Valuing environmental costs and benefits in an uncertain future: risk aversion and discounting

  • Fabien Medvecky University of Sydney
Keywords: discount rate, risk aversion, uncertainty, inter-generational justice, economics, environmental decisions

Abstract

A central point of debate over environmental policies concerns how future costs and benefits should be assessed. The most commonly used method for assessing the value of future costs and benefits is economic discounting. One often-cited justification for discounting is uncertainty. More specifically, it is risk aversion coupled with the expectation that future prospects are more risky. In this paper I argue that there are at least two reasons for disputing the use of risk aversion as a justification for discounting when dealing with long- term decisions, one technical and one ethical. Firstly, I argue that technically, it implies an inconsistency between theory and practice. And secondly, I argue that discounting for uncertainty relies on a form of individualism which, while reasonable in standard microeconomic theory where an agent chooses how to spread her own consumption over her own lifetime, is inappropriate in the context of inter-generational social decisions.

Author Biography

Fabien Medvecky, University of Sydney

Fabien Medvecky submitted his PhD at University of Sydney on the justifications for the social discount rate in inter-generational decisions. He is currently working as a research fellow at the University of Queensland and teaches in philosophy and economics. His interests are philosophy of economics, environmental philosophy, and ethics.

Published
2012-06-10
Section
Articles