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Reviewing the Stern Review, again

December 19th, 2006

Following the publication of this piece in the NY Times, I’ve had a string of email exchanges with Hal Varian, cc:ing Brad DeLong in the role of interested onlooker. I was surprised by the NY Times article since it included both a correct statement of the way in which Stern treats discounting and income redistribution (roughly speaking a 1 per cent change in income has the same value whenever it is incurred and whoever receives it) with a lot of statements that were either misleading or downright wrong, implying that the near-zero rate of pure time preference in the Stern Review implied a near-zero discount rate for cash flows.

Since Varian is one of the brightest and most technically careful people in the economics profession, I was unsurprised by the correct statement, but very surprised to see errors I’d already refuted when put forward by Arnold Kling, Bjorn Lomborg, Megan McArdle and others. Email revealed that the main problems arose from editorial attempts to ‘simplify’ things for readers, but we still have a lot of disagreements about the justifiability or otherwise of inherent discounting.

In any case, all this has spurred me on to produce my long-promised review of Stern on discounting, at least in draft form. Read, enjoy and criticise.

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  1. David Maddison
    December 20th, 2006 at 01:31 | #1

    I have just finished writing my own set of comments on the Stern Review. There is much more to the review than just the discount rate issue. If you are interested you can download them from my website: http://www.economics.bham.ac.uk/maddison/Working_Papers.htm

  2. wilful
    December 20th, 2006 at 09:25 | #2

    I have a problem with your review – a footnote on page one!

  3. Tam o’Shanter
    December 20th, 2006 at 15:59 | #3

    Q said: “read enjoy and criticise”. So be it. There seems to this reader at least to be too much on Q’s obsession with the “equity premium puzzle” (enabling him to plagiarise himself) when that really has nothing to do with Stern’s Review. Q also persists in his view that Stern did not use a 0.1 per cent social discount rate when Tol, Nordhaus, Yohe Madison and even Stern himself all say he did. It is true that Stern distinguishes between r and delta in his text but in his cost benefit calculations he says he used delta = 0.1 and it is obvious that is what largely explains his 20% “now and forever” annual loss of GDP. The reference to Lomborg is gratuitous; in his critique of Stern in The Australian, Lomborg only used the term “extremely low discount rate” which is what it is. If Lomborg is wrong so are Tol and Nordhaus. Stern is quite wrong to advocate using different discount rates for different purposes. Both Stern and Q appear to have forgotten about opportunity cost. If we now forgo the available investments that yield 6-8% per Q in favour of investments costing one per cent of world GDP p.a. for saving what may well be easily remedied costs of climate change in 100 years time, we will impoverish ourselves as well as our grandchildren.

    Meantime Whaples at TCS finds that “Few economists [randomly polled members of the AEA]think that rising GHGs will have anywhere near this [Stern type] impact – only one in eight predict that GDP will fall by more than 10 percent. Almost twice as many believe that rising greenhouse gas levels will cause the economy to grow. The most popular response is that rising greenhouse gas levels will have virtually no impact on income per person (less than 1 percent lower or higher). The vast majority (73.2%) predict that the impact will be less than 5 percent one way or the other….”

  4. Hermit
    December 20th, 2006 at 21:58 | #4

    JQ I’ve read your paper. Here’s a couple of additional factors I would include that stay within the discounting framework
    1) relative vs absolute wealth
    The Smiths say ‘we’ll have to trade in the Landcruiser in a few years, but so will the Joneses next door’. A materially inferior outcome that preserves income distribution may be acceptable to many.
    2) technological uncertainty
    People who have witnessed Medicare and the internet boom may have a deep seated belief that white knights always turn up, so why sacrifice now? Those nasty carbon taxes won’t be necessary because surely within 10 years or so clever engineers will think of a painless way to cut greenhouse gases.

    At present it looks like the political will to implement Stern recommendations will come too late; after the global warming horse has bolted.

  5. Richard Tol
    December 21st, 2006 at 06:51 | #5


    A few minor comments. First, Stern’s 1% cost to stabilize at 550 ppm is not uncontroversial. In fact, it is an outlier, although not as extreme an outlier as his estimates of the impact of climate change. Second, Gary Yohe uncovered Stern’s inconsistency on the rate of risk aversion. I pointed out that Stern double-counts the risks. Third, HM Treasury has an agreed discount rate, for reasons of internal consistency of government policy. It is very peculiar that this procedure is ignored by a civil servant working in HM Treasury.

    I have one major comment. It has been long known that if the discount rate were low, or equity were important, then we should really do quite a lot about climate change. More generally, the world would be a much better place if people were nice to each other. Reality is different, though. If you argue that the discount rate should be low for climate change, you imply that the discount rate should be low for everything. If Partha Dasgupta is correct, then Stern implies that we should save 97.5% of our income. Do you do that? I don’t. If you argue that there should be global, inequity-averse dictator for climate change, the same should hold for everything else. A large part of the meagre 2.5% of your income that you do not save, would go to Africa. If you are willing to do that, I would be willing to believe that your pure rate of time preference is 0.1% and your rate of risk aversion is unity. Somehow, I don’t think that you put your money where your mouth is.

  6. garhane
    December 21st, 2006 at 07:49 | #6

    This lay reader wishes to thank the author of the blog for his article “:Stern and the critics on discounting”. This well disciplined review of the concepts and arguements put forward by a raft of critics in the brief period since the Stern Report was published at the end of October is a timely aid to understanding the debate.

  7. gordon
    December 21st, 2006 at 09:59 | #7

    Brad deLong picks up the ball and runs a bit on climate change, with gratifying attention to the Antipodean Prof. Quiggin.

  8. Mark Leggett
    December 21st, 2006 at 13:39 | #8

    John: Very nice review.

    Re the way some critical discussion of Stern is going, don’t we need to define our terms?

    Richard Tol writes: “If you argue that there should be a global, inequity-averse dictator for climate change, the same should hold for everything else”

    But surely we’re not talking about everything else but rather a subset of everything, that is, civilisation-threatening (or worse) risks?

    In Logic, The Art of Thinking (1662) by Antoine Arnauld and Pierre Nicole (with large parts according to commentators likely to be by Blaise Pascal “the father of probability”), it is written : ‘Even the slightest chance of salvation is worth more than all the goods of the world heaped together’.

    In other words, as Ian Hacking put it in The Emergence of Probability, after introducing the foregoing point, “salvation has infinite utility”. Hacking also observed: “There is only one case in which the probability of an event is irrelevant to deciding what to do. So long as the probabilities are not zero a strategy with infinite pay-off will always dominate all others.”

    So perhaps we shouldn’t compare everything else – different options for investment in present and future goods and services – with options to keep civilisation a going concern, including by preventing damaging global warming.

    Richard Tol also writes: “Stern’s 1% cost to stabilize at 550 ppm is not uncontroversial. In fact, it is an outlier, although not as extreme an outlier as his estimates of the impact of climate change.”

    It may be an outlier, but a proper one in that it gets closer to depicting the plausible worst-case scenarios – these are the civilisation-threatening ones. For these, to me the question then is, in the spirit of Arnauld et al, whether we can afford to prevent the scenario coming true, not comparing investing in such prevention with other possible investments.

    Of the different, in some ways simpler, conceptual world concerning civilisation-threatening, (aka global, aka existential) risks, the UK academic Nick Bostrom has observed: “Our approach to existential risks cannot be one of trial-and-error. There is no opportunity to learn from errors. The reactive approach – see what happens, limit damages, and learn from experience – is unworkable. Rather, we must take a proactive approach. This requires foresight to anticipate new types of threats and a willingness to take decisive preventive action and to bear the costs (moral and economic) of such actions.”

  9. Hermit
    December 21st, 2006 at 14:10 | #9

    To underscore the difficulties ahead the goverment is re-running its climate whoppers
    If I recall correctly Australia put on a crybaby act and got an emissions allowance 8% above 1990 emissions while other countries had to cut 12%. Then around 1996 by a wave of the administrative magic wand it was declared that reduced tree clearing had henceforth ‘saved’ about 30 megatonnes of CO2 annually.

    However recently Stern reckoned Australia was 25% over 1990 levels. Seems the Australian Greenhouse Office is too keen to please its political masters. Also recently it has been empirically deduced that tree planting or tree non-clearing are unreliable carbon sinks.

    They say the first step in solving a problem is to admit it exists. We haven’t even made it that far yet.

  10. Ashpool
    December 21st, 2006 at 15:28 | #10

    I was thinking about the best strategy for a somewhat cooperative society of reproducing agents.

    I wonder if the problem is that many forms of consumption are in fact in a sense a form of saving: inasmuch as conspicuous consumption (like buying expensive clothes/cars and drinking in a posh bar) are oriented towards future procreation. So from this point of view the best strategy for a ‘gene’ might be to spend some money now (even without any risks or per capita growth). Sex is probably just as important as death. Don’t know whether that would translate to ‘inherent discounting’ in your framework. Do simulations of rational reproducing agents reproduce a hyperbolic discounting rate? Of course all this is almost certainly not rational in terms of maximizing overall social welfare..

    ‘Eat, drink, and be merry, for tomorrow we die.’

    Music and culture and various other kinds of frivolity are also an investment (maintanence of society) in their own way (and not entirely selfish, obviously).

    I guess I think a certain amount of selfishness and latitude to participate in arms races is healthy. Maybe 1/3 social darwinism + 2/3 compassion and social responsibility is a good mix?

    I agree that Nordhaus’s study basically assumes that the future can go to hell with delta=3%. Whats the point of studying global warming effects if you don’t care about the future anyhow? Also, his assumptions for the value of the environment seem incredibly low (I think you mentioned it was used in Stern). But this seems to be normal.

    p11 ‘Future individuals presumably will not share the view that utility in our time is inherently more valuable than utility in ours.’ Should the ‘ours’ at the end be ‘theirs’?

  11. December 21st, 2006 at 18:48 | #11


    Thanks for that – it helps to clarify what the disagreements are about.

    The message I take from this, and your ongoing debate with various others, is that there are no parameters for these economic models that are reasonably consistent with observed behaviour. That is, whatever values one chooses, someone can easily derive a counterintuitive (or counterfactual) result. Is that a reasonable summary?

  12. Richard Tol
    December 21st, 2006 at 20:06 | #12


    That is a very unreasonable summary.

    Economic parameters are estimated, and economic models are calibrated, just like in other disciplines.

    Occasionally, people like Quiggin or Stern stand up and say “but if I change this parameter, the results are completely different” without due regard for the empirical evidence.

    For instance, the pure rate of time preference has been measured time and again. It is somewhere between 2% and 4% in humans in the OECD. It is higher in poorer countries. It is also higher in squirrels.

    Now Stern and Quiggin argue that the pure rate of time preference should be 0.1%. Fine. I think it should be spring all year long. If only.

  13. December 21st, 2006 at 20:26 | #13

    Hmm…what if I modify that previous statement to something along the lines of “no parameters for these economic models that are reasonably consistent with observed behaviour and the moral position that we are no more important than subsequent generations”?

    Is that still no good?

    I nearly wrote that out first time but thought it was covered with “counterintuitive” – ie, I would expect that most people would reject the proposition that they were intrinsically more important than the following generations, if stated in those terms (even if they do not behave as if they rejected this proposition).

    OTOH it is quite likely that I am still rather lost on all of this. And to think, I even did economics O-level :-)

  14. jquiggin
    December 21st, 2006 at 23:24 | #14

    “For instance, the pure rate of time preference has been measured time and again. It is somewhere between 2% and 4% in humans in the OECD.”

    I’m sure you can find estimates of this kind, but they are not generally accepted because they don’t match observed behavior as well as being ethically indefensible in policy terms. Obvious counter-evidence, which I have pointed out quite a few times already is the ability of governments to sell large volumes of bonds with a real rate of return of 1 to 2 per cent.

    The view that the pure rate of time preference should be equal to zero is not some invention of mine or Stern’s – it’s standard utilitarian welfare theory, going back at least to Ramsey.

    But the focus on the issue does allow us to summarise the policy dispute fairly succinctly: if you don’t care (much) about future generations don’t do anything (much) about global warming. If you do care, do something.

  15. Richard Tol
    December 22nd, 2006 at 01:16 | #15


    The notion that the pure rate of time preference should be zero goes back to Aristotle, not to Ramsey. And that is what it is. Aristotle was interested in how the world ought to be, not how the world is. Utopia would be great.

    However, designing policy on the assumption that the world is a utopia, is rather silly.


    Yes, people would say that. But then they would also say that they are great lovers, cooks, and drivers. And yes, they behave differently. Action speaks stronger than words.

  16. aaron_m
    December 22nd, 2006 at 02:10 | #16

    Richard Tol

    In many states, especially wealthy European liberal democracies, there is more redistribution of wealth between the rich and poor than can be explained by what is in the rational self-interest of the majority of the population and our observations about how individuals value their own welfare in comparison to others’ welfare. At the same time the moral justifications for wealth redistribution have widespread acceptance and in the context of working institutions wealth distribution is possible at a rate beyond self-interest.

    So your claim that we should forget about distribution between generations, even if we can recognise and agree on what would be just, because it is not in the rational self-interest of individuals to act on these principles is not enough. You also need to show that it would be impossible to implement the institutional conditions for intergenerational redistribution. This is observably false for environmental protection within states and there does not seem to be any technical limits (although tones of practical obstacles) for institutional arrangements at the global scope to address these problems.

    I might add that this is all very basic stuff in political theory, and that the level of your argumentation on the normative issues is rather poor. Shape up please.

  17. Hank Roberts
    December 22nd, 2006 at 04:28 | #17

    Apparently nobody knows who actually wrote this; nevertheless, it’s relevant to any discussion of what people will do when they face economic costs that would improve the future at their own expense:

  18. David
    December 22nd, 2006 at 11:42 | #18

    Discounting is a necessity for the allocation of funds to help determine the opportunity cost of capital expenditure through time. The selection of the discount rate for any CBA is something that generally takes about 1 second to determine when you are building a model. Then it’s checked once you determine the IRR and may be adjusted depending upon what the review is for.

    If the item being reviewed has a positive IRR well above the discount rate used (i.e. what you think you can get away with), then you are generally laughing and the whole issue about discount rates becomes a moot point. However when it’s not, then its sensitivity testing on assumptions; considerations for the intergenerational and intergenerational equity issues; and discuss the other non-calculated positive externalities in order to slant the decision towards investment. As the joke goes “What number do you want!�

    The last time I was knocking up CBA on environmental issues and public works programs for departments in QLD we were using discount rates for public investment at about 5 to 8% respectively. As the problems with discount rates re: long term benefits are well understood by the decision makers I have dealt with. I always advised not to go below 5% to avoid dealing with annoying discussions and if the number was neagative then discuss the implications of not acting.

    While for my reviews for private investments we would generally start from about 10 to12% (i.e. roughly based on what Aus stock market should return on your investment over 20 years) and keep going up depending upon risk and number of years of investment until you get a positive cash flow.

    So for issues that have negative impacts for the environment it is quite common to see a low discount rate used while for those issues that impact on your wallet the discount rate is generally quite high. When you are talking about policy decisions that impact on society the number is somewhere in between.

    Most of the risk and uncertainty concerning the ‘with’ and ‘without’ cases is generally handled by the assumptions controlling the alternative scenarios. It’s these assumptions that generally are the points to check when you review someone’s report and generally give a greater variation to the decision to invest rather than the discount rate.

    I have worked with more than one individual who spent huge amounts of time trying to determine the correct social discount rate by finding and then using complex formulas and datasets, while I laughed. When all you really have to do is determine the 3 basic ranking criteria (NPV, IRR and B/C Ratio) and then leave it up to the irrationality of the final decision maker to determine if the discount rate is high enough.

    For decisions concerning climate change it’s really a no brainer and for the decision maker it’s either act now or get fried latter. The real issue is what is the most cost effective way of mitigating the potential impacts?

  19. Richard Tol
    December 22nd, 2006 at 21:40 | #19

    Aaron M:

    Redistribution within societies is indeed within societies. There is little sign of redistribution between societies. Are future people part of society?

    If the answer to that question is yes, then most societies redistribute from rich to poor. The logical implication is that the rich of the future should subsidise the poor of today. This calls for a higher discount rate, not a lower one.

  20. aaron_m
    December 23rd, 2006 at 00:45 | #20


    Good stuff!

    And you did not call me silly so I will refrain from being nasty as well.

    I agree the discount rate, or something, should be higher. I am not an economist so I do not get all excited about deltas and etas, but lets follow Quiggin’s explanation of what is going on in the Stern report.

    “Under the projections used in the Stern Review, average world income in 2100 is estimated at about $US 100 000. Using eta =1, a sacrifice of $70 per person (1 per cent of income) today would be justified if (and only if) it increased the income of our great-grandchildren in 2100 by at least $1 000. If this trade-off appears reasonable, then a value of eta =1 is appropriate.�
    But it is obvious that this trade off is not reasonable as a standard for welfare maximisation because it is not reasonable to think that the welfare value of 1% of income is the same for everybody regardless of how rich they are.

    We do not say that one percent of my income (lets say $20 000/year) has the same value to me as one percent of the income of an extremely poor person (Dave makes 200/year). One percent of income for both Dave and I represents a little less than four days income, but the loose of four days of income means that I can’t buy a new Ipod while the loose of fours days of income for Dave means that he will starve to death. It is not the case that if Dave can raise my income by 1% by giving 2 dollars to the Help the Ipodless Programme (HIP) that he does or very nearly does have a moral obligation to do so. Obviously because of the starvation consequences of 2 dollars Dave will never be morally obliged to give this money to HIP. In fact the only way that it makes sense on utilitarian grounds for Dave to make a transfer to me is if, for example, his giving 1 dollar (i.e. 0.5% of his income) will prevent me from loosing a little less than 90 percent (or something like that) of my income.
    The value of 1% of income for Dave and I are not the same, and there is no reason to think that these utility values become equal when the poorer person is asked to make a transfer to a richer person in the future.

    Following the view that 1 percent of anybody’s income now or in the future is equal to 1 percent of anybody else’s income now or in the future regardless of how rich they are we DRAMTICALLY weaken the demands for transfers from the rich to the poor and DRAMTICALLY increases the demands from the less rich today to the more rich tomorrow. I do not know of any serious utilitarian that would accept the view that 1% of income or consumption is of equal utility value to a rich person as it is to a poor person.

    But this does not mean that we have shown that it is reasonable to transfer the costs of climate change onto future generations, rather all we have done is highlighted the central problem with the way economist conceptualise these issues. Economists try to quantify climate change as a cost that can either be imposed on the current generation or future generations. The image is that of a big diner bill and we are asking who should pay for it. But this is not at all how the problem works. Unless we and the next few generations do something about climate change (i.e. take on costs), we will not avoid the negative consequences. So the idea that the future ought to take on the climate change problem fails on the ‘can’ of ‘ought implies can’. The only thing the future can do is passively take on the costs of a changed climate and it is only we and the next few generations that can choose to mitigate human induced climate change (in fact it might as well be we because the institutional and technological changes required will take a very long time). So the right question to ask is, do we or do we not have a moral obligation to curb HICC?

    Now comparing the effects of doing nothing or very little with doing a lot on our welfare and the welfare of future generations is centrally important to our reasoning about what is reasonable. However, we get things wrong if when we take welfare as the only parameter and we get things terribly wrong when we take consumption to be the only parameter of welfare. It is wrong to say that because the future is rich that it is OK to impose on them a host of climate problems. This simply assumes that if given a choice the future would choose higher consumption levels instead of a better climate. I cannot take somebody’s kidney then say it is OK because I have paid them a million dollars. So we need to think about what the future would have wanted us to do and what seems to be reasonable for them to expect of us. Reasoning along these lines will almost certainly entail us taking on costs to address climate change. If we can address climate change but still lead decent lives then there is a very strong moral argument against harming future generations. I agree that we still have a lot of questions about how high the costs should be given the fact that the future is richer. But note that we cannot focus on consumption alone, we need to consider the loose of certain climate conditions that cannot be brought back by future generations. They may have higher consumption levels but we will have limited their consumption choices. Having a thousand dollars to spend on oranges is not the same thing as having 500 dollars to spend on apples and oranges. Future generations will be richer but the will not be able to buy winters in the Alps or fewer cyclones. And economists will have a very difficult time putting a dollar figure on these kinds of things, while they must certainly play a huge role in our welfare assessments.

    As it stands the debates between economists over what is intergenerationally “welfare efficient� when it comes to climate change only gives us a lot of second rate theorising about intergenerational justice discussed under the guised of empirical assessment, which in turn is distracting and confusing. I think economics has a crucially important role to play here but so far I have been very disappointed with the results.

  21. Mark Leggett
    December 23rd, 2006 at 04:10 | #21

    Reading through Nordhaus’ critique and Dasgupta’s critique confirms that the main issue they have with the Stern review concerns intergenerational equity as embodied in the discount rate:
    “The radical revision of the economics of climate change proposed by the Review does not arise from any new economics, science, or modelling. Rather, it depends decisively on the assumption of a near-zero social discount rate.�
    The Stern Review on the Economics of Climate Change
    William Nordhaus
    November 17, 2006
    “….the conclusion I have reached is that the strong, immediate action on climate change advocated by the authors is an implication of their views on intergenerational equity; it isn’t driven so much by the new climatic facts the authors have stressed.â€?
    Comments on the Stern Review’s Economics of Climate Change
    Sir Partha Dasgupta, FBA FRS
    November 11, 2006
    (Revised: December 12, 2006)
    John (Quiggin) writes above in item 14:”…the focus on the issue does allow us to summarise the policy dispute fairly succinctly: if you don’t care (much) about future generations don’t do anything (much) about global warming. If you do care, do something.”
    I want then to suggest a further simplification to those in post 8 above. Many people don’t like the changes to the climate (for example drought and flood where the opposite was nearer the norm in many places round the world) they are observing right now.
    Repeated surveys show that citizens in many places are happy to pay more right now to address climate change.
    Leaving entirely aside the question of future generations then, the foregoing suggests that if we care about the present generation – and even if we just care about the present generation – we should do something.
    How would this change the modelling and the position of the critics?

  22. aaron
    December 23rd, 2006 at 05:13 | #22


    Unfortunately this is not the way the problem works. The climate change we are experiencing now has been caused by past generations and any action we take now will not benefit us but future generations. In other words we cannot reduce impacts over our life time by reducing emissions.

    The intergenerational nature of the climate problem makes it particularly difficult to resolve because each generation will reason in the same way. They may decry the pollution imposed on them by past generations but on a self-interested cost benefit analysis they will not have an incentive to take on costs to address the problem. The next generation will face the exact same decision situation. Given that the problem is structured in this way we can expect each generation to put off doing something until the next generation, and that is exactly what is happening.

    We need a commitment to justice and not just self-interest to address climate change.

  23. Richard Tol
    December 23rd, 2006 at 19:30 | #23


    I think the question is rather which world we would like to leave to our children: A richer world with a warmer climate, or a slightly less rich world with a slightly less warm climate? If we could stop climate change without incurring a substantial economic costs (on today and by implication on tomorrow), the choice would be rather easy.

    I agree that, from the perspective of justtice and equity, the case for climate policy is relatively straightforward. I even agree with Al Gore on that. However, that is not how the world works. If you want to solve a real problem, you may want to take the constraints of reality into account.

  24. Hank Roberts
    December 24th, 2006 at 05:05 | #24

    Remember the limited nature of the “we” who would incur those significant costs in the short term:

    “The richest 2% of adults in the world own more than half of global household wealth”

    As the local radio guy said when he reported this story recently: “… they own it, they can pay to fix it.”

  25. Mark Leggett
    December 24th, 2006 at 07:01 | #25

    You wrote:
    “The climate change we are experiencing now has been caused by past generations…â€?
    I take this general point. But if there is a problem and we want to be practical, isn’t there sometimes benefit in disconnecting who caused it from who can fix it? To me the key questions for those who are prepared to have a go at fixing it then are: are there ways to fix it and are they affordable?
    You continued “…and any action we take now will not benefit us but future generations.� In other words we cannot reduce impacts over our life time by reducing emissions.�
    I do not necessarily agree with this. Methods exist for the removal of carbon dioxide for sequestration not just from fossil fuel power stations from also directly the air (references at these links):
    If full feasibility can be demonstrated – and hopefully this will soon be explored – this strategy would greatly increase our capacity to get to grips with the carbon dioxide in the air and therefore lower the level more speedily.
    With a WW2-type rollout of the number of capture units required for the speediest carbon dioxide reduction, it is quite possible that the climate could be noticeably improved within say 30 years, that is, within the lifetime of many alive today.
    Concerning the affordability of the above scenario, the cost (more thorough estimates are needed) could be between $10-20 trillion (after the second reference above) depending on the carbon dioxide level sought. This, over a 20-year rollout, would require in the order of $1-2 trillion per year (a small 1.6-3.2 % of 2005 gross world product of $60.63 trillion).

  26. Mark Leggett
  27. KY Choong
    December 25th, 2006 at 21:21 | #27

    Mr Quiggan – thank you for your paper on the way the Stern Review discounts future costs and benefits. I gather critics mostly contend that eta is far too low, thereby giving too much weight to the welfare of future generations who are expected to be wealthier than the current generation. They also contend that the discount rate used in the Stern Review is below observable market returns. As I understand it, the observable market returns contended for by critics effectively imply that the current generation have very low regard for the welfare of future generations.

    Is there a way to construct an inter-generational trading mechanism that allows future generations to compensate the current generation for investing in projects that enhance the welfare of the future generations? Could a global carbon emission trading scheme serve as such a mechanism? Each generation would invest in carbon reducing projects to earn carbon credits that have a monetary value which could be realised within the life time of that generation and paid for by each succeeding generation.

    Perhaps a problem with this approach is that a future generation could be tempted to walk away from carbon emission trading – e.g., by issuing more carbon credits that effectively devalue already issued carbon credits. Is there some kind of moral hazard that a future generation will not honour the inter-generational bargain? Or perhaps carbon emission trading could somehow be institutionally entrenched in a way that makes it almost impossible for any future generation to undermine carbon emission trading (no matter how great the temptation to do so).

    If using current market rates to discount future costs and benefits mean that climate change measures are not worth implementing, and assuming this continues to be the case for future generations, does this imply that a carbon emission trading scheme is not sustainable into the future? Perhaps this is what your paper implies, if it is true that the discount rate used in the Stern Review, while ethically defensible, is substantially below the returns required to compensate a generation that has little regard for the welfare of future generations.

    Best regards,


  28. Hermit
    December 26th, 2006 at 13:34 | #28

    KYC your argument reminds me of the ‘forgetting cycle’ whereby the US forgot the lessons of the Vietnam war and repeated them in Iraq. I think there are several reasons why a stabilised climate is unlikely to lead to a relaxation of mitigation efforts. First people have concern for their children and grandchildren, a kind of unquantified discounting. There will still be enough lasting repercussions to keep people angry; for example the need to drink recycled sewage will rekindle fond memories (or archive footage) of the flowing streams of the mid 20th century. There will also be new kinds of natural disasters to keep people vigilant such as the comet ‘Apophys’ in near-earth orbit in 2036.

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