You’d probably be willing to spend quite a lot of money on protecting your family from the effects of climate change, if they were happening right now. But how much would you be willing to spend on protecting your great, great grandchildren from the same sort of effects?

Economists suggest the answer is “probably less”, but can’t agree over how stingy you might be. It matters because the answer has a big impact on calculating the economic pros and cons of addressing climate change action today.

A new piece of research takes a novel approach to trying to figure it out. And it draws on an unlikely source: the UK housing market.

Discount rates

Economic models struggle to deal with unexpected or irrational human behaviour at the best of times. Nonetheless, policymakers tend to pay attention to the models so economists continue to find ways to simulate people’s choices.

To address the question of how much people value the welfare of future generations, economists rely on something called a discount rate. It works something like this:

• If we assume you value the pound in your pocket very highly,
• And we assume you care less about future generations than the current generation,
• Then saving future generations from £100-worth of climate change in 100 years time is likely to be worth less than £100 to you today.
• That means you discount some of the benefit of your actions that future generations may feel.

If that explanation doesn’t work for you, try this much longer one from Grist’s David Roberts featuring pictures of otters.

Economists express the discount rate in terms of a per cent reduction per year. For example, if something is worth $103 next year is worth $100 to you today, you’ve applied a 3 per cent annual discount rate.

Some economists such as Yale University professor Bill Nordhaus assume people discount the future benefits of climate change by about four to six per cent – that’s relatively high, and suggests that future consequences are relatively unimportant to people.

Other studies assume people care about future generations more. For instance, 2006’s high-profile Stern Review used a discount rate of 1.4 per cent.

Critics say the Stern Review’s lower discount rate allowed the study to justify calling for greater spending on climate action. But Lord Stern himself has continued to defend the choice.

As the discount rate is effectively a judgement call, the argument is likely to rage on. A new paper from the US National Bureau of Economic Research (NBER) at least adds some fresh data to the debate.

Discounting houses

After studying a quirk of the UK housing market, the NBER’s research suggests a discount rate somewhere in the middle may be about right.

In the UK, people either buy houses as a ‘freehold’ or a ‘leasehold’. Freeholders buy the land outright. Leaseholders buy a contract for the land for a period of time, typically between 80 and 999 years. When leaseholders sell their ‘house’, they’re actually selling the contract minus the years they’ve lived in the property.

The researchers looked at the difference between the sale price of freehold and almost-identical leasehold houses. That allowed them to estimate how much money people were willing to part with for benefits that wouldn’t kick in until well after they’re dead – much like, the researchers say, paying to avoid climate change.

They found that people paid 10 to 15 per cent less for properties with 100 years left to run on their leases than the equivalent freehold. If the lease had 125 to 150 years left, people paid five to eight per cent less. When leases had more than 700 years left, there was no difference between the prices.

Once they’d crunched the numbers, the researchers found that equated to an annual discount rate of 2.6 per cent. There’s not much precedent for transferring house buying data to climate policy. Nonetheless, it’s interesting to note that NERB’s figure falls pretty much in the middle of Nordhaus and Stern’s rates.

The discount rate furore might all seem a bit esoteric but the dispute cuts to the heart of climate change policy decisions. If the discount rate is low, then we may spend more money than is strictly necessary combatting climate change. If it’s too high, we may not spend enough.

While it’s unlikely NERB’s research will settle the debate, it does offer much-needed data on how people value distant events.