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Systematic discounting in climate policy analysis

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  • Bayer, Stefan
  • Cansier, Dieter

Abstract

We investigate the systematic intergenerational discounting of climate policy on basis of the neo-classical benefit-cost analysis. Reference point is the Ramsey-rule which results from optimal growth theory. The agents live infinitely long. This signifies that intergenerational comparisons do not exist. The resulting rates - the pure rate of time preference, the growth discount rate, and the opportunity cost rate - are examined in detail for their legitimacy regarding intergenerational comparisons. One result of our examination is that utility-based pure time preference rates cannot be justified ethically in intergenerational comparisons. Under certain conditions, the consumption based growth discount rate can be used where intergenerational aspects are concerned. If we discount long-term climate policy effects by using an investment-based opportunity cost rate, we further have to analyze the calculation of consumption equivalents. If we adjust the planning horizon to the life expectancy of human beings, a realistic discounting method would be to use an OLG-model. This method allows each living generation to discount intragenerationally with the sum of the pure time preference rate and the growth discount rate. As soon as intergenerational effects exist, one may only use the growth discount rate to calculate present values.

Suggested Citation

  • Bayer, Stefan & Cansier, Dieter, 1996. "Systematic discounting in climate policy analysis," Tübinger Diskussionsbeiträge 85, University of Tübingen, School of Business and Economics.
    • Handle: RePEc:zbw:tuedps:85
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    References listed on IDEAS

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    1. R. H. Strotz, 1955. "Myopia and Inconsistency in Dynamic Utility Maximization," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 23(3), pages 165-180.
    2. Rabl, Ari, 1996. "Discounting of long-term costs: What would future generations prefer us to do?," Ecological Economics, Elsevier, vol. 17(3), pages 137-145, June.
    3. Robert M. Solow, 1974. "The Economics of Resources or the Resources of Economics," Palgrave Macmillan Books, in: Chennat Gopalakrishnan (ed.), Classic Papers in Natural Resource Economics, chapter 12, pages 257-276, Palgrave Macmillan.
    4. Thomas Sterner, 1994. "Discounting in a world of limited growth," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 4(5), pages 527-534, October.
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    Cited by:

    1. Gianluigi Cisco & Andrea Gatto, 2021. "Climate Justice in an Intergenerational Sustainability Framework: A Stochastic OLG Model," Economies, MDPI, vol. 9(2), pages 1-13, April.
    2. Helmut Karl, 1997. "Ökologie, individuelle Freiheit und wirtschaftliches Wachstum: Umweltpolitik in der sozialen Marktwirtschaft," Working Paper Series B 1997-03, Friedrich Schiller University of Jena, School of of Economics and Business Administration.
    3. Cansier, Dieter, 1997. "Volkswirtschaftliche Grundlagen der Nachhaltigkeit," Tübinger Diskussionsbeiträge 98, University of Tübingen, School of Business and Economics.

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