Document Type

Article

Abstract

Current approaches to discounting in climate policy present a seemingly intractable problem and stalemate. While it is widely recognized that choice of discount rate in climate models can easily dwarf the effect of other parameter inputs, there is at present a very wide disagreement, both in law and in economics, about the appropriate discount rate to use. This paper provides a framework for achieving a workable consensus range for acceptable discount rates in climate models. It does so by emphasizing three factors previously ignored in the literature. First, it demonstrates that the choice of discount rate should be tailored to the type of climate model at issue, distinguishing particularly between policy evaluation models versus optimization models. Second, it suggests that some disagreement in these debates is fundamental (because reflecting deep unbridgeable differences in views about the proper scope of the market) while some disagreement is not. By focusing attention on the non-fundamental sorts of disagreement it becomes possible to shrink the consensus range of plausible discount rates. Third, the paper argues that some of the current disagreement about the choice of discount rate for modeling purposes on the front-end can actually be better addressed through elements of program design on the back-end.

Date of Authorship for this Version

8-2012

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