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Intergenerationally Equitable Discounting and its Implications for Climate Policy

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  • Hiroaki Sakamoto

Abstract

This paper investigates the properties of intergenerationally equitable dis- counting by using an axiomatically well-founded welfare function which was originally developed by Epstein (1983), and more recently extended by Bommier and Zuber (2008). In stead of seeking for the appropriate value of social rate of time preference, intergenerational equity is incorpo- rated at axiomatic level. I show that the intergenerational-equity-consistent (IE-consistent) discount rate can be higher or lower than the standard no- time-preference case without appealing to uncertainty. The relationship between IE-consistent discount rates and risk of world extinction is also examined with an emphasis on the case where the hazard rate is endoge- nously determined. With an application to climate change, I show that endogenous hazard rate can increase the discount rate, which implies rel- atively less stringent carbon abatement as the optimal climate policy.

Suggested Citation

  • Hiroaki Sakamoto, 2010. "Intergenerationally Equitable Discounting and its Implications for Climate Policy," Discussion papers e-09-004, Graduate School of Economics Project Center, Kyoto University.
    • Handle: RePEc:kue:dpaper:e-09-004
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    References listed on IDEAS

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    JEL classification:

    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming
    • Q56 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environment and Development; Environment and Trade; Sustainability; Environmental Accounts and Accounting; Environmental Equity; Population Growth

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