Assessing climate change

It is widely accepted in both academic and policy circles that estimated future benefits from projects should be discounted when determining their value to society expressed in current terms. However, to implement this approach, it is necessary to specify a discount rate that should be used for this purpose. When the maturity of a project is long-term, its estimated economic value is extremely sensitive to minor alterations to the discount rate. This is because small changes to the annualized rate compound to much more significant differences over these time horizons. Indeed, it is because of the sensitivity of long-run cost-benefit analysis to the choice of the discount rate that discounting the distant future has been described as one of the most critical problems of all of economics. There is an ongoing and still largely unresolved debate in academic circles over the appropriate choice of discount rates to apply in such contexts. Policy guidance on this topic also varies substantially internationally despite a number of recent events organized by governmental organizations. In light of this debate, I investigate how the discount rate used to assess intergenerational projects such as climate change mitigation should be determined. During my visit at Northwestern University, I plan to make progress by discussing how to further develop my theoretical models with Bruno Strulovici who is one of the top researchers on this topic. My project builds on and advances previous research from my side. One paper with Geir B. Asheim on the topic has already been published in a top field journal and another paper with Moritz A. Drupp, Mark C. Freeman and Ben Groom is invited for resubmission by a general economics journal.