Robert W. Hahn is a senior fellow at AEI and founder and executive director of AEI’s Reg-Markets Center, which continues the AEI-Brookings Joint Center’s mission of examining cutting-edge issues in law, economics, regulation, and antitrust. Previously, he worked for the Council of Economic Advisers and served on the faculties of Harvard University and Carnegie Mellon University. He frequently contributes to leading scholarly journals and general-interest periodicals, including the American Economic Review, the Yale Law Journal, Science, and the New York Times. Mr. Hahn is the author of Reviving Regulatory Reform: A Global Perspective (AEI Press, 2000) and several other books. In addition, Mr. Hahn is cofounder of the Community Preparatory School, an inner-city middle school in Providence, R.I., that provides opportunities for disadvantaged youth to achieve their full potential.

Cass R. Sunstein is the Felix Frankfurter professor of law at Harvard Law School and the Harry Kalven Visting professor of law at the University of Chicago. Mr. Sunstein is a former law clerk to U.S. Supreme Court Associate Justice Thurgood Marshall and was the attorney adviser in the Department of Justice. He is the author of many books, including After the Rights Revolution (Harvard University Press, 1990), Democracy and the Problem of Free Speech (Simon & Schuster, 1995), and Free Markets and Social Justice (Oxford University Press, 1997). His latest book is Nudge: Improving Decisions about Health, Wealth and Happiness (Yale University Press, 2008). He has testified before congressional committees on topics such as regulation and administrative law. Mr. Sustein has participated in constitution-making and law reform in many nations, including Russia, Ukraine, South Africa, Poland, and China.

David Weisbach is the Walter J. Blum professor of law and Kearney director of the program in law and economics at the University of Chicago. Previously, Mr. Weisbach clerked for Judge Joel M. Flaum of the seventh circuit court of appeals and he worked as an associate in the law firm of Miller & Chevalier. In 1992, Mr. Weisbach joined the Department of Treasury, where he worked as an attorney adviser in the office of the Tax Legislative Counsel and, subsequently, as associate tax legislative counsel. Mr. Weisbach previously taught at the Georgetown Law Center and joined the University of Chicago faculty in 1998. Mr. Weisbach’s work focuses on issues of federal taxation.

Steve Newbold is a policy analyst in the National Center for Environmental Economics at Environmental Protection Agency, where he specializes in integrating ecological modeling and economic valuation for policy assessment, including cost-benefit analysis. He also has conducted research on cost-effective habitat protection, the benefits and costs of controlling small firm pollution, habitat selection and population dynamics of birds, the impacts of cooling water withdrawals on fish populations, outdoor recreation demand, and the potential for adaptive management to improve ecological sustainability.

Richard G. Newell is the Gendell associate professor of energy and environmental economics at the Nicholas School of the Environment, Duke University. He is a research associate of the National Bureau of Economic Research and a university fellow of Resources for the Future, where he was previously a senior fellow. He has served as the senior economist for energy and environment on the president’s Council of Economic Advisers. Mr. Newell’s research focuses on the economics of markets and policies for the environment, energy, and related technologies, particularly the cost and effectiveness of alternatives for reducing greenhouse gas emissions and achieving other environmental and energy goals.

Conference Summary

WASHINGTON, OCTOBER 9, 2008—There is widespread agreement that climate change caused by greenhouse gases is a serious problem that could lead to drastic and possibly catastrophic environmental changes, doing great harm to the welfare of future generations. But according to legal scholars at an AEI Reg-Markets Center event on October 3, going all out to cut emissions today is not the most valuable use of our resources. David A. Weisbach of AEI and the University of Chicago and Cass R. Sunstein of Harvard University presented their Reg-Markets Center working paper on one of the most important and controversial variables of climate change policy analysis: the discount rate.

The discount rate is the premium that people are willing to pay to consume this year rather than next year. If people prefer to consume today because they believe that they will be richer next year, then the discount rate is high. If people prefer to save because they believe the future may be the same as today, the discount rate is lower. Climate change policies like emissions mitigation are likely to reduce the welfare of current generations while benefiting future generations, and the discount rate determines how that welfare loss is distributed across generations.

Weisbach and Sunstein described the disagreement over the choice of the discount rate as a debate between two schools of thought: positivists and ethicists. Positivists equate the discount rate with the market rate of return. Projects for which the rate of return is less than the market rate should be rejected, because resources could be more productively engaged elsewhere. Ethicists disagree with this analysis, arguing that the market rate will not adequately reflect all the social or long-term benefits of climate change mitigation projects. Additionally, climate change investments are so immense that they will likely alter the economy fundamentally, changing the market rate of return itself. Because of the benefits that the market rate of return neglects, ethicists argue that the true discount rate should be lower and that climate change action should be more aggressive.

Weisbach and Sunstein argued that the two camps’ arguments are not mutually exclusive. While the ethicists are discussing how much we need to leave to the future, Weisbach explained, positivists are discussing which projects to choose given how much we have chosen to leave for the future. Weisbach and Sunstein concluded that the positivists have the more efficient viewpoint, but, as the ethicists contend, cost-benefit analysis might breach current generations’ moral obligations. That said, Sunstein added, refusing to discount is not the appropriate response. “If we are leaving [future generations] less or worse off than ethics requires,” he said, “we should think about the best way to do that, and refusing to discount isn’t going to be helpful.”

Steve Newbold, an economist at the Environmental Protection Agency, disagreed with Sunstein and Weisbach’s characterization of the ethicists’ arguments. He advocated a more generous interpretation and contended that ethicists may have a healthier appreciation for the complexities of climate policy—including risk, uncertainty, and the growing scarcity of environmental services—than the positivists. “The ethicists may just be trying to bring these issues to the analysis in the simplest way possible: by adjusting the discount rate downward,” he said.

Richard Newell of Duke University pointed out that the positivist approach—when applied carefully—is complicated by a number of real-world issues, including taxation and uncertainty. While he agreed that investing in the policies with the greatest rate of return is desirable, the feasibility of different options is also relevant to climate policy decisions: “Even if we’d like to maximize the rate of return, if we had a net positive investment in greenhouse gas mitigation, even if it’s not the biggest one we could imagine, if it’s positive and we have nothing else on the table, I think economics suggests that we should take it.”

Balancing the positivist and ethicist approaches will be a key climate policy consideration during the next administration. “If it turns out that emissions reductions are the best way to help [future generations], great,” Sunstein said. “But it would be a bit of a surprise if that were the best way of helping them.”