Discounting Disentangled

Drupp, Moritz A.; Freeman, Mark; Groom, Ben; Nesje, Frikk

doi:10.1257/pol.20160240

Cited by 213 publications

(195 citation statements)

References 60 publications

(48 reference statements)

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“…First, economists suggest applying risk-free, public, and long-term interest rates when evaluating problems such as climate change (Weitzman 2001, Dasgupta 2008, Arrow et al 2013, Groom and Hepburn 2017. Expert elicitations indicate values around 2%-3% (Drupp et al 2018), and the U.S. Interagency Working Group on the Social Cost of Carbon uses a rate of 3% as central value (U.S. IAWG 2016). Second, cost-effective and cost-benefit analysis should be coherent: Nordhaus (2017) showed that the stringency of climate policy, as measured by the Social Cost of Carbon, is (exponentially) increasing as the discount rate is lowered, implying that very stringent climate targets are optimal only for low discount rates.…”

Section: Introductionmentioning

confidence: 99%

The role of the discount rate for emission pathways and negative emissions

Emmerling

Drouet

Wijst

et al. 2019

Environ. Res. Lett.

111

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The importance of the discount rate in cost-benefit analysis of long term problems, such as climate change, has been widely acknowledged. However, the choice of the discount rate is hardly discussed when translating policy targets-such as 1.5°C and 2°C-into emission reduction strategies with the possibility of overshoot. Integrated assessment models (IAMs) have quantified the sensitivity of low carbon pathways to a series of factors, including economic and population growth, national and international climate policies, and the availability of low carbon technologies, including negative emissions. In this paper we show how and to what extent emission pathways are also influenced by the discount rate. Using both an analytical and a numerical IAM, we demonstrate how discounting affects key mitigation indicators, such as the time when net global emissions reach zero, the amount of carbon budget overshoot, and the carbon price profile. To ensure inter-generational equity and be coherent with cost-benefit analysis normative choices, we suggest that IAMs should use lower discount rates than the ones currently adopted. For a 1000 GtCO 2 carbon budget, reducing the discount rate from 5% to 2% would more than double today's carbon price (from 21 to 55 $/tCO 2 ) and more than halve the carbon budget overshoot (from 46% to 16%), corresponding to a reduction of about 300 GtCO 2 of net negative emissions over the century.

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Section: Introductionmentioning

confidence: 99%

The role of the discount rate for emission pathways and negative emissions

Emmerling

Drouet

Wijst

et al. 2019

Environ. Res. Lett.

111

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“…More recently, it has been shown that uncertainty about whether impacts in the far future affect capital investment or household consumption leads to rates that converge toward the consumption rate (Li and Pizer 2018). It should be noted that even if the consumption rate of interest is deemed to be the appropriate rate, the actual value for that rate remains inherently uncertain (Drupp et al 2018). Nonetheless, given these considerations, it is not surprising that in the context of the GWP, others have noted that "…the 100-year timescale is consistent with discount rates that are commonly used for climate change analysis" (Sarofim and Giordano 2018).…”

Section: Discussionmentioning

confidence: 99%

A theoretical basis for the equivalence between physical and economic climate metrics and implications for the choice of Global Warming Potential time horizon

Mallapragada

Mignone

2019

Climatic Change

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The global warming potential (GWP) is widely used in policy analysis, national greenhouse gas (GHG) accounting, and technology life cycle assessment (LCA) to compare the impact of non-CO 2 GHG emissions to the impact of CO 2 emissions. While the GWP is simple and versatile, different views about the appropriate choice of time horizonand the factors that affect that choice-can impede decision-making. If the GWP is viewed as an approximation to a climate metric that more directly measures economic impact-the global damage potential (GDP)-then the time horizon may be viewed as a proxy for the discount rate. However, the validity of this equivalence rests on the theoretical basis used to equate the two metrics. In this paper, we develop a new theoretical basis for relating the GWP time horizon and the economic discount rate that avoids the most restrictive assumptions of prior studies, such as an assumed linear relationship between economic damages and temperature. We validate this approach with an extensive set of numerical experiments using an up-to-date climate emulator that represents state-dependent climate-carbon cycle feedbacks. The numerical results largely confirm the theoretical finding that, under certain reasonable assumptions, time horizons in the GWP of 100 years and 20 years are most consistent with discount rates of approximately 3% and 7% (or greater), respectively.

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“…The data I use to calibrate the model and generate the results in Figures 1a and 1b are taken from a recent survey by Drupp et. al.…”

Section: G Details Of Calibrationmentioning

confidence: 99%

“….2: Experts' recommended values for the pure rate of social time preference (ρ i ), and the elasticity of marginal utility (η i ) for appraisal of long-run public projects, from theDrupp et. al.…”

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confidence: 99%

Nondogmatic Social Discounting

Millner

2020

American Economic Review

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The long-run social discount rate has an enormous effect on the value of climate mitigation, infrastructure projects, and other long-term public policies. Its value is however highly contested, in part because of normative disagreements about social time preferences. I develop a theory of “nondogmatic” social planners, who are insecure in their current normative judgments and entertain the possibility that they may change. Although each nondogmatic planner advocates an idiosyncratic theory of intertemporal social welfare, all such planners agree on the long-run social discount rate. Nondogmatism thus goes some way toward resolving normative disagreements, especially for long-term public projects. (JEL D61, H43)

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Discounting Disentangled

Cited by 213 publications

References 60 publications

The role of the discount rate for emission pathways and negative emissions

The role of the discount rate for emission pathways and negative emissions

A theoretical basis for the equivalence between physical and economic climate metrics and implications for the choice of Global Warming Potential time horizon

Nondogmatic Social Discounting

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