Agreeing to disagree on climate policy
- aColumbia Business School, Columbia University, New York, NY 10027; and
- bGrantham Research Institute on Climate Change and the Environment, London School of Economics and Political Science, London, WC2A 2AE, United Kingdom
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Edited* by Kenneth J. Arrow, Stanford University, Stanford, CA, and approved January 23, 2014 (received for review August 24, 2013)
Significance
The social cost of carbon—the cost to society of an additional ton of CO2 emissions—is a crucial measure of the desirable intensity of climate policy. The models economists use to calculate it, however, are highly sensitive to the choice of discount rate, which measures our concern for the well-being of future generations. Different economists favor different values, and this leads to radically different policy prescriptions. We present a method for combining a diverse set of discount rates into a single “representative” rate and apply it to the analysis of the social cost of carbon performed by the US government. This approach may help resolve ethical conflicts and, hence, lead to consensus policy recommendations.
Abstract
Disagreements about the value of the utility discount rate—the rate at which our concern for the welfare of future people declines with their distance from us in time—are at the heart of the debate about the appropriate intensity of climate policy. Seemingly small differences in the discount rate yield very different policy prescriptions, and no consensus “correct” value has been identified. We argue that the choice of discount rate is an ethical primitive: there are many different legitimate opinions as to its value, and none should receive a privileged place in economic analysis of climate policy. Rather, we advocate a social choice-based approach in which a diverse set of individual discount rates is aggregated into a “representative” rate. We show that performing this aggregation efficiently leads to a time-dependent discount rate that declines monotonically to the lowest rate in the population. We apply this discounting scheme to calculations of the social cost of carbon recently performed by the US government and show that it provides an attractive compromise between competing ethical positions, and thus provides a possible resolution to the ethical impasse in climate change economics.
