The Social Evaluation of Intergenerational Policies and its Application to Integrated Assessment Models of Climate Change

B.E. Journal of Economic Analysis and Policy, 2010

U of Chicago Law & Economics, Olin Working Paper No. 565

38 Pages Posted: 26 Jul 2011 Last revised: 29 Jul 2011

Louis Kaplow

Harvard Law School; National Bureau of Economic Research (NBER)

Elisabeth J. Moyer

University of Chicago - Department of the Geophysical Sciences; University of Chicago - Center for Robust Decisionmaking on Climate & Energy Policy (RDCEP)

David A. Weisbach

University of Chicago - Law School; Center for Robust Decisionmaking on Climate & Energy Policy (RDCEP)

Date Written: November 11, 2010

Abstract

Assessment of climate change policies requires aggregation of costs and benefits over time and across generations, a process ordinarily done through discounting. Choosing the correct discount rate has proved controversial and highly consequential. To clarify past analysis and guide future work, we decompose discounting along two dimensions. First, we distinguish discounting by individuals, an empirical matter that determines their behavior in models, and discounting by an outside evaluator, an ethical matter involving the choice of a social welfare function. Second, for each type of discounting, we distinguish that due to pure time preference from that attributable to curvature of the pertinent function: utility functions (of consumption) for individuals and the social welfare function (of utilities) for the evaluator. We apply our analysis to leading integrated assessment models used to evaluate climate policies. We find that past work often confounds different sources of discounting, and we offer suggestions for avoiding these difficulties. Finally, we relate the standard intergenerational framework that combines considerations of efficiency and distribution to more familiar modes of analysis that assess most policies in terms of efficiency, leaving distributive concerns to the tax and transfer system.

Keywords: individual discount rate, social discount rate, intergenerational distribution, climate policy, integrated assessment models

JEL Classification: D63, D81, H23, H43, Q51, Q52, Q54, Q58

Suggested Citation

Kaplow, Louis and Moyer, Elisabeth J. and Weisbach, David A., The Social Evaluation of Intergenerational Policies and its Application to Integrated Assessment Models of Climate Change (November 11, 2010). B.E. Journal of Economic Analysis and Policy, 2010; U of Chicago Law & Economics, Olin Working Paper No. 565. Available at SSRN: https://ssrn.com/abstract=1895605

Louis Kaplow

Harvard Law School ( email )

1575 Massachusetts Avenue
Cambridge, MA 02138
United States
617-495-4101 (Phone)
617-496-4880 (Fax)

HOME PAGE: http://www.law.harvard.edu/faculty/directory/facdir.php?id=32&show=bibliography

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Elisabeth J. Moyer

University of Chicago - Department of the Geophysical Sciences ( email )

5734 S. Ellis Ave.
Chicago, IL 60637
United States

University of Chicago - Center for Robust Decisionmaking on Climate & Energy Policy (RDCEP) ( email )

5735 S. Ellis Street
Chicago, IL 60637
United States

David Weisbach (Contact Author)

University of Chicago - Law School ( email )

1111 E. 60th St.
Chicago, IL 60637
United States
773-702-3342 (Phone)
773-702-0730 (Fax)

Center for Robust Decisionmaking on Climate & Energy Policy (RDCEP) ( email )

5735 S. Ellis Street
Chicago, IL 60637
United States

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