Ethics of the Discount Rate in the Stern Review on the Economics of Climate Change
AbstractAny comparison of the costs and benefits of climate change is dominated by the chosen discount rate. But, although the Stern Review emphasises the ethical nature of the parameters entering into its choice of a relatively low discount rate, its discussion of the â€˜pure time preferenceâ€™ parameter is unbalanced. In particular, no consideration is given to the role of â€˜agent-relative ethicsâ€™, which (i) has a wellestablished philosophical pedigree going back to David Hume; (ii) is likely to correspond closely to world-wide public attitudes towards intergenerational welfare; and (iii) would entail discounting a unit of welfare accruing to future generations compared to an equal unit accruing to people alive today at a positive rate. The authors also discuss the other ethical parameter upon which the discount rate depends, namely the elasticity of marginal utility with respect to consumption. In the conventional model, this simultaneously reflects different aspects of inequality aversion as well as risk aversion, which complicates its interpretation. Finally, they discuss the divergence between market rates of discount and the low rate chosen in the Review, and the limitationsâ€”on the one handâ€”on the normative significance of market rates, as well as the dangerâ€”on the other handâ€”of relying on rates chosen by elites or philosopher kings.
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Bibliographic InfoArticle provided by World Economics, Economic & Financial Publishing, 1 Ivory Square, Plantation Wharf, London, United Kingdom, SW11 3UE in its journal World Economics Journal.
Volume (Year): 8 (2007)
Issue (Month): 1 (January)
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