2011 Articles

Discounting the Standard Model: Why the Ramsey Model Does Not Adequately Explain Climate Change Policy

Du, Yangbo

"Any specific climate policy recommendation—from those promoting a ‘business-as-usual’ trajectory to those promoting aggressive mitigation in the immediate future—can be justified via some particular set of values for relevant parameters as demonstrated in Guo et al. (2006), Tol (2009), and Anthoff, Tol, and Yohe (2009a, 2009b), which makes separating climate policy evaluation from value judgements stemming from individual or societal perspectives impossible. This paper, which provides a backward-looking framework for evaluating future strategies to deal with anthropogenic climate change, is not intended to provide any definitive. judgment of the means of ensuring intergenerational equity in policy analysis or the optimality of any particular method of discounting; rather, its empirical component is geared toward opening up avenues for future research in the welfare aspects of mitigating climate change. In a similar vein of argument to that of Tóth (2000), there is no presumption that benefit-cost analysis with discounting is necessarily a proper means of evaluating climate change mitigation policy, but rather an extension of theoretical arguments proposed by Dasgupta (2000, 2009), who has raised concerns about the efficacy of intergenerational welfare economics in addressing issues to which it is directed: empirical data to test the validity of the standard model and to examine its underpinnings in practice. The practical aspects of the findings from our exercise rely on the presumption that the standard model is a valid descriptor of intergenerational welfare economics. There is ample evidence from both theory and practice to substantiate claims that the standard model is of limited applicability in questions of intergenerational welfare, and the plausible nature of such claims is highlighted in this paper. Arguably, one can interpret the empirical argument of this paper, while focused on discounting, as justification for finding alternative methods of evaluation."--from page 105-106