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Discounting the Future: the Case of Climate Change

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  • Ekeland, Ivar
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    Abstract

    According to the Stern Report on climate change, the course of the next fifty years is set: present policies will impact only in the very long term, fifty to two hundred years from now. There is no market for interest rates, so far into the future, and economists must find other ways to set interest rates in a coherent way. This paper reviews some of the methods which have been used. We start with the classical Ramsey model of economic growth, which remains a central reference in the current debate, and we study the determinants of the interest rate in that framework. We then adapt the model (and the results) to take into account various concerns, namely (a) the existence of the environment as a distinct, non-producible good, (b) uncertainty on the parameters or on the model (c) intergenerational equity.

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    Bibliographic Info

    Paper provided by Paris Dauphine University in its series Economics Papers from University Paris Dauphine with number 123456789/3682.

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    Date of creation: 2010
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    Publication status: Published in Cahiers de la Chaire Finance et Développement Durable, 2010
    Handle: RePEc:dau:papers:123456789/3682

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    Related research

    Keywords: Interest Rates; Climate Change; Long-Term Policy Making; Growth Models;

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    1. Nordhaus, William D, 1991. "To Slow or Not to Slow: The Economics of the Greenhouse Effect," Economic Journal, Royal Economic Society, vol. 101(407), pages 920-37, July.
    2. Karp, Larry, 2005. "Non-Constant Discounting in Continuous Time," Institute for Research on Labor and Employment, Working Paper Series qt0nn1t22z, Institute of Industrial Relations, UC Berkeley.
    3. Robert J. Barro, 2012. "Inflation and Economic Growth," CEMA Working Papers 568, China Economics and Management Academy, Central University of Finance and Economics.
    4. Karp, Larry, 2005. "Global warming and hyperbolic discounting," Journal of Public Economics, Elsevier, vol. 89(2-3), pages 261-282, February.
    5. Martin L. Weitzman, 1998. "Gamma Discounting," Harvard Institute of Economic Research Working Papers 1843, Harvard - Institute of Economic Research.
    6. William D. Nordhaus, 1992. "Lethal Model 2: The Limits to Growth Revisited," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 23(2), pages 1-60.
    7. Roger Guesnerie, 2004. "Calcul économique et développement durable," Revue économique, Presses de Sciences-Po, vol. 55(3), pages 363-382.
    8. Michel, P., 1980. "On the Transversality Condition in Infinite Horizon Optimal Problems," Cahiers de recherche 8024, Universite de Montreal, Departement de sciences economiques.
    9. Gierlinger, Johannes & Gollier, Christian, 2008. "Socially Efficient Discounting under Ambiguity Aversion," IDEI Working Papers 561, Institut d'Économie Industrielle (IDEI), Toulouse.
    10. Kamihigashi, Takashi, 2001. "Necessity of Transversality Conditions for Infinite Horizon Problems," Econometrica, Econometric Society, vol. 69(4), pages 995-1012, July.
    11. Robert J. Barro, 1999. "Ramsey Meets Laibson In The Neoclassical Growth Model," The Quarterly Journal of Economics, MIT Press, vol. 114(4), pages 1125-1152, November.
    12. Martin L. Weitzman, 2007. "A Review of the Stern Review on the Economics of Climate Change," Journal of Economic Literature, American Economic Association, vol. 45(3), pages 703-724, September.
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