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How Should the Distant Future be Discounted When Discount Rates are Uncertain? Christian Collier and Martin L. Batsman November 7, 2009. Abstract The so-called Weitzman-Golliebuzzzz e” is the fact

In the context of climate policy we have had to work hard to understand how much to pay attention to future climate change while not being so “out there” as to have a pessimistic view of the risk that the problem will get worse in the future. On the other hand there are many ways of measuring the future value of an asset at a given level of interest rates—so long as they are consistent with the relevant utility function. As a consequence there exist different versions of the “Cost-Benefit Analysis” (CBA) that have been used to assess government policies on climate change. In this paper I consider some of these alternative approaches, and argue that the way in which they have been used to assess the costs and benefits of government policies on climate change indicates that the standard “Cost-Benefit Analysis” does not tell us the full story. After exploring a number of alternative models and estimating their “correct” discount rate, I conclude that the best available version of CBA gives an estimated positive value for the benefits of government policies on climate change, but not for the costs. I shall therefore suggest that the standard CBA should be amended to allow better analysis of uncertainty and to provide a better framework for assessing uncertainties and risks from the perspective of future planners. This involves modifying the assumptions that underlie the approach and replacing the standard model (the “Weitzman-Golliebuzzzz” cost-benefit model), which is usually based on the standard form of the relationship between welfare and expected future welfare. While I suggest an approach that may not be perfectly satisfactory, my motivation here is not to propose a change in the CBA itself. Rather I believe that the main issue is the way that the standard approach treats climate risk. Introduction The issue of uncertain costs and future benefits in estimating policies to reduce atmospheric greenhouse gases, or to combat climate change, is of great interest. Several methods for estimating these benefits are available. There are “direct” estimates of future benefits from carbon taxes or carbon trading; other studies (for example, that of the UK's Tyndall Program) estimate benefits from measures that are assumed to be “mitigating,” like cap-and-trade systems. Yet a common criticism of these studies is that their results are dependent on assumptions that are either too weak or too strong.

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