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CU ��«����Ƶ economist Alessandro Peri makes the case that empowering the young can meaningfully affect climate policy and climate outcomes

The consensus opinion in previous research—that future generations are the major beneficiaries of proactive climate policies—tends to emphasize the importance of intergenerational altruism. However, that perspective largely ignores the idea that selfish incentives of current young and old generations can be an important driver to undertake climate policy, says Alessandro Peri, assistant professor in the ��«����Ƶ Department of Economics.

Recent studies indicate that peak global warming occurs within a decade of emissions. Thus, current climate policy could benefit young generations later in their lifetimes, says Peri, a macroeconomist whose research focus includes computational and environmental economics.

 

CU ��«����Ƶ economist Alessandro Peri argues that selfish incentives of current young and old generations can be an important driver to undertake climate policy.

Meanwhile, climate policy may benefit the current old generations by reducing the damages associated with climate change and therefore increasing the value of their assets.

In the paper, recently published in the Journal of the Association of Environmental and Resource Economists, Peri and his two co-authors advanced what they say is the first study to examine the direction and magnitude of the selfish incentives of young and old to undertake climate policy.

In the economic model Peri and his co-authors developed, the younger generation (ranging from infants to those aged 35) and the older generation are both part of solutions addressing the climate crisis. The older generation tends to control most of the world’s physical assets, such as factories, he notes.

“What we found after we analyzed, theoretically and quantitively, this question of selfish incentives for climate policy is that incentives of the younger generation can be an important driver for climate policy to address the challenge of global warming,” says Peri.

Abatement measures related to reduced carbon emissions can affect the asset owners’ wealth and, accordingly, the old generation’s selfish incentives to support or oppose climate policy, but the effect is quantitatively small. Hence, Peri says, the exhortation in the title: “Empower the Young!”

When climate policy is a win-win

To explore the selfish incentives for climate policy, the model Peri and his co-authors developed uses a two-generation overlapping generations model, rather than the more common infinitely lived agent model. Peri says the two-generation structure permits a clear distinction between the two types of self-interest: the younger generation’s concern for its future consumption and the older generation’s desire to protect its wealth.

For the incentives of the current young and old generations to undertake climate policy to be aligned (a win-win situation), climate policy must increase the value of the assets owned by the old generations.

“Think about it like if you own a house in front of a lake,” Peri explains. “You don't really like the lake, but someone else decides to clean the lake. Well, the value of your house close to the lake is going to increase; you’re going to benefit indirectly from the cleaning of the environment on your wealth. The (increase) of this price allows the older generations to engage in climate policy and be happy about climate policy.”

For this to happen, Peri and his co-authors created an economic model that uses endogenous asset prices, relaxing the assumption of fixed asset price adopted by most models in the climate literature.

As wealth is transferred from the older generation to the younger one, for the asset price to increase it has to be the case that current young generations want to save more.

 

“With the new evidence that has shown that emissions today will have an impact in our lifetime in terms of global warming, we wanted to add our new part … looking at how selfish incentives can help mitigate this great human challenge," says CU ��«����Ƶ researcher Alessandro Peri.

“They (the young) are willing to consume a little bit less today and save for tomorrow, so that they can consume more tomorrow,” as a result of climate policy, Peri says. “And what we show is that for that to happen, it means the young have to have a high elasticity of intertemporal substitution, which is just a fancy way of saying that they are willing to transfer more consumption from today to tomorrow” as a result of the effect of climate policy on the value of consumption over time.

Still, based upon the results of computational research done for the research paper, Peri says he and his co-authors determined that selfish incentives for the younger generation proved more quantitatively important for climate policy than those of the old generation.

Goal to spur further research and discussions

Peri says he hopes the economic model for addressing climate change that he and his co-authors created will complement existing research on economic policy related to climate change, including those that rely on altruistic motivations. He says he does not expect lawmakers to adopt the model as policy, but he hopes the paper will spur further research by economists and prompt discussions among policymakers.

Discussions about combatting climate change are particularly timely now, Peri says, given that in 2024 the temperature of the earth reached —before heat-trapping fossil fuels began accumulating in the atmosphere. The Paris Climate Accords, signed by representatives for numerous countries in 2016, aims to keep warming below that level when looking over multiple years.

“This is the great challenge we are facing nowadays, with the announcement in 2024 that we reached 1.5 degrees Celsius above pre-industrial times. So, it’s been the hottest year that we’ve observed since the pre-industrial era,” Peri says. “With the new evidence that has shown that emissions today will have an impact in our lifetime in terms of global warming, we wanted to add our new part … looking at how selfish incentives can help mitigate this great human challenge.”

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