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Jeff Schweitzer

Jeff Schweitzer

Posted: July 27, 2010 01:07 PM

The human species is consuming resources unsustainably and inefficiently. The problem all boils down to discount rate. Before we can understand such an odd and simple conclusion we need to look first at a few gross patterns of consumption.

Ocean Orgy

Worldwide, about 1 billion people rely on fish as their main source of protein. Humans currently consume about 100 million metric tons of seafood annually, close to or slightly exceeding the amount the ocean can naturally supply sustainably. Over-fishing, coastal erosion from badly managed developments, pollution and loss of critical habitat are now threatening the resource that once seemed so vast and limitless. We have managed in the last 100 years to deplete 90 percent of all primary food stocks of fish in the oceans, including tuna, marlin, cod, skates, and halibut. More than 80 percent of all fish species are now considered over-exploited.

Even if we stopped fishing, recovery is not ensured: the larvae of many commercially important fish rely on coral reefs for shelter during critical stages of development. But more than half of the world's coral reefs are dead, dying or highly endangered. Why should you care? Coral reefs provide about $375 billion worth of economic and environmental services each year. About 500 million people live within just sixty miles of a coral reef, and benefit directly from the reefs' productivity and protection they provide from the ocean's wrath. The Great Barrier Reef alone supports about 8 percent of all of the world's fish species. You eat many of them.

A 400 pound blue fin tuna will sell for well over $100,000. The magic of the market offers no refuge to the diminishing population. In an ideal world of perfect markets, as a population declines scarcity would drive up the price to a point that the commodity (tuna in this case) would no longer be economically viable, hitting a price consumers would no longer be willing to pay. Reduced commercial pressure would allow the population to recover and start the cycle anew. Alas, that is not the case because our appetite for tuna is so voracious, and our willingness to pay for the privilege of eating sushi so great. We will not only hunt blue fins below a sustainable number of survivors, we will hunt down the very last tuna.

By over-exploiting fish we risk not only running out of food; we also significantly endanger critical ecosystem functions. One result is the attack of the jellyfish, as we now see off the coast of Namibia. Up until about 20 years ago, this area was a rich fishery and an important source of sardines. The sardines thrived on plankton that proliferated in nutrient-rich waters upwelling from the deep. But the sardines were overfished, and in their diminished numbers no longer kept plankton growth under control. The plankton growth, now unconstrained, resulted in masses of dead plants sinking to the bottom where the process of decay used up most of the available oxygen creating a vast dead zone killing the once thriving coastal waters. Jellyfish were unaffected, and could munch with abandon on now abundant plankton; their numbers exploded, filling the waters with thick mats of stinging goo. Not a fisherman's or swimmer's delight, nor a source of food for the locals. All because nobody thought to stop fishing the sardines until they were no more.

Tropical Trouble

Our species is destroying 40 million acres of tropical forests every year. We are losing up to 50,000 species annually, a rate nearly 1000 times the natural background level of natural extinction. Along with those species and habitats we lose knowledge, medicines and critical ecosystems functions. Nowhere can this be seen more clearly than in Haiti, where the impoverished nation's barren, brown eroded hills butt up against the lush growth of the Dominical Republic forests to define a border of intense contrast visible from space. Haiti's population grew from 3 million in 1940 to 9 million at the turn of the century. Forests were cleared for cropland to feed the growing number of mouths. Downed trees were used as fuel for cooking, or sold as charcoal for cash to supplement farm income. Unfortunately the trees eventually ran out, and with 98 percent of all trees gone, so too went all of their ecosystem functions. Flooding became more frequent and more severe because trees were not there to slow down and absorb the water. Crop yields dwindled in the face of flooding and erosion. With no trees, rains wash almost 40 million tons of precious dirt into rivers every year. The rapid buildup of sediment in waterways killed off vital fisheries, leading to food shortages. With little water being sopping up by trees, aquifers were not replenished, leading to severe shortages of drinking water. With no trees, with diminished resilience, every storm brings another cycle of destruction. All because nobody thought to stop chopping down trees until there were no more.

Fossil Foolish

If the standard of living in China grew to levels now seen in the United States, China's existing population would consume more oil per day than the entire world combined now does in 2010. Experts estimate America's per capita oil consumption is on average of 2.3 gal/day; Japan and Korea come in at 1.4 gallons of oil per person per day. If China's consumption grew to equal America's, China would use about 90 million barrels of oil per day, exceeding the current total daily global oil production of about 80 million barrels. Even if China instead consumed more moderately, equal to what Japan and Korea do today, China would use 55 million barrels of oil per day. Obviously economic, political and environmental constraints will prevent China from consuming all or even two-thirds of the world's available oil; something will give. Right now the average American consumes five times as much energy as the average Chinese citizen, but those dynamics are shifting rapidly. As that gap narrows we race toward a breaking point of insufficient energy reserves to sustain growth in per capita consumption in both countries.

Unlike the trees of Haiti or sardines of Namibia, we are not in danger of running out of oil any time soon. Oil is in fact relatively abundant still, just more difficult to reach. But we are running out of time nonetheless. Given that almost every aspect of our economy is currently dependent on fossil fuels, the shift to renewable energy sources will be an extended process lasting multiple decades. We do not have the luxury of waiting until oil becomes scarce to start doing something about the inevitable scarcity. Every year we wait to institute a national plan to create a green energy economy brings with it more pain in the transition. Creating a smooth transition is not the only problem. Massive oil spills create local environmental disasters, but fossil fuels also have significant global impact. Our planet is warming unnaturally because we are dumping 70 billion tons of carbon dioxide into the atmosphere every year as a byproduct of our oil lust. All because we cannot muster the collective will to stop sucking oil from the ground until the holes are dry.

Common Thread

These stories of consumption share a common denominator. Humans tend to deplete nonrenewable resources (and resources that should be renewable) even when the doomed fate of the resource becomes as obvious as the many tragic consequences. We do not stop even when doing so would be universally beneficial to all involved. This is not a "tragedy of the commons" but a case of momentum combined with the extremes of capitalism.

Think about this: Haitians must now survive in a world with no trees. At some point long before the forest was irreversibly destroyed Haitians knew that people would have to come up with a means of survival once the forest was completely cleared. When surviving without trees became an inevitability, ideally society would have transitioned to a post-tree economy before the forests were actually gone. Continuing to cut trees at that stage did nothing to prevent the inescapable transition, only made a post-tree economy that much more miserable with erosion, choked waterways and scarce drinking water.

The same tragic story of momentum applies to the Namibian fishermen, who are now living in their world without sardines. As the supplies diminished, a future with no sardines was seen clearly enough. Those fisherman could have transitioned to a post-sardine life before the last fish was taken. Continuing to fish when the consequences of local extinction were clear did not stop the inevitable, only made life after the transition that much more difficult.

Modern western societies are now repeating the mistake of the Haitians and Namibians with our fossil fuels. As oil supplies become more difficult and expensive to secure, we can see a future in which oil is inevitably no longer our primary fuel. We know that at some point in the future our economy must be based on renewable energy sources. Yet we continue to deplete our resource without any serious effort to transition to a post-fossil fuel world. Our ancestors will look back and with great regret say about us: "At some point long before oil was depleted Americans knew that people would have to come up with a means of survival once the wells ran dry. When surviving without oil became an inevitability, ideally society would have transitioned to a post-oil economy before the fossil fuels were actually gone. Continuing to pump oil at that stage did nothing to prevent the inescapable transition, only made a post-oil economy that much more painful and miserable."

Personal Discount Rate

How can we explain human behavior that is so clearly counter to our best interests, individually and collectively, and so dangerous to current and future generations? Why would we deplete a resource when we see the depletion coming, knowing that no matter what, we will need to adjust to the absence of that resource? Why not adjust and adapt before the resources is actually gone? The answer is personal discount rate.

Roughly speaking, our discount rate measures how much we would pay to have some future benefit given to us now (the classic example is taking a lump sum instead of an annuity). Money today has greater perceived value than money tomorrow. This is perfectly rational; money in hand now is not at risk of not materializing later; inflation lowers the value of future money, creating an actual cost of waiting to receive the funds; and taking the money now allows for investments that could grow over the waiting period (in other words waiting for future money entails an opportunity cost). Economists try to capture some of these variables with "diminishing marginal utility" and "social time preference rate" and other esoteric measurements.

On the other hand....let us make this easy. Consider a starving man, who is offered a choice: he can have a sandwich now, or $10,000 a month from now. The unfortunate man will certainly forego future riches for immediate nourishment. He essentially has an infinitely large personal discount rate. The sandwich is worth everything to him, and the $10,000 a month from now has zero value. He completely dismisses the value of a future $10,000. Now consider a wealthy man given that same choice. The sandwich has zero value to him (he just ate a big lunch), and waiting for the $10,000 causes no pain but some modest gain. He basically has a personal discount rate of zero, meaning he is willing to pay nothing to have a future benefit given to him now. He will take no amount less than the $10,000 for the privilege of getting the money sooner. Most of us fall somewhere in between. We believe that $100 one year from now has less value than $100 in hand. We encounter this "time value" of money (or goods) in the form of loans, too. A lender is willing to forego the use of $100 now if the borrower will pay back $120 one year later; the transaction reflects the same time value of money as captured by interest rate.

The actual value of personal discount rate is notoriously difficult to nail down. The value is impacted by personal circumstances such as our age and health, the perceived desirability of what is being offered, the immediacy and urgency of our needs (food, clothing, shelter), our moral commitment to future generations, our emotional state and our level of patience in waiting for a result.

However, for our purposes nailing down a precise value is not necessary. Haitians were able to cut down the last tree because the individuals taking the specific actions had high personal discount rates. On any given day the value of a tree cut down was worth significantly more than one standing one year later, just as the starving man dismissed the future value of $10,000 in the face of a sandwich in hand immediately. The tree today meant fuel for cooking and money to buy food for hungry mouths. The forests of Haiti and the sardines of Namibia and the blue fin tuna in the Atlantic were depleted by people acting rationally, even if with very different motivations.

But a paradox arises because while an individual acting rationally can chop down the last tree in the forest, he is simultaneously acting irrationally by jeopardizing the future of the society in which he lives. Discount rate is more than just a fancy way to say a starving man will take food over any future benefit. That is trivially true. The concept becomes important when relatively wealthy individuals and society, no longer shackled by daily survival needs, make decisions about the environment for future generations. The majority of America is not starving, but we nevertheless exhibit a high discount rate in our voracious use of oil not much different than the starving Haitian. We are telling future generations that we value our air, water and climate more today than we do the obligation to bequeath to them a sustainable world in the future.

Here is where discount rate unites the starving man in Haiti with the SUV driver in the Unites States. The rational actions of men seeking to survive short-term and of gas-guzzling suburbanites with an urgent need to attend choir practice can be transformed to meet the broader needs of society that are harmed by their current actions by lowering personal discount rates in both cases. The common cure for most environmental ills can be found here in the face of huge differences in geography, culture, biodiversity and prosperity.

We have not discovered Eden, only a common end point to help guide public policy. We know for a fact that left to our own devices humans will deplete a resource even knowing the dire consequences that will ensue. Appropriately designed and properly implemented public policies of regulation, taxation, incentives, and legislation can help prevent this tragic outcome. Such policies, highly specific to each country's and region's particular circumstances, would create an environment in which individuals acting in their own personal best interest at the same time contribute to society's long-term needs. Some confidence in a sustainable future goes a long way. Government has a critical role here, in spite of conservative objections, at least in removing perverse incentives and counterproductive subsidies.

Until we manage to reduce the average human personal discount rate we will continue to auction our species' future on eBay for pennies on the dollar.

Jeff Schweitzer is a scientist, former White House senior policy analyst and author of, Beyond Cosmic Dice: Moral Life in a Random World (Jacquie Jordan, Inc)( Follow Jeff Schweitzer on Facebook.


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