Ramsey Discounting Calls for Subtracting Climate Damages from Economic Growth Rates

Abstract

The Ramsey equation ties the utility discount rate and the elasticity of marginal utility of consumption together with per capita consumption growth rates to calculate consumption discount rates. For many applications, per capita consumption growth rates can be approximated with per capita output growth rates. That approximation does not work for climate change, which drives an ever-increasing and increasingly uncertain wedge between output and consumption growth. NAS (2017) in a central recommendation and illustrative example conflates the two. The correct, consumption-based discounting method generally decreases consumption discount rates and, thus, increases the resulting Social Cost of Carbon Dioxide (SC-CO2).

Keywords: Discounting, Ramsey Equation, Climate Change

JEL Classification: D6, H43, Q5