so good afternoon and welcome to all the people who are here with us in this room today and the people who are connected on the internet with us welcome to this appointment within the festival of economics in trento 2020 so the topic we're going to debate is is it possible to give a prize to the future of our planet human organizations often have to make decisions that have their effect for a long long time after for a government for an international institution the time horizon for these effects to be seen might be dozens of years or even centuries think about some economic policy decisions like the ones to mitigate the risks of climate change or the strategies of adaptation to climate change or again very important choices in terms of the infrastructural development of a given area to make a decision like this it is necessary to have a tool to analyze and to support the decision-making process and thinking about a long time frame long term it is clear that a lot of information which is contained in this process start as hypothesis and of course these hypotheses must be based on one hand on scientific data this is the case when we talk of climate mitigation strategies the multi-disciplinary approach including atmosphere physics economic considerations demographic data they're all important and fundamental factors but on the other hand you need also a shared method this is why many national governments as well as international institutions like the european union have devised guidelines to try and have a shared orientation for this type of calculation which after all is an economic calculation and within this economic calculation it is clear that the attempt at measuring the costs and benefits that will develop in the very long term and at different time frames requires the weighting of what happens in different time frames economists refer to this as the discount factor issue the discount factor has one fundamental parameter which is the interest rate well we have the privilege today to talk about this with christian golier whom i'm going to introduce in detail but first i would like to welcome him welcome him here with us today hello christian thank you christian for being here with us today professor christian golia is one of the best known environmental economists his career and his cv are very prestigious and it would be too long to report about all what he has done and written in detail therefore i will only briefly hint to that professor gulia is the founder together with jean terrell of the toulouse school one of the most important institutes of economic research worldwide he's a fellow at the economic society he has received and advanced the grant from the european research council in 2011 he has written more than 100 publications in the most prestigious world scientific magazines and he's one of the main authors of the two latest reports of ipcc so he is an authority in this field well christian i would like to ask you about some facets which are related to the issues we're debating here today that is when we think in terms of dozens of years decades or even centuries obviously we try to avoid the rights of different generations the present generation and generations that have not been born yet from a strictly ethical viewpoint many claim that the rights of those who have not been born yet of future generations must be placed at the same level as the rights of the present generation economists have been claiming for a long time that it is necessary to review this approach suggesting that it is necessary when calculating costs and benefits to identify the pros and cons of specific economic policy decisions it is necessary to identify an interest rate inside the discount factor that is a positive value christian what do you think of this do you believe economists are right when they claim that a positive discount trait has to be applied to this kind of calculation thank you thank you for the question eduardo so uh it's let me first uh remind the audience the the the how christian uh this problem of this country is for our society in fact when we are when we are talking about discounting we are talking about uh how do we value how do we translate our responsibilities towards future generation into a way of computing and determining how much of our current revenue should we devote to satisfy our immediate needs and how much should we devote to savings and the investments that will be useful for future generations to create to create value on their own so so it's really we are really talking about responsibility our responsibility to have future generation in it's it's marvelous and in economics we translate these responsibilities towards future generation into a number which is the discount rate so if we because we think that facing our responsibility to our future generation is critically critically important it's critically important to understand uh what's the origin of the d of discounting and why do why we discounted the positive and the positive rate and if we value the future less than we value the present and that's critically important as you explain when we think about climate change how should we uh how much effort should we do to reduce our emission today should we postpone this effort in the waiting for for more mature technologies to reduce emissions how much should we accumulate capital for the future generation what's up what's the sustainability of our public debt and pension systems all those things are related to this debate on the discount rate um the key thing just about you know the current the current decision this year to uh increase italian and european in-depthness public in deafness in order to increase i mean to reduce the negative impact of the coronavalist crisis on our on our wealth current wealth and consumption we are we are protecting our current consumption and to do that we ask future generation to accept to sacrifice more of their well-being to reimburse this this debt that we are currently creating is it fair should we do something different that's again this is the problem of the discount and so so so this discount which is the price the price of time the price of the future how do we value the the relative uh impact of including consumption at different point in time this this this price is related to a responsible political issue which is of responsibilities the world future generation so in a decentralized economy interest rate and the cost of capital of firms and individuals determine this discount rate if if a firm think about investing this firm will compare its cost of capital to the return to the return of this capital and if the investment has returned which is larger than its cost of capital it will be so it will be optimal for the company to invest and so because the cost of capital is related to the hotel uh that is observed on the market so if the service is free uh the cost of capital will be close to the fee to the history interest rate if it's riskier it will be closer to the the average rate of return on equity in the economy so so in a decentralized economy this discount rate this value of time is determined by the market and so we can look at what has been the the rate of return of of capital in the economy over the last century to see what has been the incentive for firms and for consumers to invest to save and to invest for the future for great free capital the expected rate of the average rate of hutton has been has been close to zero percent basically when i think of indian term it has been even negative in france in italy in in germany everything has been more positive in the u.s around one person per year over the last century but if you look at his killer capital of course we need to compensate for the risk investors take by accepting to uh put more risk in their portfolio and that will generate a larger expected rate of return it has been around four five six seven percent per year on average depending upon the country you consider so it's safe in fact those return in particular for for equity has been extremely large and we often refer to this observation to either treatment for the optimist or the equity equity premium puzzle on the public sector because the public sector is not confronted to interest rate and rate of return capital the the the public sector has determined its own discount rate and in the u.s this discount rate has been over the last 20 years fixed at seven percent and that means that in the u.s in order to invest public money in in public projects this public project must have returned at least one to seven percent per year in order to to make that into for the for the state of the uh the union uh to invest to invest in those projects so so this seventh person is extremely large keep in mind that the discounting uh one thousand euros at seven percent over the duration of one hundred years it's only one year old so you should we you if we use this seven person it means that we should not value more a project that generates a single benefit in 100 years of 1000 year old we should not value it more than one euros today okay so that's uh that's the power of this counting so so is it is it is it acceptable from the point of view of the ethics or from the point of view of our responsibility toward the future generation if we use seven percent to discount the flow of marginal damage of climate change of climate damage generated by by uh by uh emitting one tonne of co2 today we this this present value of this flow is very low it's something like five year olds or ten years old so that should be the price of carbon if we use such a large penalty of of the future by using such a large discount in france we use a four person in the uk 3.5 person i'm not sure italy has an official discount if if it does please tell me so why do we discount so that's that's no no let me go back to your question anyway i'm sorry for this little detour here so why do we discount the future why do we value the future less than the present why do we penalize the future so there is one single one simple argument that has been used by economist for the last century and it's the idea of people are impatient okay maybe some of you know the marshmallow test you put a marshmallow in front of a little kid and in an experiment and you say to the kid if you stay with the marshmallow if you don't eat it within the next 10 minutes i will come back and i will give you give you a second marshmallow and most kids decide to eat the single marshmallow and don't wait for ten minutes uh in spite of the fact that the rate of return of this weighting is one hundred percent within ten minutes so uh think about the rate of return like that in financial markets of 100 percent over 10 minutes so you see that people are sometimes extremely impatient well of course this argument for why we should penalize the future coming from the from ep impatient uh is not it's not technically acceptable when we think that the benefits of the of waiting goes to other people compared to me so it is an ethical issue here if i if i would put a penalty for people who are born later than me just because they are born later than me it would be ageism exactly as i would be a racist if i decided to put a penalty for people who don't have the same color of the skin than me so that's ethically inacceptable so let me remove the first argument for why we should penalize the future impatience is not an argument a more critically important argument used by economists over the last century without really realizing it in fact it's only efficiently that we realize that we discount for this argument and this argument is the following suppose that we live in an in a growing economy that prosperity will continue over the last two centuries over the next next two centuries as we have seen the prosperity of the last two centuries so so over the last two centuries in the western wall we have seen a two-person growth rate per year but let me believe that we can extrapolate that for the next two centuries so that means that people who will live in two centuries from now will be 50 times wealthier than me and so the question is should we value one-year hoes to be given to them as much as i would value one more you need one more your host for myself okay well there is a simple argument against that which is inequality aversion we are inequality of us think about you know this debate and uh coming from uh the tom applications book on the increased inequalities around the world we are inequality universe but if we recognize that we are inequality of earth in a growing economy our future generation is the poor people we are the poor people and the future generations are the wealthy people and if you ask people today to invest for the benefits of the future generation you are increasing intergenerational inequality and that's a stronger the argument i agree i mean that same you should agree with me that indeed if and it's a big if if we believe that the economy will continue to hold over the last over the next two centuries i should recognize that investing for the future is bad because it's increased inequality in their generation and therefore we should not do that much we should we could accept to invest for the future only if the return of the investment of our project is large enough to compensate for the fact that investing for the future increase inequality and that's one argument one big in fact the fundamental argument for why in economic models we have positive discount it's a combination of two assumptions assumption one possibility will continue to go to to exist and second uh we are inequality of earth there is associated to this big idea an equation that we call an economic defense rule the ramsey equation which says that the discount rate we should use an etiquette ground is equal to the product of two coefficients two parameters the growth rate of consumption and the degree of inequality aversion and you immediately see the link between this equation and the idea that i developed earlier so to end up at this stage and i send this this fully answered to your first question eduardo there is an argument for why we should analyze the future in a growing economy we should investing for the future include inequality and we should do that investing only if the rate of return of those investment is large enough so in other words we need to discount the future at the positive discount rate and this discount rate is the product of the degree of inequality aversion of the people prime time the growth rate of of consumption what's the degree of inequality aversion well i in my classes that we have no time to talk about that here in my classes i used to do a little experiment where i i asked my student to to see whether they accept to transfer money from the from the wealthy to the poor in spite of the fact that this transfer generate their weight loss and i look at what's the size of the dead weight loss that's what the maximum dead weight loss that they accept to uh to decide to make the the transfer anyway and so when we do that kind of vfi we get a degree of inequality version around two and if i look at the literature of the big names in economics that makes that made a stand on what should be this number two is what i get on average so meaning the hamster rule and this argument for responding the future can be summarized by the fact that the discount rate should be equal to two times the growth rate of the of consumption so if you believe that consumption will continue to grow that two percent per year you should use a discount rate of four percent thank you kristen because your considerations enable us to resolve one of the apparently country intuitive reasoning so partially opposing ethical concepts with economic concepts but you were rightly saying that there are big ifs if one talks about these issues for example the use of a discount rate for people in their daily lives is something quite uh for example having some future revenue streams today through for example the um a mortgage means that you have to pay a positive discount rate but still we are talking about time frames that are within the lifetime or fall within the lifetime of a single person but if we talk about time horizons that go well beyond the life of a single person but will impact on the current generation as well as on future ones do you think it is still right to utilize the idea of a discount rate that remains constant over time or should we rather consider the major uncertainty that is connected to so many factors we don't know whether that will happen in the future does this impact on the discount rate as you mentioned it earlier on so that's a critically important question and the economists did not examine that question for a long time at least from the point of view of the ethics researcher in finance have discussed and debated and modeled a situation where they could explain the term structure of the income that is the interest rate as a function of the maturity of the of the bond there they consider but but if we look at the ethical issue that is associated to maybe we could that question that maybe we could use for person to discount a project with a very short maturity maybe we should use a much smaller discount rate for for project maturing in in decades or in in centuries this is the case you know for for climate change for the for the management of nuclear waste in france and things like that yes and you know let me link this question of the term structure of the socially way of penalizing the future to the question of the of the uncertainties of course the rule that i just presented this handset that has been used in the debate on on carbon pricing 10 years ago in particular in the debate between nick stern and and and bill now those uh this this transfer rule was used by economists to debate on that and and that explained for example why bill now does use a discount rate of four percent he knows those models so that this four person is comes from the fancy rule the problem is for such long maturity there is so much uncertainty about whether the italian or the world prosperity will continue to grow that two persons per year in fact if you look at the last two two decades there has been such a large change in in this growth rate and the expectation about this growth rate that i think it's critically important to recognize this uncertainty and to recognize that all responsibility to our future generation uh is kitten candy related to uh to those uncertainty of course if we are sure that the growth of our economies will continue to be two percent per year for the next centuries or so why do should we care about climate change future generation will be so much wealthier than us that we should not care too much the problem is we are not sure at all that the growth it will be as it was over the last two centuries and think about forget about the last two centuries since about the seventh seven last millennia seven months in the last seven million the average growth rate has been basically 0 okay we believe that the level of consumption of the italian farmer at the end of the 17th century was not larger than the 7 million earlier so the basically the growth rate of the of consumption in the world has been 0 for 7 million yeah and this is only over it was it has been only over the last two centuries that things change a bit and so we are not so sure that these two centuries is there forever or it's just an accident of history and we will go back to a more standard situation we know also so this debate about the secular stagnation uh the possibility of of uh you know a big pandemic not not coronavirus but black death uh that will bring us back to the middle age uh or maybe you know quite the contrary we are just discovering scientific and technological knowledge that we didn't know earlier we are only starting to use the new technologies of communication information and so so we there are plus and and and minus when we think about optimism or specimens around the future so we so so the question is who is the question is not who is hunger who is right the question is we should recognize those uncertainties and we should integrate those uncertainties into the way we value the future the way we translate our responsibility towards future generations into actions and those actions must be evaluated using this conflict so how this this how this uncertainty affect the way we should uh adapt the fancy rule that i presented a few minutes ago well think about yourself okay what's the effect of an information that would come to you tonight that would tell you oh you know you believe that your incomes will continue to grow the two percent per year until you retire in fact my friend this is not true there is uncertainty maybe it will be three person maybe it will be four percent maybe it will be one person maybe it will be zero person until you have retirement how this new uncertainty about your own future would affect your own willingness to sacrifice the present for the benefits of your own future well we know economists have been working on that over over at least one century since at least since john maynard keynes who introduced the concept of precautionary savings people save because they're future and uncertain okay saving is sacrificing the prison for the benefit of the future so what you do in your own life we should also do it at the collective level okay so if our collective future is more uncertain we should collectively decide to invest more for the future and how do we do that we do that by reducing the discomfort we use by reducing the discomfort we use more projects we'll pass the test of a positive net present value so that's one argument so we i need to adapt but the answer will don't to take into account of basic risk and there have been a estimation of the impact the impact is not very large if you use standard distribution like the normal distribution to introduce uncertainty about future consumption that would happen if for example you use a geometric boronian motion to describe the stochastic process of growth that is typically done in finance or in macroeconomics the effect of uncertainty is not so large so that's why over the last 10 years recognizing that we have lost big shock of their economies the financial crisis of 2007 and eight the current coronarius we see that we it's just not possible to represent those shocks using a gaussian distribution they are fat tails they are black swans they are catastrophic macro events that cannot be represented with the normal distribution and once you introduce those factors into the model in fact the impact of those uncertainty on the way we should translate our responsibility toward future generation into a discount rate it's much bigger so we should reduce a lot the discount rate because of those uncertainty okay so let me stop here at this stage uh seeing answering your question i didn't give you exact a quantitative answer to your question i just gave you argument for why just using the ramsey rule is actually the idea so for example in france we have decided to use that kind of argument for fact to revise the discount rate that was typically a person 20 years ago no it's it's it's three point it's four percent for short maturity and you go down to zero person for maturities larger than one century and the argument is that for very long maturities the uncertainty is so large that that's in fact the the inequality aversion argument that i gave you earlier that is still true on average an expectation because there is so much uncertainty about the usefulness of these arguments that we should basically eliminate christianity thank you very much christian these aspects which you have so well explained are part of the cost-benefit analysis for those projects that are evaluated on decades or centuries in italy the idea of the cost-benefit analysis has come from the university rooms to be applied to more recent facts for instance recently there was a publication of the cost-benefit analysis of a large infrastructure that will connect italy to france i'm talking of the high-speed train connecting terrain with lyon so apart from polemics the cost benefit analysis is something used to evaluate projects that also have completely different repercussions so there is one problem i mean if the method is right and correct to understand whether a project is valid or not can we actually use the very same approach to compare projects that are totally different one from the other i shall give you an example as you rightly recalled we're going through the covet pandemics crisis we know that huge investment will be necessary when the vaccine is available to achieve global coverage this implies the immediate use of huge resources but we also know that we have budget constraints therefore investing on this kind of project means giving up other projects that would have benefits over centuries like the projects to capture and stalk co2 i mean do you believe that it is possible to use this approach also to compare projects that are different from one from the other edoard benefit analysis i mean you are high to say we face a budget constraint at the level of the household at the level of the state and the consequence of this constraint is that and it's particularly important in in time of uh in our time like you know crisis we need to make sure that each public people spend is spent to create the larger possible value for society we need to make sure that given this limited amount of public money we have we maximize the creation of value of this of this money okay and the only way to do that you know is to value sex okay decide you cannot decide things if you don't put values on sex so i urge government some do more than others from that dimension to what it should take time to make public the way they value all things i talk here over 20 over the last 25 minutes about the value of the future but that's not the only thing you are hard to say i mean the in the uh train connection there are many other issues that uh competing uh using the do you think that public money for more immediate needs the near terrain will not be there for the next five years or so and it will be used for for centuries probably uh it's not only a question of the way we value the present compared to the future because that that big project has other impact for example it has impact on on the on the number of lives saved on the roads because if you put you create this train line there will be less people dying on the road because they you they will use the train harder than their car and we know that train is much safer and carved it's also uh so how do we value life saved okay uh does the italian government has something to say about that in france we have decided 10 years ago to put a value of life at 3 million per person 3 million euros how do we value the equality of the environment in the other side of the alps in france there are big cities that are overburdened by trucks crossing the traffic crossing the alps with not only co2 emission but a lot of other very nasty emissions pollutions and that has a value too how do we value nature okay how do we value natural capital so don't try to make good decisions if we don't first value those things and see you the same value for life for example when you compare an investment uh to uh reduce climate damage among those damages there will be a loss of life expectancy that that's related to the value of life they will be there will be so many other impacts so don't try to decide about how much to invest to reduce emissions of co2 if you don't before that estimate and could make clear what what's the value of things that are important for your citizens okay so life is decision decision must be based on value and cost benefit analysis does exactly that it put on the balance the good things of the project and they translate those good things into euros values and on the other side of the balance it put it because mostly most of them the financial costs of the of the project and we should do it the product creates social value if and only the value of those benefits of so many different nature is larger than the cost of the project and that's the only way we can rationalize the optimization of the use of public money in order to maximize welfare thank you very much christian we still have a few minutes so is there any questions we are going to ask them to christian we're just checking with our people connected on the internet so far we haven't had any questions from them so any questions from the audience here in the room thank you very much for all what you have explained to us today stressing once again how important it is to analyze extremely complex topics making use of a scientific approach fighting climate change the need to make decisions today to have a better future for the future generations on this planet requires this kind of analysis and it requires an intellectual effort by people who like you have dedicated most of their careers to this kind of analysis so thank you very much once again for being with us today and for telling us so much thank you very much it's something to thank you very much for the compliment uh you're right to say and i probably didn't stress that enough in in my in my presentation the role of uh quantifying the different elements appearing in our models so i talk a little bit about the way we measure inequality aversion in our society and it's a critically important dimension there is another big input in my models and that need to be based on on scientific evaluation that's the beliefs we have about the future generation i told you if we are sure the growth rate will be two percent per year we we should do we should use that this country if there is some uncertainty gaussian distribution we should do it differently with the smaller discriminate and if there is black hole if there are black swans or factives which that should also be introduced in the model and that will generate a recommendation from this country the problem is how do we how do we measure those beliefs how do we okay because this input is critically important to think about what discount rate we should use how to translate our responsibilities toward the future into operational rules for for government for firms to make decisions investment decisions the problem is these numbers in order to get these numbers from the model i need the critical input which is what's of collective beliefs about consumption in one centuries from now two centuries from now and that's that's a problem that's the problem with the model so i usually say it's not fairly science but let us try to okay you tell me what's overly what what are all collective beliefs about consumption in in 2000 uh in 120 the 27th century and given destruction his structure believes i will tell you what should be the socially delivered discontent and which investment project should should be should be implemented and which investment project should not be invested has not been implemented so you see there is a limitation there is a limitation to a fully scientific approach to the measure of responsibility toward the future generation because there is no simple way for such long horizons to have a measure of our collective beliefs for the distant future keep in mind that for shorter forms and we have a way to estimate our collective belief because we have interest rates okay you can reverse the family rule if you observe the interest rate observe it suppose that it's it's minus one person the real interest rate today in europe you can reverse the fantasy rule and say the growth and the expected growth because we should be equal to half half this this this interest rate so you you get one simple way to estimate or collective belief the problem is that we don't have uh interest rate for for the kind of time horizons that i i'm thinking about when i when i'm thinking about the future thank you very much christian and thank you very much to all those who have been with us during this very interesting meeting please stay with us also because we have many interesting appointments thank you very much from festival economy you