Ethics, climate change and the role of discounting

Abstract

This article reviews the debate over the social discount rate, focusing on climate change and ethical dimensions of the discussion. The Ramsey equation is reviewed as the key equation for determining the discount rate. It states the time preference as a function of three parameters: discount rate on utility, growth rate of consumption, and consumption elasticity of utility. Arguments for and against discounting future utility are examined. Differing conclusions among authors on the value of the discount rate arise from different inputs they use in the Ramsey equation. The article also considers two further arguments urging the discount rate be set equal to social rate of return on marginal capital and market interest rates. Lastly, the article examines the controversy over the appropriate discount rate for use in cost-benefit analyses of climate change mitigation, particularly the criticism of the Stern Review’s use of a low discount rate. – AI-generated abstract.