, Volume 37, Issue 2-3, pp 141-169
Date: 04 Sep 2008

Discounting climate change

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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. However, I also show that if future uncertainties 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. Various modelling avenues that offer a way out of the dilemma are discussed. None is entirely satisfactory.

The ideas I apply here were presented in my Plenary Lecture to the World Congress of Environmental and Resource Economists, held in Monterey, California, June 2002, and were explored in Dasgupta (2001: Ch. 11). For discussions and correspondence over the years, I am very grateful to Kenneth Arrow, Geir Asheim, and Karl-Göran Mäler. While revising the paper I have benefited greatly from the comments of William Cline, William Nordhaus, W. Kip Viscusi, and Martin Weitzman.