November 20, 2020
Saving the Planet: How can Behavioural Economics help?
Professor Brian Sturgess

Netflix has been one of the beneficiaries of the Covid-19 pandemic as shareholders of the streaming giant have witnessed viewing number and subscriptions soar during the lockdown. I am one of these Netflix addicts and just as many of us are using the lockdown to learn a language or to play the piano, it also possible and imperative to learn more about a much more serious crisis facing humanity than the virus. But those seeking some popcorn comfort in the hope of a better world emerging after the lockdown can take little solace from the work of the doyen of broadcasters of the natural world Sir David Attenborough’s Netflix excusive documentary A Life on Our Planet.  

 

 

A sixth mass extinction?

The main theme of Attenborough’s program is the loss of the natural world and the consequential threat of climate change. This is far from a looming danger. It is already happening. According to the National Oceanic and Atmospheric Administration (NOAA) in the USA,  the ten highest global temperatures recorded have all occurred since and including 1998 and 2020 is set to become the warmest year ever since recorded temperatures began in the mid-1800s.  Admittedly the lockdowns imposed across the world since the spring have seen carbon emissions falling as economic activity and global movement has stilled. The impact of the pandemic has seen abrupt fall of 8.8 per cent in global CO2 emissions (a reduction of 1551 Mt CO2) in the first six months of 2020 compared to the same period in 2019. This unintended beneficial side effect of the health crisis is a short-term respite, not a fix, as it is simply a reduction in the flow of greenhouse gases into the atmosphere having little impact on the stock that is already there. As Attenborough demonstrates in the programme the threat of chaos and the existential threat to human life and livelihood from climate charge have not gone away. Far from it, but despite the frightening message this is science fact not fiction. A Life on Our Planet is essential and compelling viewing and while many of us are stuck at home should be watched now not tomorrow. 

 

Following the last of five mass extinction events in Earth’s 4 billion years, ending the age of the dinosaurs as a result of a climate altering mass impact by an asteroid, nature has recovered and evolved to produce the vast biodiversity we see in the balmy and relatively stable Holocene period over the last 11,000 years. Following the retreat of glacial ice the climate has not varied by much more than plus or minus one degree Celsius above or below the average global temperature.  This benevolent climate has been locked in by the biodiversity of the planet it has allowed to flourish which has helped to maintain atmospheric carbon dioxide levels low enough to prevent any runaway greenhouse gas effect from putting upward pressure on the planet’s temperature. The remnants of the last global Ice Age, the polar ice caps reflect sunlight and help maintain this benevolent equilibrium. A self-maintaining and regulating system.  

Attenborough calls the Holocene “our garden of Eden” with a “rhythm of seasons so reliable it gave our species a unique opportunity” to develop. But human action since the industrial age threatens to disrupt what could have been a sustainable system. He believes the litmus test that this near clockwork system has been under threat for some time can be seen in the warming of the oceans whose sheer scale had been dampening rising global surface temperatures for some time. A rise in atmospheric carbon was a feature of all five mass extinctions, but while it took volcanic activity millions of years to accomplish this, human economic activity with burning of fossil fuels has taken less than 200 years.  The 94 year old Attenborough’s production cleverly uses frames to tell a story of how the world has come under increasing stress in his lifetime. The production monitors the last eight decades of this period by using a digital style clock with three indicators: global population, the stock of carbon in the atmosphere in terms of parts per million and the remaining wilderness from 1937 until 2020. During this tiny slice of the Holocene period, around 0.7 per cent of it, the global human population has exploded from 2.3 to 7.8 billion pushing back the remaining wilderness from 66 per cent to 35 per cent of the planet. Meanwhile, human economic activity causing deforestation and burning fossil fuels has pushed up the stock of carbon in the atmosphere by 48 per cent from 280 to 440 parts per million. (Chart 1)


 

Chart 1: Population and Carbon 1937 to 2020


Source: Netflix


Attenborough notes that the average global temperature is already one degree Celsius warmer than when he was a child. ”Our blind assault on the planet has finally come to alter the very fundamentals of the living world”, but while the first two thirds of the documentary are Attenborough’s witness statement of the global destruction he has experienced he forewarns that the damage done in his lifetime “will be eclipsed” by the damage to come. At the start of A Life on Our Planet, Attenborough blames the Chernobyl nuclear plant meltdown, which made a city uninhabitable, on bad planning and human error. In contrast, he calls the threat of climate change ‘our greatest mistake.’  But he also presents a message of hope in stating that this future could be prevented by acting now’’: by taking steps to rewild the world; by moving all energy production to sustainable sources - solar, wind and water; by restoring the oceans. But acting now is the problem. There is a natural tendency to procrastinate when the future is uncertain. Until a crisis arrives. We can see that the level of public support for locking down economies to combat the threat of the corona virus pandemic has been high in most countries. In contrast, although the need to take action now to combat climate change is possibly of greater importance, it is not as easy to mobilise public support. 


Discounting the future

The economic problem of trading off the present for the future is simple. How much must should be invested currently in reducing carbon emissions to produce benefits or to avoid the bearing much larger costs in the future? In the context of the policy choices facing the United Kingdom is it worth spending £250 billion now, a sum just greater than the expansion of government net debt between July 2020 and the same month the year before, to avert a loss of GDP of, for example, £2 trillion in 2070, as a result of climate damage valued at today’s prices? Apart from the ethical dimension about the importance of caring for future generations and the difficulties of knowing the precise economic and climate models, the answer depends on what is the value today of £2 trillion in 50 years. This depends on society’s rate of time preference or its discount rate. The value of the discount rate is seen by economists mainly as a technical question, but it revolves around the main problem if the world cuts emissions immediately, the beneficiaries of its action will be future generations, but the costs of emissions reductions will be paid mostly by the current generation. The Intergovernmental Panel on Climate Change (IPCC) has estimated that after the effect of climate sensitivity, the average global temperature change due to a doubling of the concentration of CO. in the atmosphere, discount rates are the second most important factor in evaluating the impact of climate change.  

The problem is that there is no agreement about the correct discount rate to use. Two notable studies of the economics of climate change by Nobel Prize winning American economist William Nordhaus  and Lord Stern in a government report for the United Kingdom have suggested using very different rates: 4.3 per cent and 1.4 per cent respectively. The gap between these discount rates reflect differing assumptions about the urgency of facing up to the future threat of climate change. The higher the discount rate the less imperative it is to spend sizeable resources now to avert losses in the future because future economic damage is valued less in today’s terms. For example, if the discount rate is 4.3 per cent, £1 in one year would be worth 96p today [£1/(1.043)] and a pound in two years would be worth 92p [£1/(1.043)2] and so on with the present value declining at an exponential rate.  Using the same formula the present value of a £1 received in two years’ time would be higher at 97p at a lower discount rate of 1.4 per cent and would be still worth 87p after 10 years. In contrast, the present value of a £1 received in 10 years’ time at a discount rate of 4.3 per cent is only 64p. 

The choice of discount rate is of immense importance. For example, if the discount rate used to calculate the optimal resources needed currently to trade off the costs of climate change were at Nordhaus’s 4.3 per cent it would only be worth spending only £243.7 billion now to avert economic damage of £2 trillion, or 6.8 per cent of the total climatic impact in 2070 since any greater sum would not be economic because of the time value of money. But at discount rate of 1.4 per cent it would be worth spending nearly a trillion now, almost half the economic damage caused, to avert a £2 trillion loss of GDP in 50 years’ time. The appropriate rate of discount has implications for policy. A low rate of discount implies an immediate and dramatic policy response with high carbon taxes and significant resources devoted in the coming years to decarbonise economic activity. A higher rate of discount implies that rapid changes impose current costs that are far too high compared to future benefits which calls for a slow but steady change in the energy system in line with internationally agreed global targets. 


Discounting in practice: Behavioural economics

Interest rates are now at historically low levels and should remain low for the foreseeable future. Surely this means that market signals are falling in line with the rate of discount which would make the energy generation and infrastructure projects to avert the economic damages that climate change threatens an economic use of resources? There has not been a cheaper time to borrow to make investments, but unfortunately, households, companies, fund managers and especially governments do not make investment decisions in line with the rational model of projected future costs and benefits discounted at an appropriate exponential rate.  Experiments in the growing field of behavioural economics indicate that when presented with intertemporal choices observed human behaviour is best modelled by employing a system of hyperbolic rather than exponential discounting. Individuals employing hyperbolic discounting have a bias towards the present and the near future when it comes to contrasting current factors against longer term benefits and costs. This leads to systematic cognitive biases and inconsistencies when humans assess intertemporal choices and these affect decisions as trivial of deciding when to go on a diet regime to more important choices such as saving sufficiently for retirement and spending resources to green the energy infrastructure. 

 

The choices made between balancing the present against the future using different rates with exponential discounting depends crucially on the size of the gap between low and high rates and on the time period, but with hyperbolic rates the difference depends mainly on the time horizon. The difference between exponential and hyperbolic discounting using two reference discount rates is shown in Chart 2, with both exponential functions graphed, with discount rates at 2 per cent and 10 per cent lying consistently above the two hyperbolic functions with the same discount rates. The importance of the future in terms of the present is measured by the present value of future resources.  The discount ratios show that a £ received in 1years time with exponential discounting is worth 98p and 90p at 2 per cent and 10 per cent and at 10 years’ time worth 82p and 35p respectively. The value placed on the future in terms of the present falls as the discount rate rises as in the Nordhaus-Stern controversy. But with hyperbolic discounting the present bias of decision makers is reinforced as a £ received in a year’s time has a present value of only 50p at a discount rate of 2 per cent and 53p at a rate of 10 per cent. In ten years a £ has a present value of only 9.3p and 10p at discount rates of 2 per cent and 10 per cent respectively. The practice of hyperbolic discounting, which most behavioural economics studies indicate is how humans actually compare the present with the future, presents an enormous challenge for the world to take action now. 


Chart 2: Exponential vs Hyperbolic Discounting 2% and 10%



 

 

Designing Green Projects

 

The reason why governments have reacted more robustly to the pandemic than to the threat of climate change, even at the cost of liberty and economic livelihoods, is due to the immediacy of the threat. Reactions by the public and by politicians also shows hyperbolic discounting in action with long-term economic damage sacrificed at the altar of short-term health fears based on the most pessimistic epidemiological models. In contrast, in order to plan, invest and take action now for a net zero future it is necessary to more carefully balance present costs against future benefits while following the science. But to most people mainly the present costs not the future costs are most evident. 

 

Recognising that human decisions are best modelled by hyperbolic rather than exponential discounting has implications for the design of green projects. For example, large scale solar and wind farms and grid level battery storage facilities have enormous long-term benefits in terms of the provision of sustainable energy at close to zero marginal cost, but planning their location frequently encounters the problem of Nimbyism (Not in My Backyard) leading to local resistance, additional planning costs and delays.  This means that appealing to the need to meet net zero targets by 2050 or stressing the potential to power 100s of thousands of homes with sustainable and potentially lower electricity prices has little meaning for most people. Present bias means that projects need to show immediate benefits now alongside presentations of the costs of inaction. 

 

The problem can be illustrated by a recent large scale green project in the UK, a £450 million large solar generation and battery storage project at Cleve Hill in Kent. The project received planning permission this year from Alok Sharma, Secretary of State at the Department of Business, Energy and Industrial Strategy (BEIS) instead of the relevant local authority since it was deemed a Nationally Significant Infrastructure Project. The rules are in the process of changing for storage projects over 50MW to give more local input, which is why it is important that green energy companies consider how they can engage the public in their plans. The Cleve Hill project had generated much local opposition and an almost united front of environmental groups that should be normally in favour of green energy initiatives. This opposition which would have been an obstacle to local authority approval. 

The local hostility was cemented by the vocal opposition of Helen Whately, the Conservative MP for Faversham who told The Independent newspaper that the project would have a “devastating” impact and “would destroy an entire landscape.” The project’s sheer scale upset many people. Hilary Newport, Director the Kent branch, of the Campaign to Protect Rural England (CPRE), complained to the local press in November 2017 when the plans were displayed locally about the proposal. "At about 890 acres, it's about the size of Central Park in New York,” she said. Another concern expressed by protestors was not about size and visual impact, but about the safety of the complementary, but necessary, lithium ion battery storage project which at 700 MW required only 25 acres of land, but would potentially be one of the largest in the world. As of July of this year the United Kingdom had only 1GW of battery storage capacity to assist in the balancing of the national grid with a 4GW project pipeline. It was recently estimated that the country needs at least a minimum of 40 GW in installed storage capacity to have a chance of meeting the 2050 net zero target. 

 

The developers of the project extolled the benefits and projected that it would generate enough non-subsidised electricity from renewable energy to power 110,000 homes. From the perspective of presentation these are all future benefits which it is difficult for a local householder to comprehend what this means in terms of their local energy costs whatever the future national benefits on meeting climate change targets. To set these future effects against current fears about the impact on house prices, the local environment and safety is especially difficult. However, there are many insights from the expanding field of behavioural economics about the best way to design and present green projects to overcome local apathy or resistance, but to remain with hyperbolic discounting one of the problems of the Cleve Hill project, was the failure to stress any immediate benefits to the local community. 

 

A more pragmatic approach, recognising the cognitive present bias problems due to hyperbolic discounting, would have been to complement the project with an investment, equally green, promising immediate benefits. An example would be to create local public goods, such as woods, ponds, nature reserves and other community assets of benefit to the community and of interest to local schools and children with renewable energy projects attached, particularly those requiring large scale battery storage capacity necessary to balance the grid. There is a large appetite for such rewilding projects in the United Kingdom and there are already many support schemes including payments for carbon offsets in woodland. The government has recently pledged to protect 30 per cent of the countryside for wildlife by 2030 up from the current level of 5 per cent and in November committed £40m to create green spaces in England in order to help restore species and combat climate change,   This is not enough and Craig Bennett, from the Wildlife Trusts, commented: "A previous promise of £40m was over-subscribed seven times over… we need £1bn every year for this enormous task."


 

Acting now


The traditional economic policy solution to combatting climate change is to make use of the price mechanism to incentivise consumers and producers through carbon pricing. This is still extremely important and carbon prices are still too low given the scale of the task of decarbonising the world economy. But the robust findings of behavioural economics should complement, not replace price signals. There are a number of tools such as framing and saliency that can help overcome present bias. One study found that individuals who had seen an avatar of their older selves were willing to put twice as much money into long-term savings accounts as those who had only seen a virtual image of their current selves making present and future costs and benefits more immediate and salient.  In A Life on Our Planet David Attenborough attempts something similar visually by comparing what he has seen during his long lifetime with someone born in 2020.  This generation will witness and be affected by an ice-free North Pole, dying oceans, falling global food production, mass migration and starvation, rainforests turned to dry savannah’s and the unleashing of further gases into the atmosphere adding methane to carbon dioxide which will accelerate the process of global warming by the 2050s. The world will be well on the way to the sixth mass extinction by 2100, when a child born today would be 80.  I recommend that everybody who can watches the programme during the lockdown.


Climate change is not just about trading off current economic benefits about the well-being of unknowable generations using a discount rate, hyperbolic or otherwise. To help tackle this problem it is necessary to overcome a number of cognitive biases based on the findings of experiments of how people actually behave rather than how they are supposed to behave if they were Spock-like rational decision makers. Climate change is about a generation who are here now. It is about our children. I am a baby boomer and have lived in a relatively stable time free from global war and will probably not be around to see most of this disruption, but this will affect my son who is 26 and my daughter who is 10, and it will affect their children in turn. We must investigate whatever avenues, disciplines and tools at our disposal to face this theat. 


Brian Sturgess teaches Behavioural Economics at the University of Buckingham

1. https://www.ncei.noaa.gov/news/projected-ranks#:~:text=The%20warmest%20years%20globally%20have,Courtesy%20of%20NOAA%20NCEI.

2.  https://www.carbonbrief.org/state-of-the-climate-2020-on-course-to-be-warmest-year-on-record


3. https://www.nature.com/articles/s41467-020-18922-7


5.  https://www.lse.ac.uk/granthaminstitute/publication/the-economics-of-climate-change-the-stern-review/


6.   https://media.rff.org/documents/RFF-DP-12-43.pdf


7. https://www.accountingcoach.com/present-value-of-a-single-amount/explanation/3


8. https://www.gov.uk/government/news/battery-storage-boost-to-power-greener-electricity-grid


9. https://www.independent.co.uk/environment/cleve-hill-solar-farm-kent-biggest-uk-environment-battery-storage-safety-government-a9531361.html


10. https://www.kentonline.co.uk/whitstable/news/plans-for-britains-biggest-solar-farm-near-whitstable-on-display-136412/


11. https://www.energy-storage.news/news/developer-offers-clarity-on-battery-safety-assurances-at-uks-biggest-solar


12.  https://www.energy-storage.news/news/40gw-of-battery-storage-and-longer-durations-could-help-smash-uk-net-zero-t


13.  https://www.bbc.co.uk/news/uk-54947577?fbclid=IwAR0R2uoSQ2ItdAvID1QoGfmW1bLYZLXLMZoMKYoB3Xfmk3o9uD_wlXKIBzw#:~:text='Enormous%20task'&text=%E2%80%9CA%20previous%20promise%20of%20%C2%A3,year%20for%20this%20enormous%20task.%22


14. https://www.columbiathreadneedle.co.uk/media/10116793/en_mind_the_gap_paper_two.pdf

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