Arbeitspapier

Discounting for climate change

It is well-known that the discount rate is crucially important for estimating the social cost of carbon, a standard indicator for the seriousness of climate change and desirable level of climate policy. The Ramsey equation for the discount rate has three components: the pure rate of time preference, a measure of relative risk aversion, and the rate of growth of per capita consumption. Much of the attention on the appropriate discount rate for long-term environmental problems has focussed on the role played by the pure rate of time preference in this formulation. We show that the other two elements are numerically just as important in considerations of anthropogenic climate change. The elasticity of the marginal utility with respect to consumption is particularly important because it assumes three roles: consumption smoothing over time, risk aversion, and inequity aversion. Given the large uncertainties about climate change and widely asymmetric impacts, the assumed rates of risk and inequity aversion can be expected to play significant roles. The consumption growth rate plays four roles. It is one of the determinants of the discount rate, and one of the drivers of emissions and hence climate change. We find that the impacts of climate change grow slower than income, so that the effective discount rate is higher than the real discount rate. The differential growth rate between rich and poor countries determines the time evolution of the size of the equity weights. As there are a number of crucial but uncertain parameters, it is no surprise that one can obtain almost any estimate of the social cost of carbon. We even show that, for a low pure rate of time preference, the estimate of the social cost of carbon is indeed arbitrary - as one can exclude neither large positive nor large negative impacts in the very long run. However, if we probabilistically constrain the parameters to values that are implied by observed behaviour, we find that the social cost of carbon, corrected for uncertainty and inequity, is 61 US dollar per metric tonne of carbon.

Language
Englisch

Bibliographic citation
Series: ESRI Working Paper ; No. 276

Classification
Wirtschaft
Climate; Natural Disasters and Their Management; Global Warming
Subject
social cost of carbon
climate change
pure time preference
risk aversion
inequity aversion
income elasticity
time horizon
uncertainty
Klimaveränderung
Risiko
Soziale Diskontrate
Soziale Kosten
Zeitpräferenz
Risikoaversion
Einkommenselastizität
Grenznutzentheorie
Welt

Event
Geistige Schöpfung
(who)
Anthoff, David
Tol, Richard S. J.
Yohe, Gary W.
Event
Veröffentlichung
(who)
The Economic and Social Research Institute (ESRI)
(where)
Dublin
(when)
2009

Handle
Last update
10.03.2025, 11:42 AM CET

Data provider

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Object type

  • Arbeitspapier

Associated

  • Anthoff, David
  • Tol, Richard S. J.
  • Yohe, Gary W.
  • The Economic and Social Research Institute (ESRI)

Time of origin

  • 2009

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