The Choice of Discount Rate for Climate Change Policy Evaluation

Lawrence H. Goulder and Roberton Williams

RFF Working Paper Series from Resources for the Future

Abstract: Nearly all discussions about the appropriate consumption discount rate for climate change policy evaluation assume that a single discount rate concept applies. We argue that two distinct concepts and associated rates apply. We distinguish between a social-welfare-equivalent discount rate appropriate for determining whether a given policy would augment social welfare (according to a postulated social welfare function) and a finance-equivalent discount rate suitable for determining whether the policy would offer a potential Pareto improvement. Distinguishing between the two rates helps resolve arguments as to whether the choice of discount rate should be based on ethical considerations or empirical information (such as market interest rates), and whether the discount rate should serve a prescriptive or descriptive role. Separating out the two rates also helps clarify disputes about the appropriate stringency of climate change policy. We find that the structure of leading numerical optimization models used for climate policy analysis may have helped contribute to the blurring of the differences between the two rates. In addition, we indicate that uncertainty about underlying ethical parameters or market conditions implies that both rates should decline as the time horizon increases.

Keywords: climate change; discounting; discount rate (search for similar items in EconPapers)
JEL-codes: D61 D63 H43 Q54 (search for similar items in EconPapers)
Date: 2012-09-06
New Economics Papers: this item is included in nep-ene and nep-env
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (46)

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Related works:
Journal Article: THE CHOICE OF DISCOUNT RATE FOR CLIMATE CHANGE POLICY EVALUATION (2012)
Working Paper: The Choice of Discount Rate for Climate Change Policy Evaluation (2012)
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