Social Discounting and the Tragedy of the Horizon: from the Stern-Nordhaus debate to target-consistent prices

Ramiro Peres

No 593, Working Papers Series from Central Bank of Brazil, Research Department

Abstract: The "social cost of carbon" (SCC) is a value used to price or tax emissions, so internalizing their externalities; economists disagree about it, and one of the sources of dispute is the "pure time preference rate" – which reflects how much one favors present over future well-being. Those advocating a descriptive approach, associated with William Nordhaus, propose to aggregate the time preferences empirically observed, often resulting in a low SCC. On the other hand, the normative approach, associated with Nicholas Stern, advocates temporal impartiality; but it implies transferring more resources to the next generations – at the limit, assuming exponential population growth, it can be associated with a "longtermist" stance. We discuss how a different approach could help leaving this dispute behind – by estimating carbon prices that are consistent with the goals of the Paris Agreement – thus emphasizing the role of political and international agreements.

Date: 2024-06
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