Discounting Climate Change*byPartha Dasgupta**University of CambridgeFirst Version: April 2007Revised: March 2008 * The ideas I apply here were presented in my Plenary Lecture to the World Congress ofEnvironmental and Resource Economists, held in Monterey, California, June 2002, and wereexplored in Dasgupta (2001: Ch. 11). For discussions and correspondence over the years, I amvery grateful to Kenneth Arrow, Geir Asheim, and Karl-Göran Mäler. While revising the paperI have benefitted from the comments of William Cline, William Nordhaus, and Martin Weitzman.** The author is the Frank Ramsey Professor of Economics at the University of Cambridge andFellow of St John's College.ABSTRACTIn this paper I offer a fairly complete account of the idea of social discount rates as appliedto public policy analysis. I show that those rates are neither ethical primitives nor observables asmarket rates of return on investment, but that they ought instead to be derived from economicforecasts and society's conception of distributive justice concerning the allocation of goods andservices across personal identities, time, and events. The welfare theory is developed in thecontext of three empirical studies on the economics of global climate change. I argue that thetheoretical foundations of intergenerational welfare economics are still unsettled even indeterministic models. The standard precautionary motive for saving is then reviewed in the casewhere future uncertainties are not large. I then show that if the uncertainties associated withclimate change and biodiversity losses are large, the formulation of intergenerational well-beingwe economists have grown used to could lead to ethical paradoxes even if the uncertainties arethin-tailed: an optimum policy may not exist. Various modelling avenues that offer a way out ofthe dilemma are discussed. It is shown that none of them is entirely satisfactory.JEL Classification: C61, D53, D9, G12Keywords: utilitarianism, well-being, social discount rates, uncertainty, inequality aversion, riskaversion, rate of time preference, rate of return on investment, precautionary principle, elasticityof marginal well-being, risk-free discount rates, thin-tailed distributions.3PrologueImagine someone who has been reading articles and watching documentaries on climatechange. She is persuaded that rising concentrations of carbon dioxide in the atmosphere is a majorcontributor to the process. She knows that even though the global warming associated withclimate change is slow in comparison to the speed of contemporary economic growth, the carbonconcentrations expected to be reached at the end of this century under business as usual haven'tbeen harboured by Earth's atmosphere in the past several million years. This scares her. However,she realises that although the investment required to curb the process - controlling carbonemissions, enlarging sequestration possibilities, and investing in alternative energy technologies -are large, the benefits will be enjoyed only many decades from now. Which is why she is not onlyanxious about climate change, she is also at a loss to know how to think about the matter.As our protagonist is a citizen of a functioning democracy, she wants to instruct herpolitical leaders to start discussions with governments of other countries on what, as she sees it,is a global commons problem. That is why she now seeks a grammar that can join herunderstanding of the way the world works (the ways in which people would choose under variouscircumstances, the pathways Nature chooses, the consequences of those choices, and so on) tothe basis on which alternative global investment policies ought to be evaluated. As carbonemissions involve massive externalities, she realises that in her role as a citizen she shouldn't relyexclusively on her private interests, but should instead adopt something like a social point of view,one that would appear reasonable not only to her, but to others as well. This makes her want totake others into account when deliberating over the costs and benefits of alternative investmentpolicies. But she realises that when it comes to climate change, most of those others will bepeople who are yet to be born. So, she wants to know what contemporary economics has to sayabout her dilemma.Our protagonist asks an economist friend to give her a reading list, complaining to himthat correspondents even in the most prominent newspapers never write about the questions thatare vexing her. The friend assures her that economics does have the conceptual tool she seeks,and that it has already been put to use by contemporary economists for studying the economicsof climate change. He gives her three books to read: Cline (1992), Nordhaus (1994), and Stern(2006).Some days later our protagonist calls her friend to complain. She says she has now read4the books, but remains confused. Cline and Stern, she says, urge immediate, strong global actionto combat climate change - Stern, she notes, recommends what amounts to an annual expenditureof 2% of the GDP of rich countries. But Nordhaus, she observes, claims that despite the threatsclimate change poses to the global economy, it would be more equitable and efficient to investin reproducible and human capital now so as to build up the productive base of economies -including, especially, poor countries - and to put into effect controls on carbon in an increasing,but gradual manner, starting several decades from now. What confounds her, our protagonistremarks, is that Cline and Stern, on the one hand, and Nordhaus, on the other, reach very differentconclusions even though they are all agreed that global GDP per capita can be expected tocontinue to grow over the next 100 years and more even under business as usual - at somethinglike 1-2% a year. What, she asks, is going on?This article offers an account of what she wants to know.1. Facts and ValuesReading the many reports on Stern (2006), published in newspapers and magazines at itslaunch (31 October 2006) - interestingly, reading the book itself - would give one the impressionthat the case built by the authors for strong, immediate action rests wholly on insights drawn fromthe new and more refined global circulation models of climate scientists. In fact the conclusionsreached by Stern and his co-authors are implications of their choice of a pair of fundamentalethical parameters; they aren't driven so much by the new climatic facts