Abstract
The importance of the discount rate in cost-benefit analysis of long term problems, such as climate change, has been widely acknowledged. However, the choice of the discount rate is hardly discussed when translating policy targets—such as 1.5 °C and 2 °C–into emission reduction strategies with the possibility of overshoot. Integrated assessment models (IAMs) have quantified the sensitivity of low carbon pathways to a series of factors, including economic and population growth, national and international climate policies, and the availability of low carbon technologies, including negative emissions. In this paper we show how and to what extent emission pathways are also influenced by the discount rate. Using both an analytical and a numerical IAM, we demonstrate how discounting affects key mitigation indicators, such as the time when net global emissions reach zero, the amount of carbon budget overshoot, and the carbon price profile. To ensure inter-generational equity and be coherent with cost-benefit analysis normative choices, we suggest that IAMs should use lower discount rates than the ones currently adopted. For a 1000 GtCO2 carbon budget, reducing the discount rate from 5% to 2% would more than double today’s carbon price (from 21 to 55 $/tCO2) and more than halve the carbon budget overshoot (from 46% to 16%), corresponding to a reduction of about 300 GtCO2 of net negative emissions over the century.
Highlights
The social or consumption discount rate has been at the core of the discussion of climate change economics for many years, due to its importance for evaluating climate change impacts in the future against today’s costs of mitigating emissions (Weitzman 1994, 2001, Nordhaus 2007a, Dasgupta 2008)
The recently released IPCC special report on 1.5 °C (IPCC 2018) has reviewed a set of new stringent emission pathways, but has made almost no reference to the choice of time discounting, except saying that the impacts of varying discount rates on 1.5 °C mitigation strategies can be assessed to a limited degree
Assumptions about discounting are embedded in the models which generate the scenarios used in these reports. Both in this and previous assessment report, a value of 5% has been applied to calculate the net present value of monetary flows such as carbon prices. This rate is in line with what is commonly used by detailed process Integrated assessment models (IAMs), it is not necessarily the right value which should be used to calculate century-long emission reduction pathways
Summary
The social or consumption discount rate has been at the core of the discussion of climate change economics for many years, due to its importance for evaluating climate change impacts in the future against today’s costs of mitigating emissions (Weitzman 1994, 2001, Nordhaus 2007a, Dasgupta 2008). In practice, long term targets are often discussed and have been proposed (such as the well below 2 °C and the 1.5 °C objectives from the Paris Agreement), and detailed process models (DP-IAMs), characterized by a high level of disaggregation (Weyant 2017), have translated them into minimum cost emission pathways and their investment strategies (cost-effectiveness analysis) These assessments have focused on the role of key factors such as economic and population growth (Kriegler et al 2016, Marangoni et al 2017, Riahi et al 2017), national and international climate policies (Clarke et al 2009, Aldy et al 2016, Vrontisi et al 2018), fossil fuel availability (McJeon et al 2014, Kriegler et al 2016) and low carbon technologies (Kriegler et al 2014, Luderer et al 2018). The only two contributions addressing this issue partly are Ermoliev et al (2008), who considers the role of the discount rate for management of catastrophic risks, and (Chen and Tavoni 2013) as a sensitivity analysis for the use of direct air capture (DAC)
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