Is The Future Worth It?

In 2008, oil was found at the site of Ombrina Mare near the Adriatic coast of Italy and the exploration companies that had confirmed the existence of the oil applied for a permit to extract it. The drilling project aroused strong local and national opposition, leading to massive environmental demonstrations in the Abruzzo region, a request for a referendum by ten Italian regions and, ultimately, legislative decrees that banned near-shore projects like this one. In 2016, the application for the oil production concession in Ombrina Mare was finally rejected by the Italian government. In 2017, however, Rockhopper Exploration plc, a UK-based company that had acquired the applicant company a few years earlier, commenced international arbitration proceedings against the Republic of Italy in order to, as its CEO described it, “protect our investment in the Ombrina Mare project” and “protect its shareholders’ interests”.^[1] In 2022, the tribunal awarded Rockhopper €184 million, to be paid by the Italian government as compensation for the investment the company had lost due to the introduction of environmental legislation. 

But what, exactly, did this €184 million price tag represent? Rockhopper had no oil drilling installations to dismantle, workers to lay off or contracts to terminate. All Rockhopper had was an expectation: an expectation of tonnes of oil to be extracted and sums of cash flows to be generated in the future. This expectation was judged to be legitimate enough that its disappointment amounted to “expropriation”, and valuable enough that its worth amounted to €184 million. 

To arrive at that value, the tribunal used a method known as discounted cash flow analysis (DCF),^[2] generally employed by firms to make investment decisions. To decide if an investment is worth it, the method indicates, one should calculate its value (referred to as “net present value”, or NPV) by projecting the flows of costs and benefits the investment is likely to generate in the future. These future flows are then translated into present value by “discounting” them — that is, reducing their value according to a factor called the “discount rate”. Just as one would apply an interest rate to determine the future value of a present sum of money, the discount rate is meant to determine the present value of a future sum of money, based on the assumption that a dollar today is worth more than a dollar tomorrow. It is this line of reasoning that the tribunal awarding Rockhopper €184 million ventured into: a judge thinking like an investor. 

Discounting the future

Discounting and present value were formulated in the early 20^th century by North American economist Irving Fisher as “the principle of capitalisation”. Fisher argued that capital was to be understood not as a specific kind of entity, but as a specific relationship to time that was resolutely future-oriented, in which any entity could engage and hence become capital. Capital, by this formulation, is therefore anything that will produce flows of income during a certain period of time, with the predicted value of its future income determining its value in the present. Fisher gave the following example: it is the orchard that produces the apples (note that the orchard is considered to be capital, precisely because it engages in a relationship with the future defined as the generation of a flow of apples), but it is the value of the apples that produces the value of the orchard. Thus, value depends only on the future, not on the present nor the past. 

This was certainly the tribunal’s line of thought when it chose not to adopt Italy’s proposal to value Rockhopper’s investment based on the costs that the company had actually incurred for it (€2 million) or the price it had paid to acquire the exploration company that had initially discovered the oil reservoir and applied for the exploitation permit (€36 million).^[3] According to the court, the value of Ombrina Mare depended on the future, not on the past. But whose future, exactly? The court decided that the future that mattered was the one anticipated by the investor, ignoring a host of other possible futures. In the protests that took place in Abruzzo, for instance, citizens imagined creating a national park and supporting ecotourism in the area. 

In the debates on the use of the DCF method in investor-state dispute settlement and international arbitration beyond the Italian Ombrina Mare case, commentators have observed that the inflation of damages based on forward-looking projections rooted in corporate practices presents a serious risk to governments’ abilities to introduce policy, not least concerning climate and environmental crisis. In other words, by committing to the futures imagined by corporations, we risk creating a  “regulatory chill” that could jeopardise  countries’ clean energy futures. That these futures have been discarded raises a question. Has our relationship to the future been subsumed by the investor’s? And more fundamentally, is the principle of capitalisation, embedded in valuation devices like the DCF formula, a driver of the ecological and climate crisis? Answering these questions requires delving deeper into the specific process of capitalisation which, as historian Jonathan Levy writes, is so ubiquitous under capitalism “that it has become conceivable as a general form of strategic action and valuation”.^[4]

An inherent contradiction

The process of capitalisation is a mode of engaging with the future that rests on a contradiction.^[5] On the one hand, the future is valued as the relevant temporality for action: to decide what should be done now, one should look to the future, rather than the present or the past. The tribunal’s decision regarding Ombrina Mare epitomises this valuation of the future: what matters is not what the company did in the past, but what it could have done in the future, had this future existed. 

At the same time, the future is devalued as a time that is less worthy than the present. This devaluation is captured in the discount rate: an event that occurs later in time is “discounted” when its value is translated into the present. The reduction in value is all the stronger the more distant the event is in time. 

This contradictory relationship to the future has been embedded in the process of capitalisation since early attempts to extend it beyond the realm of finance from which it originates. One of the first formalisations of the DCF formula emerged from scientific forestry in Germany in the nineteenth century, as part and parcel of the development of the notion of “sustainability”.^[6] Foresters proposed that the value of forests stemmed from their likely future yields of timber and wood. A formula known as the Faustmann formula, an ancestor of the DCF, was put forward as a method for determining the value of these forests, with their future yields translated back into their present value using a discount rate. Importantly, the formula was presented not only as a means to value the forests but also to determine their optimal management. For instance, “rotation lengths” — that is, the age at which trees should be felled — became a function of maximising forest value. And because this value was understood as stemming from a future that had to be discounted, the conclusion was to shorten rotation lengths. 

Thus, in a single move, discounting forced a future-oriented shift in perspective, and engendered an effect of acceleration, driven by the idea that time had a cost, that the forest was capital to be valued for its future yields, and that ensuring the trees’ future required a form of sacrifice and hence a reward for the investor whose capital was locked in them.^[7] Paradoxically, the concern for sustainability and the salience of the short-term future were the product of the same process: the process of capitalisation. In practice, as James C. Scott has shown, scientific forestry’s “utopian dream” of sustainability failed in the encounter between the “administrators’ forest” and “the naturalists’ forest” — that is, a forest whose growth depended on complex ecological processes and local biodiversity.^[8] Despite this failure, the conception of the future as investment embedded in the process of capitalisation remained. 

Public policy as investment

We are still grappling with the entanglement of urges to value and devalue the future in our responses to the climate and ecological crisis today. Since its early experiments in the nineteenth century and its formalisation in economic theory at the start of the twentieth, discounting has become entrenched in decision-making practices in markets and public policy while continuing to evolve. In the middle of the twentieth century, following advances in corporate finance and capital budgeting, the DCF formula was transformed into a standard tool that managers should apply to value investments to meet the interests of their shareholders. The discount rate was redefined as the cost of capital — that is, the reward required by investors in compensation for entrusting capital to a firm. At the same time, the principles of discounting expanded beyond corporate management and into policymaking through related tools like cost-benefit analysis (CBA). CBA transformed public policies into any other kind of investment: a policy was only worth implementing if its future benefits outweighed future costs in purely monetary terms, all translated back into the present through a “social” discount rate. The shortcomings of this view of public policy as investment became palpable when it came to environmental and climate policies.    

The landmark Stern Review on the Economics of Climate Change, a 2006 report for the United Kingdom government by economist Nicholas Stern,^[9] laid bare the incompatibility between the use of discounting in CBA and the attempt to address the climate and ecological crisis. When assessed through the lens of CBA, ambitious climate policies become worthless propositions: their eventual benefits are indeed so distant in time that they become heavily discounted and can barely weigh against their initial costs, most of which are much more proximate in time. The Stern review proposed using discount rates close to zero in order to make the future count as much as the present, arguing that we must “treat the welfare of future generations on a par with our own”. 

The proposition to use discount rates almost equal to zero was harshly criticised by other economists, most prominently William Nordhaus, who argued that the discount rate that determines the “efficient balance between the cost of emissions reductions today and the benefit of reduced climate damage in the future” should be “the return on capital”.^[10] According to Nordhaus, this return on capital, “which measures net yield on investments in capital, education and technology”, was “observable in the marketplace” and importantly, far higher than the low discount rates proposed by Stern. His argument, in a nutshell, was that the devaluation of the future pertained to the inherent nature of the economy, and was not a matter of political will. 

A future stuck in capitalisation? 

Much of the debate that ensued from the so-called Stern/Nordhaus controversy focused on the level of the discount rate and hence the problem of devaluing the future. Less attention has been devoted to its twin principle: the valuation of the future. The Stern Review embraced explicitly the investor’s conception of the future. In its view, mitigation “must be viewed as an investment, a cost incurred now and in the coming few decades to avoid the risks of very severe consequences in the future”. The future is valued as the relevant temporality for action in the present, but also as a temporality radically different from the present. The notion of “future generations” illustrates this separation between the present and the future. It embodies a figure of otherness: an Other for whom we struggle to force ourselves to care, precisely because this Other appears as distant from us, and often gets depicted as different, qualitatively new, sometimes richer and smarter, sometimes more fragile, but always largely unknown.^[11]

Is the future — inhabited by the figure of the investor and their expectations of future cash flows, or by the figure of future generations and their unknown desires and living conditions — worth it? Could our increasingly apparent inability to care for the future be linked to the kind of relationship to the future that capitalism has cultivated: a relationship stuck in the mechanics of capitalisation? And could that relationship be reinvented? 

A few months ago, 18 children from the state of California filed a suit against the United States Environmental Protection Agency (EPA), claiming that the very use of discounting in its cost-benefit analyses of climate policies discriminates against them. The argument relies on a powerful inversion of the present/future divide: from the present of future generations — an elusive matter of concern — to the future of present generations, a future tangible because it is visibly present. It thus sketches an alternative to the investor’s future that has prevailed to date. To break the links between capitalism and the ecological and climate crisis, we urgently need to transform our relationship to the future, freeing it from the logics of capitalisation and its unequal treatment of time.