Working Paper: NBER ID: w23591
Authors: Eli P. Fenichel; Matthew J. Kotchen; Ethan T. Addicott
Abstract: We develop a demographically-based approach for estimating the utility discount rate (UDR) portion of the Ramsey rule. We show how age-specific mortality rates and life expectancies imply a natural UDR for individuals at each age in a population, and these can be aggregated into a population-level social UDR. We then provide empirical estimates for nearly all countries and for the world as a whole. A striking part of the analysis is how the estimated UDRs fall within the range of those currently employed in the macroeconomics and climate change literatures. We use our results to derive heterogenous social discount rates across countries and explore the consequences for an integrated assessment model of climate change. We find that introducing regional heterogeneity of UDRs into the RICE model has little impact on the business-as-usual trajectory of global emissions. It does, however, change the trajectory of optimal emissions, the corresponding optimal carbon tax, and the distribution of emission reductions across countries.
Keywords: Utility Discount Rate; Demographics; Climate Change; Social Discount Rates
JEL Codes: H43; O21; Q54
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| age-specific mortality rates (J11) | utility discount rate (UDR) (L97) |
| life expectancies (J17) | utility discount rate (UDR) (L97) |
| utility discount rate (UDR) (L97) | population-level social UDR (R20) |
| regional heterogeneity of UDRs (R19) | optimal carbon tax (H21) |
| lower UDR (R19) | greater concern for future climate damages (Q54) |
| lower UDR (R19) | higher optimal carbon tax (H21) |
| countries with lower UDRs (O15) | reduce emissions more (Q58) |
| demographic factors (J11) | utility discount rate (UDR) (L97) |
| demographic factors (J11) | emissions policies (Q58) |