Estimation of the Social Discount Rate (SDR) with Climate Change Uncertainty: The Case of Korea

Abstract

This paper estimates the appropriate social discount rate (SDR) with regard to climate change uncertainty for the Korean economy. First, following Burke et al. (2015)ʹs framework, we measure the marginal economic impact of climate change on the Korean economy focusing on temperature rise. Then, based on this historical relationship, we predict future GDP growth rate according to the climate representative concentration pathway (RCP) and socio‐economic scenarios (SSP) by 2100. Lastly, we estimate the SDR for the Korean economy for the next decade, based on the trajectory of future GDP growth rate.BR Overall, taking into consideration that climate uncertainty may be crucial in determining an appropriate SDR for environmental policy appraisal, we find that at given levels of temperature rise, the Korean economy may suffer from global warming relatively more than the rest of the world. Therefore, in the worst‐case scenario, Koreaʹs predicted future GDP growth rate would drastically decline. Consequently, our estimation supports that the appropriate level of SDR calculated based on the Ramsey Rule should decline over time, and even reach negative values depending on the climate scenario.