On sustainable consumption

Do ethical considerations restrict the rate at which society consumes?

In this paper Campbell and Martin study a continuous-time model with two forms of capital, one safe and one risky, so that society faces an asset allocation problem as well as a consumption-savings decision. The risky asset is taken to represent the Earth itself, while consumption should be understood as the rate at which society consumes, rather than sustains, the biosphere. In these terms, the consumption-savings decision is intended as a modelling metaphor that encompasses questions of resource depletion, environmental degradation, and so on. The authors then argue that the implication of sustainability for social discounting and consumption decisions depends on the production technology available to society. Under this assumption of a binding sustainability constraint, the sustainable social rate of time preference and consumption-wealth ratio, which equal one another, lie between the riskless interest rate (assumed to be greater than zero) and the risky return on optimally invested wealth.

This conclusion is in contrast to the Ramsey rule¹  which postulates that society should not discount the future at all because to do so is unethically to privilege the generation alive today over those yet unborn. A position recently taken by the Stern Review² which argues that aggressive climate mitigation action requires a social rate of time preference close to zero. Instead, Campbell and Martin find that:

For plausible parameter values, the sustainable consumption-wealth ratio is considerably higher than both the riskless interest rate and the consumption-wealth ratio permitted by the Ramsey rule of zero social time preference.

Sustainability in a Risky World
Authors: John Y. Campbell, Ian W. R. Martin
From: Harvard University, London School of Economics

What level of consumption is sustainable?

The Campbell and Martin (CM) paper above define social welfare as the expected discounted flow of a constant relative risk aversion (CRRA) utility from consumption. In this paper Robert Pindyck extends the CM framework to a more general definition of social welfare, one that includes population in the social welfare function, and allow both population and productive wealth to evolve stochastically. There are three reasons why including population in the social welfare function is important: a) total productive wealth generates total consumption, but what matters for individual welfare is per-capita consumption; b) people consume but they also produce, so total consumption should depend on the total population; and c) society values the very existence of people — alive now and potentially in the future — and not just the consumption enjoyed by those people and/or their contribution to aggregate production. His conclusions include:

• If the return on capital is low and/or population growth is high, a positive
  sustainable consumption-wealth ratio may not exist;
• An increase in the volatility of the return on capital always reduces the sustainable consumption-wealth ratio, but an increase in the volatility of population growth can increase or decrease the ratio, depending on the parameters of the model.
• For plausible parameter values, the sustainable consumption-wealth ratio is well below the optimal ratio that maximizes social welfare. This implies that achieving sustainability can come at the cost of a substantial welfare loss.

Population, Productivity, and Sustainable Consumption
Author: Robert S. Pindyck
From: MIT