.43; Viscusi, supra note 76, at 129.
n183.
See 57 Fed. Reg. at 53,522-23.
n184.
Id. at 53,523.
n185.
See id. at 53,520, 53,523.
n186.
See id. at 53,528 (3.8%); 61 Fed. Reg. 6397, 6397 (1996) (3.0%); 63 Fed. Reg.
3932, 3933 (1998) (3.8%).
n187.
For clear analyses, see Arnold, supra note 22, at 177-97; Lind, supra note 22.
For an excellent primer on discounting, see Lind, supra note 182, at 21-94.
n188.
Arnold, supra note 22, at 180.
n189.
See id. at 181.
n190.
Because income taxes are due on nominal interest, the tax adjustment must be
performed first. See id. at 192 n.10.
n191.
See id. at 192.
n192.
See id. at 192; Viscusi, supra note 76, at 129, 134.
In
1998, the yield on 30-year Treasury bonds stood at 5.57%, the lowest since
auctions on these bonds began in 1977. See Guy Dixon & Candace Cumberbatch,
Bond Price Hit New Highs, Lifted by Concerns About Japan and Signals of a U.S.
Slowdown, Wall St. J., July 7, 1998, at C19. An individual facing a 28% federal
marginal tax rate would have an after-tax return of 4.0%. Subtracting the
change in the consumer price index for the twelve-month period ending in May
1998, which is 1.7%, see U.S. Bureau of Labor Statistics, Consumer Price Index
Summary (visited July 8, 1998)
<http://stats.bls.gov/news.release/cpi.nws.html>, would result in a
discount rate of 2.3%.
n193.
See Arnold, supra note 22, at 181.
n194.
See id. at 184-85.
n195.
See id. at 190.
n196.
See supra text accompanying notes 183-184.
n197.
In the case of environmental regulation, the government is not making the
investment, but is instead requiring private parties to make it. The same
analysis is applicable, however. See Arnold, supra note 22, at 189-91.
n198.
See id. at 180-84; Lind, supra note 22, at S-10, S-11.
The
Department of Energy continues to engage in this inquiry:
Because the proposed appliance efficiency
standards will primarily affect private, rather than public, investment, the
Department continues to believe that using the average real rate of return on
private investment as the basis for the social discount rate is most
appropriate. If the primary impact of the standards were on Federal or other
public expenditures, DOE agrees that real interest rates on long term
government securities would likely be a better basis.
60
Fed. Reg. 37,388, 37,394 (1995).
n199.
See Arnold, supra note 22, at 184-85; Lind, supra note 22, at S-8, S-9.
n200.
See Arnold, supra note 22, at 184-85, 190-91; Lind, supra note 22, at S-8, S-9.
n201.
See Ronald G. Cummings, Legal and Administrative Uses of Economic Paradigms: A
Critique, 31 Nat. Resources J. 463, 471 (1991); Randolph M. Lyon, Federal
Discount Rate Policy, The Shadow Price of Capital, and Challenges for Reforms,
18 J. Envtl. Econ. & Mgmt. S-29, S-30 (1990). For an interesting survey of
the different choices of discount rates in federal agencies, see Edward R.
Morrison, Comment, Judicial Review of Discount Rates Used in Regulatory
Cost-Benefit Analysis, 65 U. Chi. L. Rev. 1333, 1336-37, 1364-69 (1998).
n202.
59 Fed. Reg. 45,872, 45,895-97 (1994).
n203.
See 43 C.F.R. 11.84(e)(2) (1998) (Department of the Interior). Ohio v. Department of the Interior, 880 F.2d
432, 464-65 (D.C. Cir. 1989), upheld the Department of the Interior's choice of
a 10% discount rate for natural resources damages, following OMB's pre-1992
policy, see supra text accompanying note 182.
n204.
See supra text accompanying notes 73-75.
n205.
See supra text accompanying notes 133-143.
n206.
See supra text accompanying notes 153-160.
n207.
See supra text accompanying note 156.
n208.
See Jones-Lee et al., supra note 159, at 55-57.
n209.
In contrast, in the Cropper and Subramanian study, the respondents were asked
to evaluate the ease with which each of the risks could be avoided. See supra
text accompanying notes 136-138.
n210.
The upward adjustment resulting from the unrepresentativeness of the risk
preferences of the population exposed to workplace risks cannot be estimated as
a result of the paucity of the empirical data, though logic compels the
conclusion that such workers will have a lower-than-average willingness-to-pay
to avoid risk. See supra Part I.E.2.b.
n211.
See supra text accompanying notes 123-125.
n212.
See supra text accompanying notes 103-106.
n213.
For a twenty year lag, a discount rate of 2% reduces the valuation to 67% of
the undiscounted amount, as compared to a reduction to 55% of the undiscounted
amount for a 3% discount rate.
n214.
See supra text accompanying notes 183-184.
n215.
See supra text accompanying notes 80-83.
n216.
The OMB approach, however, avoids the pitfall of using V[in'60,60'] as the
basis for estimating V[in'40,40']. Such a procedure might lead to undervaluation
because of changes over time in the income and saving levels of individuals.
See supra Part I.E.1.b.
n217.
The adjustments for the dread nature of the harm, the involuntary nature of the
harm, the salary differential, and the impact of economic growth are 2, 2,
1.23, and 1.22, respectively. See supra text accompanying notes 204-213. The
calculation assumes that all the factors are multiplicative. See supra text
accompanying notes 206-210. This assumption should be the focus of empirical
study.
n218.
See B.T. Westerfield, Asbestos-Related Lung Disease, 85 Southern Med. J. 616
(1992). Some of the adverse consequences of exposure to asbestos have latency
periods of 30 and 40 years. See id. at 618.
n219.
See supra Part I.E.2.b.
n220.
See supra text accompanying notes 177-179.
n221.
For discussion of the differences with the intergenerational setting, see infra
text accompanying notes 281-283.
n222.
See supra text accompanying notes 65-69.
n223.
See supra text accompanying note 35 (discussing Barnes's testimony).
n224.
See supra Part I.F.1.
n225.
See supra Part I.G.
n226.
See supra text accompanying notes 214-218.
n227.
For applications of this concept in the legal literature, see Bruce Ackerman
& Anne Alstott, The Stakeholder Society (forthcoming 1999) (manuscript at
131-42, on file with the Columbia Law Review); Christine Jolls, Contracts as
Bilateral Commitments: A New Perspective on Contract Modification, 26 J. Legal
Stud. 203, 210, 219-24 (1997); Christine Jolls et al., A Behavioral Approach to
Law and Economics, 50 Stan. L. Rev. 1471, 1538-41 (1998); Deborah M. Weiss,
Paternalistic Pension Policy: Psychological Evidence and Economic Theory, 58 U.
Chi. L. Rev. 1275, 1285-86, 1300-06 (1991).
n228.
Intergenerationally, the situation is different because the individual making
the decision is different from the individual affected by the decision. See
infra text accompanying notes 281-283.
n229.
Ackerman & Alstott, supra note 227, at 141.
n230.
See supra note 192.
n231.
For critiques of cost-benefit analysis, see Steven Kelman, Cost-Benefit
Analysis: An Ethical Critique, Regulation, Jan./Feb. 1981, at 33; Duncan Kennedy,
Cost-Benefit Analysis of Entitlement Problems: A Critique, 33 Stan. L. Rev. 387
(1981). For critiques of the techniques for valuing human lives, see sources
cited supra note 64.
n232.
See supra text accompanying notes 21-22.
n233.
See William D. Nordhaus, Managing the Global Commons: The Economics of Climate
Change 4 (1994) ("A complete analysis of the economics of climate change
must recognize the extraordinarily long time lags involved in the reaction of
the climate and economy to greenhouse gas emissions.").
n234.
For a comprehensive list, see 1 Philippe Sands, Principles of International
Environmental Law 198-213 (1995).
n235.
Stockholm Declaration of the United Nations Conference on the Human
Environment, June 16, 1972, 11 I.L.M. 1461.
n236.
United Nations Conference on Environment and Development: Rio Declaration on
Environment and Development, June 13, 1992, 31 I.L.M. 874.
n237.
United Nations Conference on Environment and Development: Framework Convention
on Climate Change, May 9, 1992, 31 I.L.M. 849.
n238.
Putnam & Graham, supra note 6, at 60.
n239.
Keeler & Cretin, supra note 5, at 303; see also id. at 304 ("Delaying
any program ... increases its benefit to cost ratio.").
n240.
See Arnold, supra note 22, at 178.
n241.
See Nordhaus, supra note 233, at 125 ("If investments in equipment or
human capital yield 10 percent annually, it would be inefficient to make
investments that yielded only 3 percent."); id. at 135.
n242.
See id. at 125.
n243.
See Hillman & Kim, supra note 5, at 200-02; Michael W. Jones-Lee &
Graham Loomes, Discounting and Safety, 47 Oxford Econ. Papers 501, 511 (1995);
Lipscomb, supra note 94, at S237.
n244.
See Lewis A. Kornhauser & Richard L. Revesz, Evaluating the Effects of
Alternative Superfund Liability Rules, in Analyzing Superfund, supra note 133,
at 115, 118.
n245.
See id.
n246.
In some cases, in contrast, environmental remediation costs may fall over time
as a result of technological innovation.
n247.
Even if the cost were less than $ 100, a static evaluation would counsel against
investing in remediation if the funds could be invested in an alternative
project with a sufficient return.
n248.
In practice, the problem is more complicated because the increase in costs and
damages is likely to be continuous but the structure of the analysis remains
the same.
n249.
See William D. Nordhaus, Economic Approaches to Greenhouse Warming, in Global
Warming: Economic Policy Responses 33, 58 (Rudiger Dornbusch & James M.
Poterba eds., 1991) ("we are likely to be increasingly averse to climate
change as the change becomes larger").
n250.
See Robert C. Lind, Intergenerational Equity, Discounting, and the Role of
Cost- Benefit Analysis in Evaluating Global Climate Policy, 23 Energy Pol'y
379, 382 (1995); David W. Pearce et al., The Social Costs of Climate Change:
Greenhouse Damage and the Benefits of Control, in Climate Change 1995: Economic
and Social Dimensions of Climate Change 179, 184-86 (James P. Bruce et al.
eds., 1996) [hereinafter Climate Change 1995].
n251.
See Pearce et al., supra note 250, at 214.
n252.
See Lind, supra note 250, at 384.
n253.
See James K. Hammitt, Outcome and Value Uncertainties in Global-Change Policy,
30 Climatic Change 125, 130 (1995).
n254.
See K. J. Arrow et al., Intertemporal Equity, Discounting, and Economic Efficiency,
in Climate Change 1995, supra note 250, at 125, 132 ("society cannot set
aside investments over the next three centuries, earmarking the proceeds for
the eventual compensation of those adversely affected by global warming");
Farber & Hemmersbaugh, supra note 19, at 297 (same); Lind, supra note 250,
at 381-82 (questioning society's ability to make transfers across several
generations).
n255.
See Nordhaus, supra note 249, at 57.
n256.
Tyler Cowen & Derek Parfit, Against the Social Discount Rate, in Justice
Between Age Groups and Generations 144, 148 (Peter Laslett & James S.
Fishkin eds., 1992); see Farber & Hemmersbaugh, supra note 19, at 291;
James C. Wood, Intergenerational Equity and Climate Change, 8 Geo. Int'l Envtl.
L. Rev. 293, 321 (1996).
n257.
David W. Pearce & R. Kerry Turner, Economics of Natural Resources and the
Environment 223-24 (1990); see Morrall, supra note 132, at 28 (without
discounting "all rules yielding continuous benefits are worth any amount
of immediate costs").
n258.
For further discussion, see infra Part II.C.
n259.
For example, Tyler Cowen and Derek Parfit note:
No generation can be morally required to
make more than certain kinds of sacrifice for the sake of future generations.
And this is part of a more general view, which has nothing to do with time. On
this view, no one is required to make great sacrifices merely to benefit
others.
Cowen & Parfit, supra note 256, at
149.
n260.
See Robert Solow, An Almost Practical Step Toward Sustainability, 19 Resources
Pol'y 162, 168 (1993).
n261.
Maureen L. Cropper et al., Rates of Preference for Saving Lives, 80 Am. Econ.
Rev. Papers & Proc. 469, 469 (1992) [hereinafter Cropper et al., Rates of
Time Preference]. For an earlier version of the study, see Maureen L. Cropper
et al., Discounting Human Lives, 3 Am. J. Agric. Econ. 1410 (1991).
n262.
See Cropper et al., Rates of Time Preference, supra note 261, at 469.
n263.
See id. at 471 tbl.1. For studies using shorter time frames, see Cairns, supra
note 164, at 222; John A. Cairns & Marjon M. van der Pol, Saving Future
Lives: A Comparison of Three Discounting Models, 6 Health Econ. 341, 343
(1997); Horowitz & Carson, supra note 11, at 408; Jan Abel Olsen, Time
Preferences for Health Gains: An Empirical Investigation, 2 Health Econ. 257,
259 (1993).
n264.
See Johannesson & Johansson, supra note 13, at 331. For an evaluation of
the extent to which the framing of the question affects the results, see Magnus
Johannesson & Per-Olov Johansson, Saving Lives in the Present Versus Saving
Lives in the Future - Is There a Framing Effect, 15 J. Risk & Uncertainty
167, 169 (1997) [hereinafter Johannesson & Johansson, Risk &
Uncertainty].
n265.
See Cropper & Portney, supra note 73, at 375. The study is Ola Svenson
& Gunnar Karlsson, Decision-Making, Time Horizons, and Risk in the Very
Long-Term Perspective, 9 Risk Analysis 385 (1989).
n266.
See supra text accompanying notes 92-97. As three prominent commentators
recently explained:
If one discounts present world GNP over
200 years at 5 percent per annum, it is worth only a few hundred thousand
dollars, the price of a good apartment. On the basis of such valuations, it is
clearly irrational to be concerned about global warming, nuclear waste, species
extinction, and other long-term phenomena. Yet we are worried about these
issues, and are actively considering devoting very substantial resources to
them. There appears to be a part of our concern about the future that is not
captured by discounted utilitarianism.
Andrea Beltratti et al., Sustainable
Growth and the Green Golden Rule, in The Economics of Sustainable Development
147, 149 (Ian Goldin & L. Alan Winters eds., 1995).
n267.
See Cairns, supra note 164, at 224-25 ("the further in the future the
benefit the lower the rate at which most individuals discount it"); Cairns
& van der Pol, supra note 263, at 342 (referring to "increasing
evidence ... that individuals do not appear to apply a constant discounting
model"); Cropper et al., Rates of Time Preference, supra note 261, at 471
("Discount rates are much higher for short horizons than for long
horizons."); Johannesson & Johansson, Risk & Uncertainty, supra
note 264, at 174 ("estimated discount rates decrease[ ] with the time
horizon"); Olsen, supra note 263, at 262 ("The longer the time
horizon, the lower are the implied [discount] rates."). One study found a
similar result in an intragenerational context. See Loewenstein & Thaler,
supra note 176, at 184 ("discount rates declined sharply with the length
of time to be waited").
n268.
See supra text accompanying notes 264-265 (discussing Svenson & Karlsson
study).
In
arguing in favor of a constant discounting model, William Nordhaus states that
"it would be unrealistic to make decisions based on the premise that there
is, in fact, no time preference given that many social decisions are, in fact,
tilted in favor of present generations." Nordhaus, supra note 233, at 123.
It is therefore worth emphasizing that the studies discussed in this section
reveal a strong moral intuition against such discounting.
n269.
See Arrow et al., supra note 254, at 137-38; Cropper & Sussman, supra note
65, at 162; Fuchs & Zeckhauser, supra note 161, at 265; Jones-Lee &
Loomes, supra note 243, at 501; Lind, supra note 250, at 385-86.
n270.
See Arrow et al., supra note 254, at 130, 134.
n271.
In theory, the rate could also be negative, which would imply the privileging
of the utilities of later generations.
n272.
See Arrow et al., supra note 254, at 134-35; Lind, supra note 250, at 385. If
one adds utilities over an infinite time period, the social welfare function
will be ill-defined; to avoid this problem, some discounting would be required.
See Arrow et al., supra note 254, at 136; Jones-Lee & Loomes, supra note
243, at 507, n.10. As Kenneth Arrow and his co- authors explain, however,
"because even a very small positive discount rate ... would resolve the
mathematical issue, this objection has little practical moment." Arrow et
al., supra note 254, at 136.
n273.
Arrow et al., supra note 254, at 130; see Nordhaus, supra note 233, at 123-24;
David Pearce et al., Sustainable Development: Economics and Environment in the
Third World 30 (1990). For the derivation of the relationship, see Arrow et
al., supra note 254, at 134-35.
n274.
See Arrow et al., supra note 254, at 130; Lind, supra note 250, at 384.
n275.
See Cline, supra note 106, at 249; Arrow et al., supra note 254, at 134.
n276.
Fuchs & Zeckhauser, supra note 161, at 265 (emphasis added).
n277.
See supra text accompanying notes 21-22.
n278.
See Robert C. Lind, Intertemporal Equity, Discounting, and Economic Efficiency
in Water Policy Evaluation, 37 Climatic Change 41, 52 (1997).
n279.
See Thomas C. Schelling, Intergenerational Discounting, 23 Energy Pol'y 395,
396 (1995) ("To be less interested in the welfare of East Africans than
former Yugoslavians is less like 'discounting' than, perhaps, 'depreciating.'
When we count future welfare less than our own we are depreciating generations
that are distant in time, in familiarity, in culture, in kinship, and along
other dimensions.").
n280.
As a result, the issue of growth discounting is not presented by the example.
n281.
Of course, taking a "multiple selves" analysis to its logical
conclusions, see supra text accompanying notes 227-230, would turn any
intragenerational problem into an intergenerational problem.
n282.
See Cowen & Parfit, supra note 256, at 155 ("Pure time preference
within a single life does not imply pure time preference across different
lives."). As Joseph Lipscomb notes in the medical context, with respect to
future generations, "discounting represents a global political decision
about the relative weights current decision makers should attach to future
population cohorts." Lipscomb, supra note 94, at S246. He adds that this
discount rate "need have no relationship to how a given population member
(or a statistically representative member) values current versus future gains
in health status." Id.
n283.
See supra text accompanying notes 227-230 (discussing "multiple
selves").
n284.
See Richard Dubourg & David Pearce, Paradigms for Environmental Choice:
Sustainability versus Optimality, in Models of Sustainable Development 21, 24
(Sylvie Faucheux et al. eds., 1996) ("For maximizing a single utility
function ... over infinite time cannot help but suggest that we are dealing
with a single generation which exists forever, or even a single
individual."); Lind, supra note 250, at 385 (discussing why other
approaches are preferable). For example, Kenneth Arrow and his co-authors
acknowledge that the rate of time preference "is sometimes said to
represent discounting for impatience or myopia." Arrow et al., supra note
254, at 131. These are precisely the sorts of psychological characteristics
that justify intragenerational discounting.
n285.
The problem is fairly pervasive. For example, Kenneth Arrow and his co-authors
note that discounting for time preference reflects that "one cares less
about tomorrow's consumer than today's, or about one's own welfare tomorrow
than today." Arrow et al., supra note 254, at 130. This formulation
conflates the intergenerational and intragenerational problems.
n286.
See Lipscomb, supra note 94, at 238 (constant discounting "is basically a
political judgment about intergenerational equity").
n287.
Arrow et al., supra note 254, at 131; Parfit, supra note 21, at 485.
n288.
An even narrower view of the role of future generations in the utilitarian
calculus is that of Maureen Cropper and Frances Sussman. They explain their
approach:
Each generation receives utility from its
own consumption and that of its immediate descendants. Because this is true of
all generations, the current generation necessarily takes into account the
utilities of all future generations in making its consumption and bequest
plans.
Cropper & Sussman, supra note 65, at
170.
This
approach has been criticized as unduly privileging the position of the current
generation. See Zeckhauser, supra note 102, at 440-41 ("There is the
significant issue ... whether ... this sort of altruism does not substantially
underrepresent the impacts that will be truly felt.").
n289.
See supra text accompanying notes 261-268.
n290.
See Arrow et al., supra note 254, at 137.
n291.
See supra text accompanying notes 21-22; Schelling, supra note 279, at 396.
n292.
See Arrow et al., supra note 254, at 136; Jones-Lee & Loomes, supra note
243, at 502 n.4; George Tolley & Robert Fabian, Future Directions for
Health Value Research, in Tolley et al., supra note 70, at 300, 311.
n293.
See Arrow et al., supra note 254, at 136 ("Some have argued that the
discount rate should be adjusted for the probability of extinction. Plausible
estimates of this effect would add very little to the discount rate.").
n294.
See supra text accompanying notes 252-253.
n295.
See Parfit, supra note 21, at 482; Jones-Lee & Loomes, supra note 243, at
502 n.4; John F. Morrall III, Cotton Dust: An Economist's View, in The
Scientific Basis of Health and Safety Regulation 93, 107-08 (Robert W. Crandall
& Lester B. Lave eds., 1981).
n296.
See supra text accompanying notes 252-253.
n297.
See Heinzerling, supra note 7, at 2044-45.
n298.
It is conceivable that in some instance one could make a particularized,
factually grounded case for a probabilistic reduction of harms.
n299.
John Rawls makes the following case against a pure time preference:
There is no reason for the parties [in
the original position] to give any weight to mere position in time. They have
to choose a rate of saving for each level of civilization. If they make a
distinction between earlier and more remote periods because, say, future states
of affairs seem less important now, the present state of affairs will seem less
important in the future. Although any decision has to be made now, there is no
ground for their using today's discount of the future rather than the future's
discount of today. The situation is symmetrical and one choice is as arbitrary
as the other. Since the persons in the original position take up the standpoint
of each period, being subject to the veil of ignorance, this symmetry is clear
to them and they will not consent to a principle that weighs nearer periods
more or less heavily.
John Rawls, A Theory of Justice 294
(1971); see also id. at 284-98 (setting forth a theory of intergenerational
justice). For commentary, see John Broome, Counting the Cost of Global Warming
31, 96-98 (1992); B.M. Barry, Justice Between Generations, in Law, Morality,
and Society: Essays in Honour of H.L.A. Hart 268, 276-81 (P.M.S. Hacker &
J. Raz eds., 1977).
n300.
See supra Part I.H.
n301.
Some prominent economists are at the very least ambivalent about discounting
for pure time preference. For example, Robert Solow notes:
You may wonder why I allow discounting at
all. I wonder, too: no generation 'should' be favored over any other. The usual
scholarly excuse - which relies on the idea that there is a very small fixed
probability that civilization will end during any little interval of time -
sounds far-fetched. We can think of intergenerational discounting as a
concession to human weakness or as a technical assumption of convenience (which
it is).
Solow, supra note 260, at 165; see also
Cline, supra note 106, at 249 ("Impatience or 'myopia' may be a legitimate
basis for a single individual's preferring consumption earlier rather than
later in his lifetime, but from society's standpoint it is hardly a justifiable
basis for making intergenerational comparisons"); Lind, supra note 22, at
S-20 (intergenerational discounting "would seem a highly questionable if not
immoral public policy"); Robert M. Solow, Intergenerational Equity and
Exhaustible Resources, 41 Rev. Econ. Stud. 29, 40 (1973) (expressing doubts as
to whether time discounting is appropriate). Kenneth Arrow and his co-authors
do not analyze explicitly what the rate of time preference should be, but
assume at times that it would be zero. See Arrow et al., supra note 254, at
131.
n302.
In practice, the distinction is not as crisp because generations are not
successive, but overlapping. The conceptual distinction, however, remains
important. For models of overlapping generations, see Burton, supra note 13;
Cropper & Sussman, supra note 65, at 169-72. When generations overlap, the
current generation tends to convey benefits on the next generation even when it
is motivated only by its self-interest. See Barry, supra note 299, at 268 (as a
result of the overlap "prudent provision for the welfare of all those
currently alive therefore entails some considerable regard for the
future").
n303.
See Geoffrey H. Heal, Discounting and Climate Change: An Editorial Comment, 37
Climate Change 335, 335 (1997).
n304.
See supra text accompanying notes 273-275.
n305.
See Arrow et al., supra note 254, at 134-35.
n306.
See id. at 131-32, 141 n.10.
n307.
See id. at 132.
n308.
See supra Part I.E.1.a.
n309.
See Cline, supra note 106, at 116-19; Pearce et al., supra note 250, at 195,
198.
n310.
See supra text accompanying note 100.
n311.
See Heinzerling, supra note 7, at 2051.
n312.
See Cline, supra note 106, at 101-06 (discussing species loss and damage to
forests).
n313.
See Arnold, supra note 22, at 177; Heinzerling, supra note 7, at 2051.
n314.
See Cline, supra note 106, at 110-12.
n315.
See Schelling, supra note 279, at 399.
The
1990 Amendments to the Montreal Protocol on Substances that Deplete the Ozone
Layer marked the first time that a developing country's adherence to the
provisions of an international environmental treaty was linked to the receipt
of financial resources. See 1 Sands, supra note 234, at 269. As Philippe Sands
points out, these amendments "introduced a radical and innovative change
which has had profound consequences on the negotiation of subsequent global
environmental treaties." Id. This change is evident in the provisions of
the 1992 Climate Change Convention which requires developed countries to
provide financial assistance and technological assistance to developing
countries. See id. at 740-41.
n316.
See World Bank, GNP Per Capita (visited July 24, 1998)
<http://www.worldbank.org/depweb/gnp/gnpaas01.htm>.
n317.
The differences in the patterns of per capita energy consumption between
developed and developing countries are stark. See International Energy Agency,
Climate Change Policy Initiatives 28 tbl.3 (1992). Over time, this share of the
responsibility might decrease as developing countries industrialize.
n318.
Perhaps, however, there is a concern that direct foreign aid would not be spent
wisely by the recipient, or could create undesirable incentives. If these
problems were sufficiently serious, long-term environmental investments could
be the most desirable way of providing foreign assistance.
n319.
See Louis Kaplow, The Optimal Supply of Public Goods and the Distortionary Cost
of Taxation, 49 Nat'l Tax J. 513, 516-19 (1996); Louis Kaplow & Steven
Shavell, Property Rules Versus Liability Rules: An Economic Analysis, 109 Harv.
L. Rev. 713, 744-45 (1996). For discussion of the distributional consequences
of environmental policy, see Richard L. Revesz, Foundations of Environmental
Law and Policy 102-03 (1997).
n320.
See Farber & Hemmersbaugh, supra note 19, at 300.
n321.
The substitutability of these future benefits is discussed below in the context
of the principle of sustainable development. See infra Part II.E.
n322.
See infra text accompanying notes 343-344.
n323.
See supra text accompanying notes 254-256.
n324.
See, e.g., Gary D. Meyers & Simone C. Muller, The Ethical Implications,
Political Ramifications and Practical Limitations of Adopting Sustainable
Development as National and International Policy, 4 Buff. Envtl. L.J. 1, 10
(1996) ("The core idea of sustainability, then, is the concept that
current decisions should not impair the prospects for maintaining or improving
future living standards."); Edith Brown Weiss, Intergenerational Equity: A
Legal Framework for Global Environmental Change, in Environmental Change and
International Law: New Challenges and Dimensions 385, 385 (Edith Brown Weiss
ed., 1991) ("Sustainable development rests on a commitment to equity with
future generations.").
For
a strong critique of the concept of sustainable development, see Wilfred
Beckerman, Through Green-Colored Glasses: Environmentalism Reconsidered 143-60
(1996).
n325.
See Dubourg & Pearce, supra note 284, at 27 ("Sustainability has
become a common policy objective of many government institutions, international
agencies, and non-governmental organisations."); supra text accompanying
notes 234-237.
n326.
Some commentators link the attractiveness of sustainable development with
criticisms of discounting approaches: "There appears to be a part of our
concern about the future that is not captured by discounted utilitarianism.
Perhaps as much as anything it is this that is driving an interest in
formalising the concept of sustainability." Beltratti et al., supra note 266,
at 149.
n327.
See David Hodas, The Climate Change Convention and Evolving Legal Models of
Sustainable Development, 13 Pace Envtl. L. Rev. 75, 77 (1995); Averil Rothrock,
Oregon's Goal Five: Is Ecologically Sustainable Development Reflected?, 31
Willamette L. Rev. 449, 451 (1995); Mary Pat Williams Silveira, International
Legal Instruments and Sustainable Development: Principles, Requirements, and
Restructuring, 31 Willamette L. Rev. 239, 243 (1995); Christopher D. Stone,
Deciphering "Sustainable Development", 69 Chi.-Kent L. Rev. 977, 978
(1994). For general discussion of the principle of sustainable development, see
1 Sands, supra note 234, at 198-208.
One
commentator has suggested that over 70 definitions of the term exist. See Susan
L. Smith, Ecologically Sustainable Development: Integrating Economics, Ecology,
and Law, 31 Willamette L. Rev. 261, 276 (1995); see also John Peezey, World
Bank Environment Paper Number 2: Sustainable Development Concepts: An Economic
Analysis, app. A (1992) (presenting an extensive list of definitions).
n328.
World Commission on Environment and Development, Our Common Future (1987).
n329.
Id. at 43.
n330.
See Weiss, supra note 324, at 401-05; Solow, supra note 260, at 162.
n331.
The following two paragraphs are adapted from Revesz, supra note 319, at
307-08.
n332.
See Weiss, supra note 324, at 401-05; Edith Brown Weiss, In Fairness to Future
Generations: International Law, Common Patrimony, and Intergenerational Equity
40-45 (1988).
n333.
See Solow, supra note 260, at 162-63.
n334.
See id. at 167-68.
n335.
See id. at 168.
n336.
Compare Weiss, supra note 324, at 404 ("The principle of conservation of
quality requires that we leave the quality of the natural and cultural
environments in no worse condition than we received it."), with Solow,
supra note 260, at 167 ("If sustainability means anything more than a
vague emotional commitment, it must require that something be conserved for the
very long run.").
n337.
Compare Weiss, supra note 324, at 404 ("We may exhaust more reserves of a natural
resource and cause modest levels of pollution, but pass on a higher level of
income, capital, and knowledge sufficient to enable future generations to
develop substitutes for the depleted resource and methods for abating or
removing pollutants."), with Solow, supra note 260, at 168 ("Most
routine natural resources are desirable for what they do, not for what they
are. It is their capacity to provide usable goods and services that we value.
Once that principle is accepted, we are in the everyday world of substitutions
and trade-offs.").
n338.
Compare Weiss, supra note 324, at 403 (we "must proceed extremely
cautiously" with respect to the possible destruction of a "unique
natural resource"), with Solow, supra note 260, at 168 ("It makes
perfectly good sense to insist that certain unique and irreplaceable assets
should be preserved for their own sake").
n339.
See Solow, supra note 260, at 163 ("So far ... the proper adjustments
needed to measure the stocks and flows of our natural resources and environmental
assets are not being made in the published national accounts.").
n340.
See Michael Jacobs, The Green Economy: Environment, Sustainable Development and
the Politics of the Future 84 (1991) ("The final objection which might be
made to our definition of sustainability is that it ignores population
growth."); Michael Redclift, Sustainable Development: Exploring the
Contradictions 29 (1987) ("The concept of 'sustainability' makes little
sense ... unless we also consider the impact of rapid population growth on the
physical resource base."); Nafis Sadik, Population, Environment, and
Sustainable Development, in In the Aftermath of the Earth Summit 21, 23
(Andreas Gettkant ed., 1993) ("The universal acceptance of the strong
links between sustainable development and the preservation of the environment
does not extend to the links between these two and the population
policy."). But see President's Council on Sustainable Development,
Population and Consumption Task Force Report 13-32 (1997) (discussing how population
growth is linked to sustainability).
The
link to population does not play a role in the discussions by Weiss, supra note
324, at 401-05, and Solow, supra note 260.
n341.
For an exploration of the ethical consequences of this link, see Parfit, supra
note 21, at 351-441; Broome, supra note 86, at 161-62.
n342.
See Jacobs, supra note 340, at 84 ("It could be argued that what
sustainability demands is not simply a constant level of environmental capacity
but a constant per capita or per person level."); Richard Baldwin, Does
Sustainability Require Growth?, in The Economics of Sustainable Development,
supra note 266, at 51, 52 ("The simple fact is that current population growth
rates, if they were maintained, would lead to an unsustainable world
population.").
n343.
See Gregory D. Fullem, The Precautionary Principle: Environmental Protection in
the Face of Scientific Uncertainty, 31 Willamette L. Rev. 495, 500-01 (1995);
Alexandre Kiss, The Rights and Interests of Future Generations and the
Precautionary Principle, in The Precautionary Principle and International Law:
The Challenge of Implementation 19, 27 (David Freestone & Ellen Hey eds.,
1996); Bernard A. Weintraub, Science, International Environmental Regulation,
and the Precautionary Principle: Setting Standards and Defining Terms, 1 N.Y.U.
Envtl. L.J. 173, 177-78 (1992). For a discussion of the status of the
precautionary principle in international environmental law, see 1 Sands, supra
note 234, at 208-13.
n344.
See supra text accompanying notes 252-253.
n345.
These issues are explored briefly in Revesz, supra note 319, at 330-31.
n346.
In this context, the principle of sustainable development has the same features
as the maximin principle.
n347.
See supra text accompanying notes 314-316.
n348.
See supra text accompanying notes 281-286.
n349.
Other objections to growth discounting are discussed at supra text accompanying
notes 308-311.
n350.
See supra Part II.E.
n351.
See supra text accompanying notes 319-320.
n352.
See supra text accompanying notes 316-317.
n353.
See supra text accompanying note 317.