This post is by Jon A. Anda, President of the Environmental Markets Network at Environmental Defense. A version of this post was published in the Financial Times on December 4, 2007.

A November 28 column by John Kay in the Financial Times, "Climate Change: the (Groucho) Marxist approach", starts with a quote from Groucho Marx: "Why should I do anything for posterity? What has posterity ever done for me?" Groucho’s position may be morally indefensible, Kay says, but "[t]he problem of weighting the present and the future equally is that there is a lot of future." From an economic standpoint, valuing future people equally would require unrealistically great sacrifices by those living today.

There’s a problem with this argument. It’s based on a rather totalitarian belief in net present value (NPV) as the means to evaluate policy – a simple calculation of the benefits of action (the cost of doing nothing) minus the costs of action. If a 5 percent discount rate applied to base-case cost and damage estimates yields a negative NPV for policy, does that mean we reject it?

Let’s put aside for a moment that our data is very incomplete. If the distribution of outcomes were more normally distributed, then perhaps yes, we could base our policy on a simple NPV analysis. But climate feedback loops drive a damage risk curve that’s more log normal than normal, with a long, fat tail.

Accounting for this significant risk of catastrophic damage requires more rigorous analysis. If we take no action now, these potentially dire consequences will be irreversible. There is an option value associated with having the flexibility to respond to new information in the future. Therefore reducing carbon emissions today can create positive option value even when NPV is negative.

Climate damage is happening sooner than scientists predicted. The future generations Professor Kay refers to are likely already born. We owe them the best possible analytics for a decision of this magnitude.