Resources for the Future (RFF)

Evaluating Long-Lived Policies When Our Desires Change

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The strength of our environmental desires is of central importance to developing efficient and effective environmental policies. Over the next several weeks, we’ll be hosting a conversation that explores whether environmental desires are changing and what that means for environmental economics and policy. This is the ninth post of eleven in the series: Are We Becoming More Environmental? Reflections on Trends in Environmental Desire. This series is a result of an RFF New Frontiers Fund award for thinking creatively about pathbreaking research to advance RFF’s mission.

We recently discussed policy evaluation when public policy alters people’s desires. What about policies that do not necessarily change desires, but desires change over the life of the policy for other reasons? As we have discussed, there are many reasons desires may change over time. These changing desires present a set of challenges for evaluating the benefits and costs of long-lived policies.

Take the case of climate change. As the globe warms, it will alter our environment, sometimes subtly, sometimes in profound ways. Dominant species in an area will evolve, changing the look of landscapes, and weather patterns will shift, impacting outdoor activities. This could alter our desires as we experience new normals, as we habituate to the changes, as we respond to how our peers react to the changes, and as we learn more about the science of such changes.

Whether or not such shifts in desires occur—and the magnitudes if they do—will impact the costs and benefits of abatement policy. If we become accustomed to climate changes and adapt (mentally and physically), perhaps the costs of climate change are much less than one would predict using today’s desires as the basis for such estimation. If so, less climate abatement may be needed; tomorrow’s climate may make us just as happy as today’s climate. On the other hand, what if our desires do not change appreciably? Or what if climate change increases the scarcity of certain environmental goods such that we desire them even more as the earth warms? Both would suggest higher costs of climate change and thus that much greater investment in abating greenhouse gas emissions is warranted.

Economists have long been undertaking analyses using integrated assessment models to attempt to identify optimal climate abatement pathways. Putting aside many methodological concerns, how would changes in environmental desires impact climate-related cost-benefit analyses? Since these models examine costs and benefits many decades into the future, it is quite unrealistic to assume stable preferences over these time periods. This would mean that willingness to pay (WTP) for greenhouse gas abatement could be changing, perhaps significantly, over time. This is not just a concern for climate change but all long-lived problems.

Is there any reason to think we could predict changes in desires and WTP in order to model the costs and benefits of policies with long time horizons? Such research is quite challenging as we discussed in an earlier post; determining whether a change in choices is due to changes in desires as opposed to prices or quantities can be difficult at best. And as we mentioned, surveys have notorious challenges for adequately capturing desires. That said, robust relationships between choices and variables such as income and education could be capturing a relationship between changing desires and be used to guide analyses of long-lived environmental issues. This is certainly an area in need of more research going forward.

There is a methodological comment here for environmental economists, as well. It is possible that in some cases desires are changing rapidly enough that even a few years can make a difference in WTP estimates. Social revolutions and large shifts in public attitudes have occurred in only a few years; the same could be true for environmental desires. Markets are able to immediately internalize such changing desires as prices and quantities adjust. But environmental goods and services that are not traded in markets or environmental public goods provided by government must be deliberately reevaluated in light of these changes.

In this case, tools such as contingent valuation, which is used by environmental economists to capture WTP, would need to be continuously updated since WTP today may not be WTP tomorrow. WTP studies, though, can be costly in resources and time, so often estimates for one situation are used as benchmarks for evaluating another—something termed benefits transfer. Perhaps a study was undertaken of WTP for clean air among Seattle homeowners. This could be used to evaluate a policy to improve air quality in Minneapolis. Attention has been paid by environmental economists to how characteristics of the population surveyed impact WTP estimates to use in making such transfers. The point here is that the time since the study was done may be another important aspect to consider.

Up next in the series: Are Policies That Reinforce Environmental Attitudes Economically Defensible?”

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