Discounting, climate and sustainability

- Dispute over discounting leads to great variation in climate policy recommendations.
- The standard welfare function ignores people's dislike of overshooting consumption.
- Policies could be ranked by inspecting policy consequences over time.
- A welfare function focusing on growth may be used in optimization models.
- Integrated assessment models must capture transition dynamics and uncertainty.

Climate policy recommendations differ widely because of disagreements over what discount rates to use. Disagreement reduces the impact of economic models and signals a need for improved methodology. The problem is related to the choice of intergenerational welfare functions. A first questionnaire finds that the standard welfare function (SWF) fails to capture people's dislike of overshooting and fluctuating consumption paths. A second questionnaire reveals that when very-long-term sustainability of well-being is threatened, people's implicit discount rates resemble the low estimates used by the Stern Review. An alternative welfare function (AWF) reflecting consumption growth can potentially capture the preference structure revealed in both questionnaires. This makes the AWF an interesting candidate when searching for policies for sustainable development under uncertainty. Importantly, the questionnaires demonstrate that people are able to choose among policies by inspecting time graphs of policy consequences. Thus, it is possible to circumvent the complexities and disagreements introduced by welfare functions and discounting.