Ramsey Discounting Calls for Subtracting Climate Damages from Economic Growth Rates

13 Pages Posted: 21 Jul 2017 Last revised: 21 Nov 2017

See all articles by J. Paul Kelleher

J. Paul Kelleher

University of Wisconsin - Madison

Gernot Wagner

New York University (NYU) - Department of Environmental Studies; New York University (NYU) - Robert F. Wagner Graduate School of Public Service

Date Written: November 21, 2017

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

Suggested Citation

Kelleher, J. Paul and Wagner, Gernot, Ramsey Discounting Calls for Subtracting Climate Damages from Economic Growth Rates (November 21, 2017). Available at SSRN: https://ssrn.com/abstract=3003848 or http://dx.doi.org/10.2139/ssrn.3003848

J. Paul Kelleher

University of Wisconsin - Madison ( email )

716 Langdon Street
Madison, WI 53706-1481
United States

Gernot Wagner (Contact Author)

New York University (NYU) - Department of Environmental Studies ( email )

285 Mercer Street
New York, NY 10003
United States

New York University (NYU) - Robert F. Wagner Graduate School of Public Service ( email )

The Puck Building
295 Lafayette Street, Second Floor
New York, NY 10012
United States

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