Thursday, November 29, 2012

What to do about climate change: looking beyond the discount rate controversy

When the Stern Review, which discussed global climate change from an economic perspective, came out, it generated a lot of discussion because of some of the assumptions that were taken. Biologists objected to the use of a discount rate even if it was only 0.1%, and economists William Nordhaus (2%) and Richard Tol (1 to 3%) objected to the value of the discount rate that was chosen. This controversy about the discount rate was reflected in a few posts of mine (I, II, III).

Etienne Espagne, Baptiste Perrissin Fabert, Antonin Pottier, Franck Nadaud and Patrice Dumas point out that the controversy between Nicholas Stern and William Nordhaus goes beyond the discount rate: the choice of the growth rate of technological progress in abatement and the sensitivity of climate to pollution. Using a climate policy model, they show that that changing these two values to their respective extreme values generates about as much variation in results in terms of the social cost of carbon as for the discount rate. But the discount rate cannot explain the differences in policy recommendations between Nordhaus and Stern, while the other two parameters can. We can thus somewhat discount the discount rate controversy and focus more on abatement technology and the climate models.

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