What are we prepared to pay today to reduce damage that will occur two centuries from now ?

Interview with Christian Gollier

Christian Gollier's research spans the fields of economics of uncertainty, environmental economics, finance, consumption, insurance and cost-benefit analysis, with a particular interest in long-term sustainable effects.

He is invited for the year 2021-2022 on the annual Avenir Commun Durable chair, a chair supported by the Collège de France Foundation and its major patrons Covéa and TotalEnergies.

At the April 2021 climate summit, UN Secretary-General António Guterres told world leaders: "Mother Nature won't wait. We need a green planet, but the world is on red alert". Do you share his point of view?

Christian Gollier: Yes, totally. The situation has been urgent for thirty years. Today, we're on a precipice. Globally, our emissions have practically doubled over the same period. Unfortunately, Europe is the only region in the world to have reduced its emissions over the last thirty years. We have managed to reduce them by 22% since 1990; we have set ourselves an additional target of minus 55% by 2030 compared with 1990.

Is this target realistic?

I don't know, because it will depend on technological progress and the social acceptability of the efforts required. It's extremely ambitious and will require radical transformations in our modes of consumption and production. Nevertheless, one thing is certain: if we do nothing, the planet's temperature will rise by several degrees by the end of the century. If we fail to act, future generations will also be forced to make considerable sacrifices, as the world will be hotter and more vulnerable to climate and weather-related disasters.

What would a just climate policy look like?

One might wonder about the right level of distribution of effort between generations - my own, for example, and those of my children and grandchildren, who would suffer severe damage if I did nothing.

But this is far from obvious..

Yes, it is. As much as I'm in a position to evaluate my retirement level and thus determine, thanks to calculations, the level of sacrifices I must make today on my income in terms of savings to compensate for my drop in future income, it's much more complicated for me when it comes to my_CO2 emissions. And that's because there are so many uncertainties and considerable questions. How can we establish a modus operandi that will determine what we should do? How quickly should I replace my internal combustion car with a more expensive electric car? When should I thermally insulate my house so that I emit less_CO2 when I heat? More generally, how can I determine a carbon value to quantify the collective benefits of my own efforts? Etc. These questions are the translation into operational terms of an ethical or philosophical issue, according to which we have responsibilities towards future generations. Obviously, we have to do something. But how far should we go? Should we make little effort, or a lot of effort, or a dramatically greater effort, to avoid serious and irreversible damage to future generations?

It is, alas, often true that people are reluctant to make sacrifices that essentially benefit others. They even hope that others will make them for them, in the hope of enjoying "free rider" status. This externality problem explains why, for the past thirty years, little has been done.

All the same, Europe is doing things, as you said...

We're making considerable efforts, but we're doing them very badly. We could reduce our emissions even further for the same collective sacrifice. A case in point? In the 2010s, French households that installed photovoltaic panels obtained a guaranteed price for the electricity they sold to EDF of 60 centimes per kilowatt-hour for twenty years, even though the production cost per kilowatt-hour in France is 6 centimes. The switch from nuclear power to photovoltaic panels therefore multiplied electricity production costs by a factor of ten. This windfall effect worked very well... A quick calculation shows that it cost us more than 1,300 euros per tonne of_CO2 avoided. On the other hand, we haven't done anything much less costly, such as replacing coal with natural gas, which would cost us a collective 30 euros. The fundamental problem is that we refuse to compare the societal costs of these efforts with the climate benefits. To achieve this, we need to put a value on carbon that is not emitted or captured.

In your opinion, this carbon price is the right solution for meeting our responsibilities to future generations.

By making polluters pay the cost of their damage to the environment, we can effectively combat global warming. Until now, almost everywhere in the world, neither governments, individuals nor companies have had any incentive to integrate their environmental damage into their analyses. We need to put a value on the things we hold dear; and the environment is dear to us. So let's collectively put a price on this common resource in order to preserve it and align private interests with the collective interest, and encourage everyone to integrate their impact on the common good into their choices. This is my interpretation of a sustainable common future.

How do we put a price on carbon?

You have to compare the cost of the effort with the societal benefit generated by that effort, which will be spread over decades and centuries. The fact is, we all tend to value the present more than the future. Take the marshmallow test. Put a child in a room and place a marshmallow on the table, telling him or her that we'll be back in fifteen minutes, and that if the marshmallow is still there, he or she will get a second one. Most children don't wait. Which suggests that people have a preference for the present, for immediate consumption. This is also reflected in the financial markets, which place less value on income that is more distant in time. Future benefits must be sufficiently greater than immediate costs to trigger an investment decision.

Financial markets penalize the future for a more fundamental reason: in a growing world, with future GDP greater than present GDP, investing means asking the poor (the present generation) to invest in order to generate profits for the rich (future generations). Investing in the future therefore means increasing intergenerational inequalities. If we believe in this growth, and are averse to inequality, sacrificing purchasing power today to improve the future is ethically problematic. For investing to be desirable nonetheless, the return on that investment must be high enough to compensate for this effect. In a growing world, therefore, there are pluses - positive returns - and minuses - increased inequality - in an investment decision. For this to happen, the return must more than offset the negative impact on intergenerational well-being of the increase in inequality that the investment generates. This is a key point.

What difficulties need to be overcome to set the right price for carbon?

There are two issues to consider: uncertainty and time. First of all, we don't know how much the concentration of_CO2 in the atmosphere will increase over the coming decades or centuries. There is still a great deal of uncertainty about the impact of climate change on the frequency of extreme weather events and on people's well-being. This is not the first time in economics that we have been confronted with this type of unknown - estimating the value of something in the future that will depend on a number of uncertain factors. All financial markets give values, on future earnings that are uncertain. In other words, the fact that damages are uncertain does not mean that it is impossible to put a value on future profits, whatever the uncertainties.

However, on these markets, we are used to valuing future benefits spread over six months, a year, five years, ten years or even twenty years, not a century or two, as is the case when we think about the sustainability of our social model. Economists are not at all accustomed to dealing with these time scales. This is at the heart of my research: what are we prepared to pay today to reduce damage that will occur in two centuries' time? I try to push the models developed over the last fifty years by economists and financial theorists over horizons of a century, two centuries, three centuries.... And when I work on the problems of nuclear waste and its final disposal at Bure, for example, I don't think in terms of a century or two, but in terms of millions of years. For such time horizons, we need to think about the future and the uncertainties that hang over it in a new way.

But can we still rely on a few certainties?

If we assume a growing world, we have to penalize the future and, consequently, a lower carbon price. However, the assumption that we need a positive discount rate to measure the price of carbon today is not tenable, it's debatable. There is no certainty that we will live in a growing world in the coming centuries. It's not impossible that, in a century or two, GDP per capita will be lower than it is today. This is a key factor: we need to fundamentally integrate the fact that we can't be sure that future generations will be more prosperous. It makes no sense to base our beliefs about the future of our civilization on the economic experience of the past two centuries in the West. We need to incorporate the possibility of economic regression, as proposed by degrowth theorists, as well as that of new prosperity based on scientific progress, all in a probabilistic way.

How can we convince people to make an effort for future generations?

According to research in economics and, above all, cognitive psychology, people want to give a positive image of themselves. Showing that we are willing to make sacrifices reinforces the image we give of ourselves to others, as well as our self-esteem, creating an additional sense of well-being. Why not try it? But in the face of the challenges we face, we're going to have to provide extrinsic incentives in addition to these intrinsic incentives - self-image and self-esteem. The government will have to create mechanisms that provide financial incentives for companies and households to make extra efforts compared to what they would be prepared to do without such mechanisms. Once again, in Europe, we have to reduce our_CO2 emissions by 33% in ten years, whereas over the last thirty years we have cut them by 22%. The effort required will be considerable.

The price of carbon, whether through a tax or a permit market, generates additional tax revenue for a government. The emissions permits that companies trade on the markets will generate a carbon dividend. Why not channel this dividend to the poorest households, who are facing end-of-month problems that probably go beyond end-of-the-world problems? I'm not just talking about modest households in France, I'm talking about those in Africa, many of whom have incomes well below ours.

With carbon pricing combined with targeted redistribution of tax income, we can create a democratic majority in favor of a sustainable common future by combining households naturally willing to make sacrifices for future generations with more modest households whose efforts are more than offset by a green cheque.

Interview by Beatrice Parrino