Discounting climate change

Abstract

In this paper I offer a fairly complete account of the idea of social discount rates as applied to public policy analysis. I show that those rates are neither ethical primitives nor observables as market rates of return on investment, but that they ought instead to be derived from economic forecasts and society’s conception of distributive justice concerning the allocation of goods and services across personal identities, time, and events. The welfare theory is developed in the context of three empirical studies on the economics of global climate change. I argue that the theoretical foundations of intergenerational welfare economics are still unsettled even in deterministic models. The standard precautionary motive for saving is then reviewed in the case where future uncertainties are not large. I then show that if the uncertainties associated with climate change and biodiversity losses are large, the formulation of intergenerational well-being we economists have grown used to could lead to ethical paradoxes even if the uncertainties are thin-tailed: an optimum policy may not exist. Various modelling avenues that offer a way out of the dilemma are discussed. It is shown that none of them is entirely satisfactory.