Policy Apr 4, 2016

How Much Will You Pay Today for a Bet­ter Tomorrow?

How we answer that ques­tion has the pow­er to shape cli­mate-change policy.

Yevgenia Nayberg

Based on the research of

David Amdur

Donald Dale

Christopher Borick

Barry G. Rabe

As sea lev­els rise and droughts per­sist, coun­tries around the world are rac­ing to slow the effects of cli­mate change.

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But fix­ing the prob­lem is nei­ther cheap nor sim­ple, and poli­cies to com­bat cli­mate change remain wide­ly unpop­u­lar. While some of this dis­fa­vor stems from not believ­ing in cli­mate change, for many it is an eth­i­cal dilem­ma: How do you com­pare the price tag of poli­cies imple­ment­ed today against poten­tial ben­e­fits for our descen­dants decades from now?

When you’re talk­ing about sup­port for cost­ly cli­mate change mit­i­ga­tion poli­cies, these are vig­or­ous­ly debat­ed ques­tions,” says Don­ald Dale, clin­i­cal asso­ciate pro­fes­sor of man­age­r­i­al eco­nom­ics and deci­sion sci­ences at the Kel­logg School. It basi­cal­ly boils down to this: How much are we will­ing to sac­ri­fice to make the future better?”

Many pro­posed fix­es work by levy­ing a fee for activ­i­ties with a high envi­ron­men­tal impact, such as a car­bon tax on using fos­sil fuels. These poli­cies are jus­ti­fied as being good invest­ments. Last year, for exam­ple, Pres­i­dent Barack Oba­ma described the Clean Pow­er Plan as an insur­ance pol­i­cy” to ben­e­fit future generations.

The results give us a deep­er per­spec­tive on how peo­ple eval­u­ate these cost­ly policies.”

But does every­one find these insur­ance poli­cies equal­ly entic­ing? Does favor break down eas­i­ly along reli­gious lines or polit­i­cal affil­i­a­tion? And for those reluc­tant to forego cash today in favor of a long-term ben­e­fit, how can offi­cials sweet­en the deal?

Dale set out to explore these ques­tions by exam­in­ing what is known as a per­son­al dis­count rate” — mean­ing how much a per­son val­ues some­thing in the near term ver­sus its val­ue as a long-term invest­ment. Gen­er­al­ly, peo­ple with low per­son­al dis­count rates val­ue the future more when com­pared with the present; peo­ple with high dis­count rates put more val­ue on the present as com­pared with the future.

Dale teamed up with David Amdur*, Christo­pher Borick of Muh­len­berg Col­lege and Bar­ry Rabe of the Uni­ver­si­ty of Michi­gan to inves­ti­gate these per­son­al dis­count rates in the con­text of car­bon taxes.

It is a nice, tan­gi­ble exam­ple where peo­ple under­stand they’re going to have to pay today for mak­ing the future bet­ter,” Dale says.But their find­ings extend to any cost­ly pol­i­cy that promis­es a long-term benefit.

Prob­ing Pub­lic Per­cep­tions on a Car­bon Tax

The researchers asked near­ly 800 Amer­i­cans a series of ques­tions. First, par­tic­i­pants were asked whether they would sup­port a fed­er­al car­bon tax. Then they were asked: What if such a pol­i­cy sig­nif­i­cant­ly helped the envi­ron­ment, but increased your ener­gy costs by 10 per­cent each month?

A sec­ond set of ques­tions was used to deter­mine par­tic­i­pants’ per­son­al dis­count rate. Respon­dents were asked to imag­ine they had just won the lot­tery. How would they pre­fer to receive their win­nings: as $1,000 dol­lars in 30 days, or as $1,020 in a year? If a per­son chose the $1,000, the ques­tion­er raised the stakes by grad­u­al­ly increas­ing the future reward.

Once they iden­ti­fied the small­est amount that a par­tic­i­pant was will­ing to wait a year for, the researchers cal­cu­lat­ed that individual’s per­son­al dis­count rate as the per­cent­age change between $1,000 and the future amount they chose. So, for exam­ple, some­one who chose to wait for $1,100 had a 10 per­cent dis­count rate.

Last­ly, the par­tic­i­pants were asked if they believed in glob­al warm­ing, and, if so, if it was a result of human activ­i­ty or nat­ur­al envi­ron­men­tal pat­terns. The sur­vey also gath­ered demo­graph­ic data, such as par­tic­i­pants’ age, polit­i­cal beliefs, edu­ca­tion lev­el, and religion.

Pre­dict­ing Support

Unsur­pris­ing­ly, the sin­gle strongest pre­dic­tor of a person’s sup­port for a car­bon tax is whether or not they believe in cli­mate change. But, until this study, there was lit­tle infor­ma­tion about how oth­er indi­vid­ual beliefs fac­tored in.

The researchers found that an individual’s per­son­al dis­count rate plays a very large role in explain­ing sup­port for a car­bon tax. In fact, they found that dis­count rate was at least as impor­tant a fac­tor as polit­i­cal affil­i­a­tion or race.People with a low per­son­al dis­count rate — mean­ing they do not have to be paid much of a pre­mi­um to wait a full year before receiv­ing mon­ey — were more like­ly to sup­port a car­bon tax than those with a high dis­count rate.

Even with­in dif­fer­ent demo­graph­ic groups such as non­whites, Chris­tians, and Repub­li­cans — groups that tend not to sup­port a car­bon tax — peo­ple with low­er dis­count rates were more like­ly to sup­port the pol­i­cy than those with high­er rates. In every sub­sam­ple we test­ed, there was a strong cor­re­la­tion,” Dale says. That was the most aston­ish­ing thing.”

Up until our sur­vey, dif­fer­ences in people’s sup­port for a car­bon tax were attrib­uted to ide­o­log­i­cal dif­fer­ences, polit­i­cal beliefs, etc.,” Dale says. But our work shows that these pref­er­ences regard­ing dis­count rates might be a bet­ter expla­na­tion. The results give us a deep­er per­spec­tive on how peo­ple eval­u­ate these cost­ly policies.”

Refram­ing Future Benefits

These dis­tinc­tions are impor­tant for pol­i­cy mak­ers to under­stand. Although many rea­son­able peo­ple believe in cli­mate change, they might also believe — just as rea­son­ably — that the costs of a car­bon tax are not worth the future benefits.

Now we have a more nuanced under­stand­ing of why car­bon tax­es are fair­ly unpop­u­lar,” Dale says. You can believe that cli­mate change is hap­pen­ing, but that doesn’t nec­es­sar­i­ly mean you’re will­ing to make huge sac­ri­fices today to stop it.”

Instead of try­ing to con­vince peo­ple that cli­mate change is an immi­nent threat, pol­i­cy mak­ers and advo­ca­cy groups could take a dif­fer­ent approach.

Rather than sim­ply insist­ing on the sci­en­tif­ic con­sen­sus that glob­al warm­ing is occur­ring,” Dale says, you might gar­ner more sup­port by per­suad­ing peo­ple that the costs today of slow­ing or stop­ping it are a pit­tance com­pared to the costs tomor­row of let­ting it occur.”

Editor’s note: David Amdur passed away in May 2014 fol­low­ing an acci­dent; Dale and his col­leagues ded­i­cat­ed this work to Amdur and his family.

Featured Faculty

Donald Dale

Clinical Associate Professor of Managerial Economics and Decision Sciences

About the Writer

Jyoti Madhusoodanan is a Bay Area-based science writer.

About the Research

Amdur, David, Donald Dale, Christopher Borick, and Barry G. Rabe. 2015. “Individual Discount Rates and Climate Change: Is Discount Rate Associated with Support for a Carbon Tax?” Climate Change Economics. Vol. 6 No. 4. 1550018-01–1550018-14.

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