When the long run matters

Terrence Iverson (), Scott Denning and Sammy Zahran

Climatic Change, 2015, vol. 129, issue 1, 57-72

Abstract: Roughly 20 percent of current CO2 emissions will likely remain in the atmosphere for thousands of years (Solomon et al. 2008 ). Despite this, climate damages attributable to current emissions that occur beyond 150 years or so have almost no effect on the current optimal carbon tax in typical integrated assessment models. The source of this strong result is conventional economic discounting. The current paper builds on recent work by Gerlagh and Liski ( 2013 ) and Iverson (J Environ Econ Manag 66:598–608, 2013a , b ) to demonstrate this fact in a simple way and to show that it is not robust to plausible changes in the calibration approach for discounting parameters. Specifically, when time preference rates decline, a possibility supported by a wide variety of studies from psychology and economics, long run consumption impacts are potentially very important and so are long run features of the carbon cycle. The paper follows (Gerlagh and Liski 2013 ) in showing that this remains true even when the discounting parameters are calibrated to match historical interests rates, thus avoiding the main economic critique of the Stern Review (Stern 2007 ; Nordhaus 2008 ; Weitzman Rev Econ Stat 91:1–19 2009 ). The effects are quantified using a formula for the optimal carbon tax from Iverson (J Environ Econ Manag 66:598–608, 2013a , b ), which we use to decompose the current optimal tax into the cumulative contribution from consumption impacts at different horizons. Copyright Springer Science+Business Media Dordrecht 2015

Date: 2015
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DOI: 10.1007/s10584-014-1321-y

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