Intergenerationally Equitable Discounting and its Implications for Climate Policy

This paper investigates the properties of intergenerationally equitable discounting by using an axiomatically well-founded welfare function which was originally developed by Epstein (1983), and more recently extended by Bommier and Zuber (2008). In stead of seeking for the appropriate value of social rate of time preference, intergenerational equity is incorporated at axiomatic level. I show that the intergenerational-equity-consistent (IE-consistent) discount rate can be higher or lower than the standard notime-preference case without appealing to uncertainty. The relationship between IE-consistent discount rates and risk of world extinction is also examined with an emphasis on the case where the hazard rate is endogenously determined. With an application to climate change, I show that endogenous hazard rate can increase the discount rate, which implies relatively less stringent carbon abatement as the optimal climate policy.