IEP 511: Environmental Decision Making

AWAYMAVE - The Distance Mode of MA in Values and the Environment at Lancaster University

Week 4: Time, discounting and evaluation

I. How should we value projects and activities over time?

Standard cost benefit analysis: the value of the project (PV) over a time period t = O and t = n is calculated by the following formula:

where Bt is the benefit at time t,
Ct is the cost at time t,
and r is the discount rate.
If PV>0 then the project is acceptable. Given a choice of projects, the project with the highest total PV is taken to be the best. The use of this formula for project appraisal involves three assumptions that we shall now look at in detail.

II. Discounting and inter-generational justice.

Discounting the future appears to violate the principle of giving equal consideration to the interests of all individuals of whatever generation. It weights costs and benefits differently depending on the time at which they occur. It discounts the future. To discount the future is to value the costs and benefits that accrue in the future less than those of the present. By applying a social discount rate, future benefits and costs are converted to current values when aggregating costs and benefits. Since benefits and costs are in cost-benefit analysis measures of preference satisfaction and dissatisfaction, one apparent consequence is that the preferences of future generations weigh less than those of the present. Thus the assumed preferences they might be supposed to have for an absence of toxic waste, expressed in their willingness to pay for that absence or their willingness to accept compensation for its presence, is valued at less than that of current generations. If a preference to avoid some damage is £n, the annual discount rate is r, then the preferences in t years time is £n/(1+r)t.
For example, if we assume a preference to avoid toxic damage expressed today at a willingness to pay value of £1000, then applying a discount rate of 5%, the "present value" of the same toxic damage occurring in 50 years time would be £1000/(1.05)50 = £87.2. The further into the future, the lower the value.

Discounting has been the subject of much controversy. In effect, it appears to provide a rationale for displacing environmental damage into the future, since the value placed upon damage felt in the future will be smaller than the same value of current consumption. Two central arguments are offered for using discounting:

1. Pure time preferences: Individuals are impatient: they prefer benefits now to benefits tomorrow and costs tomorrow to costs now simply in virtue of the time they occur; the more distant the future, the less costs and benefits are counted. Since it is the task of social policy to aggregate the preferences of affected parties, time preferences must be incorporated into public policy.

2. Social opportunity costs. Any future benefits of a proposal have to be compared to the future benefits that might have been accrued had the resources been invested at current rates of interest. Future benefits and costs should, therefore, be discounted by the interest rates expected to prevail over the period of evaluation.

Problems with these arguments:

1. Pure time preferences:

• Are pure time preferences rational? We discuss this further below.
• If they are, is it justifiable to use them in public policy making? It is one thing to value your own preferences to be satisfied now rather than later. It is another to assert that your current preferences count more than those of another future individual. The latter involves problems of injustice that do not arise in the former case.

2. Social opportunity costs. The argument from social opportunity costs works only if the goods accrued for the alternative projects are substitutable for those lost in environmental damage. However, it might be argued that for basic environmental goods that are a condition for human life, such as clean air and water, an atmosphere that filters out the sun, there exists no such substitutes. Neither are there for many particular habitats and culturally significant places. The appeal to market interest rates to defend discounts assumes a universal substitutability of goods that may not to be met with in practice. We discuss this futher below

Are pure time preferences rational?

Standard debate:
Defender of pure time preferences: If well-being consists in preference satisfaction, then we must include pure time preferences in arriving at the policy that maximises well being. Each individual will have a welfare function that corresponds roughly to the formula give earlier. In considering acts at any point t = 0, and looking forward over a probable remaining lifetime to t = n, the personal welfare value (WV) will calculated by the following formula:

The opponent of pure time preferences: Maximising well-being demands that we ignore pure-time preferences since to include them would be to fail to maximise the satisfaction of preferences over persons' lifetimes. Pigou - time preferences only show that 'our telescopic faculty is defective'. The welfare value will be represented rather by a simple sum:

Question:
Does either approach capture the way that time enters the evaluation of events in life? Thoughts on this one to the discussion site please, and do also comment on each others' contributions.

III. Narrative and evaluation

Consider the following scenarios:
A. A newly married couple, couple A, go on a two week honeymoon. The holiday begins disastrously: they each discover much in the other which they had not noticed before, and they dislike what they find. The first four days are spent in an almighty row. However, while they argue continuously over the next eight days, they begin to resolve their differences and come to a deeper appreciation of each other. Over the last two days of the holiday they are much happier and both feel that they have realized a relationship that is better than that which they had before their argument. The holiday ends happily. Sadly, on their return journey, the plane that carries them explodes and they die.
B. A newly married couple, couple B, go on honeymoon. The first twelve days proceed wonderfully. On the thirteenth day their relationship deteriorates badly as each begins to notice and dislike in the other a character trait which they had not noticed before, at the same time realizing that the other had a quite mistaken view of themselves. On the last day of the holiday they have a terrible row, and sit on opposite ends of the plane on the return journey. They both die in an explosion on the plane.

Which lives go better? Or, to stay with the language of consumer choice, given a visitation on the day before the holiday begins by an angel who presents you with a choice between the two lives, which would you choose?

Given a temporally neutral perspective, we have a sum given by (3) above. We are to tot up the days of dissatisfaction - in the case of A, the first 12 days, in the case of B the last two days - and the days of satisfaction - in the case of A the last two days and in the case of B the first twelve days - and the total value is the sum of these. Given rough equality in dissatisfactions from arguments and satisfactions from enjoyable times together, holiday B comes out as the better choice.
If one adds a discount rate and employs the formula given in (2) the value of B over A is simply magnified: since the dissatisfactions in B happen later, they count for less at the point of choice on the visitation by my angel.

Many individuals would choose holiday A; they characterize the story of holiday A as a happier one than that of holiday B. They do so because the temporal order of events is neither irrelevant nor is it the case that it is always better to have goods sooner rather than later. What counts in favour of holiday A is the narrative order of events, and crucial to that order is the way in which that story ends.
There are characterisations that we make of events in a person's life that can only be made in the context of a larger narrative order. Thus the way we characterise the days in my stories depends on their place in a larger narrative frame. In holiday A, the argument at the start of the holiday is not simply a 'cost' - a moment of pain or desire dissatisfaction. Rather, taken in context, it might be taken to be a 'turning point' in the relationship, one which clarifies the relationship and lays the foundation for the ensuing happiness. Within the context of the individuals' entire lives, it has another significance. For that reason one can also talk of the earlier event having been 'redeemed' by the later reconciliation to which it gave rise. Likewise, the moments of happiness in holiday B are not 'benefits' - feelings of satisfaction. Rather, within the context of the whole story, they are moments of illusion, when each person has a false view of the other, an illusion shattered by the final argument. Had their lives continued, the argument also may have become something else, but the ill fortune of untimely deaths robs the participants of such a future. Whether moments of pain and pleasure are goods or evils depends on their context of a life as a whole. They do not come ready-tagged as such.

In the debate of time preferences a strong sense of identity over time that is given by narrative unity or continuity is lacking. Life is treated as a series of discrete episodes, and our relation to the future begins to look like a relation to other persons. The only argument is how much I should care for the future selves that follow me.
For the defender of time preferences at any moment t0 O'Neill cares for O'Neill0 who exists now more than O'Neill1 who exists at t1 who is a physically related relative of O'Neill0 who in turn is cared for more than the more distant relative O'Neill2 and so on as time stretches out into the future.
The critic of pure time preferences assumes the same picture but is an economic maximiser who demands equal consideration for future preferences on the basis of an oddly impersonal perspective. A life is still a series of discrete acts of consumption, but the maximiser asks for any future O'Neill, O'Neilln to be given the same consideration as the current O'Neill, O'Neill0. The life still lacks internal coherence. The only relation between the various O'Neills is one of physical continuity. The relation of a person to the future becomes one of self to others.

The accounts fail to allow any place for narrative order in our identity and correspondingly in the evaluation of a moment or period in our lives. The future of one's own life does matter for an appraisal of current life in a way that the current or future lives of strangers need not. What the future is like matters to how well we can say our present life is going. Our present life is part of a larger narrative and the shape of that whole life matters. In particular, the way matters turn out matters. Our lives are not or should not be a series of disconnected events between disconnected selves such that at any moment we can say now whether our lives are going well or badly. Our own future matters to us because it determines what appraisal we can give to the present. Hence the truth in Solon's dictum that we can call no man happy until dead. The problem with Solon's dictum is only the point of death is too soon to make an evaluation: a person's death is not the end of the narratives of which they are part.

IV. Public choice

Do these arguments in the last section about intrapersonal relations of past, present and future have any implications for interpersonal relations between individuals in different, albeit overlapping, generations?
A feature of deliberation about environmental value is that history matters and constrains our decisions as to what kind of future is appropriate.

Narrative and environmental evaluation

The history of a location matters in environmental evaluation.

• Natural history. We value natural objects, forests, lakes, mountains and ecosystems specifically for the particular history they embody. The very ascription of 'naturalness' to them depends upon the specific history we can tell of them. Natural and cultural histories: flora and fauna that flourish in particular sites that are the result of a specific history of human pastoral and agricultural activity.
• Place: The value of specific locations is often a consequence of the way that the life of a community is embodied within it. Historical ties of community have a material dimension in both human and natural landscapes within which a community dwells.
• Place is also valued on a more individual level - the local familiar walk, stream, pond or landscape that invokes a very specific individual past

History blocks the substitutivity of one place for another.

Narrative:

Constraint that the past places upon us is best understood as one founded in the significance of the narrative orders objects and places can have for us. We enter worlds that are rich with past histories, the narratives of lives and communities from which our own lives take significance. The problem is, or should be construed as, the problem of how best to continue the narrative; and the question we should ask is: what would make the most appropriate trajectory from what has gone before? The value in these situations which we should be seeking to uphold lies in the way that the constituent items and the places which they occupy are intertwined with and embody the life-history of the community of which they form a part.

In the transition from past to future we are not mere conduits through which history flows. The future matters not just to the past but to us - for the characterisation of how well our own lives go depends upon what happens after we have gone. There are a variety of projects in which we engage and relationships in which we are involved which are such that how well our lives can be said to go can depend on what happens to the projects and relationships that occur beyond our lifetime.

Think

You might like to consider your own personal projects and past acheivements and decide whether this observation sounds right to you.

Web Notes by John O'Neill 2005