Intergenerational Equitable Climate Change Mitigation: Negative Effects of Stochastic Interest Rates; Positive Effects of Financing

Today's decisions on climate change mitigation affect the damage that future generations will bear. Discounting future benefits and costs of climate change mitigation is one of the most critical components of assessing efficient climate mitigation pathways. We extend the DICE model with stochastic discount rates to reflect the uncertain nature of discount rates. Stochastic rates give rise to a stochastic mitigation strategy, resulting in all model quantities becoming stochastic. We show that the optimization procedure of the DICE model induces intergenerational inequality: lacking a mechanism to regulate burden, future generations have to bear higher costs from abatement and damage relative to GDP. Further, we show that considering uncertainty of discount rates and their feedback to abatement policies, which can be interpreted as successive re-calculation, increases intergenerational inequality (and adds additional risks). Motivated by this, we consider additional financing risks by investigating two modifications of DICE. We find that allowing financing of abatement costs and considering non-linear financing effects for large damages improves intergenerational effort sharing. To conclude our discussion of options to improve intergenerational equity in an IAM, we propose a modified optimization to keep costs below 3% of GDP, resulting in more equal distribution of efforts between generations.