Discounting and welfare analysis over time: Choosing the η

Based on the Ramsey equation and the rejection of pure utility time discount, the Stern Review on the Economics of Climate Change concentrates on the use of the elasticity of marginal utility η in the intergenerational social welfare function (and not on the pure rate of time preference ρ as most of the existing literature) in order to avoid excessive saving. In this paper we first show that also from the viewpoint of sustainability, it is preferable to make ethically motivated decisions on the distribution across generations by the use of η and not of ρ. In addition, we examine how different specific values of η correspond to ethically relevant properties as “circumstance solidarity” and “no-envy”. Finally, we discuss the fundamental critique that has been raised against Stern's ethically based welfare theoretic approach to valuation across time.