Geoscience Reference
In-Depth Information
Economists generally recommend discounting when comparing
investments today with payoffs in the future, as we saw in Chapter 16.
Therefore, the third case introduces discounting into the limited par-
ticipation scenario. Recall that discounting plays an important role in
climate-change policies because the costs of emissions reductions occur
in the near future while the damages occur in the distant future.
Economic modelers generally solve for the best temperature by cal-
culating the entire path of discounted costs and damages, which can be
accomplished with a computerized integrated assessment model. How-
ever, we can simplify by putting everything in a single year. This is
done by assuming that the damages occur 50 years after the abatement.
This lag refl ects the inertial physics of the global climate system that
tion, I apply a discount rate of 4 percent per year to refl ect the produc-
tivity of investments.
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Figure 31 shows the results of the calculations with discounting and
with limited participation. It is thus Figure 30 plus discounting. The
cost curve for emissions reduction is identical to that of Figure 30, but
the damage curve has shifted downward to refl ect that discounting re-
duces the present value of distant damages.
The discounted total cost curve indicates that the cost-minimizing
temperature is 4.0°C, which is only marginally above the target with
limited participation and no discounting. Therefore, the realistic case of
discounting and limited participation results in a higher target temper-
ature than the idealized case in Figure 29. But the primary reason for
the higher optimal temperature target is limited participation, which
raises the cost of meeting the target. If we look at the participation ef-
fect alone, it raises the target temperature from 2.3°C (see Figure 29) to
3.8°C (Figure 30). Discounting raises the target by only another 0.2°C.
The result on discounting shown in Figure 31 is surprising (indeed,
it surprised me). Why does discounting change the outcome so much
less than limited participation? The reason is subtle, found in the shapes
of the damage and cost curves. The abatement cost curve is highly non-
linear with limited participation. For temperature limits above 4°C, the
additional abatement cost of changing the limit is small, while for costs
