Editing Time preference (section)

=== Climate change ===
The discount rate is particularly important in the study of climate change. Economist Thomas Schelling argued that climate change is an intergenerational discounting problem, where we are essentially deciding how to distribute utility between the current and future generations.<ref>{{Cite journal |last=Schelling |first=Thomas C |date=1995-04-01 |title=Intergenerational discounting |url=https://www.sciencedirect.com/science/article/abs/pii/0301421595901643 |journal=Energy Policy |series=Integrated assessments of mitigation, impacts and adaptation to climate change |volume=23 |issue=4 |pages=395–401 |doi=10.1016/0301-4215(95)90164-3 |issn=0301-4215|url-access=subscription }}</ref> Crucially, he also argues that we need to also consider other ways in which we can increase the well being of underdeveloped countries both now and in the future. Climate abatement techniques, viewed through this lens, need to be weighed against other wealth redistributions, such as direct payments or subsidies for other goods and industries.

One of the first papers to address this issue was Frank Ramsey’s “A Mathematical Theory of Saving.” In it, he calculates the amount which a nation should save to protect future generations. He does this by trying to maximize the utility of all generations cumulatively.<ref name="Ramsey 1928 543–559">{{Cite journal |last=Ramsey |first=F. P. |date=1928 |title=A Mathematical Theory of Saving |url=https://www.jstor.org/stable/2224098 |journal=The Economic Journal |volume=38 |issue=152 |pages=543–559 |doi=10.2307/2224098 |jstor=2224098 |issn=0013-0133|url-access=subscription }}</ref> In solving this maximization problem, we get an equation of the form<ref name="Ramsey 1928 543–559"/>

<math>r = \delta + \eta g</math>

Here, <math>r</math> is the rate of time preference, or the discount rate. It is the sum of the pure rate of time preference (<math>\delta</math>) and the growth rate of per capita consumption (<math>g</math>), adjusted by the factor (<math>\eta</math>), which represents the impact of economic growth on the discount rate.

The next big finding on the climate discount rate was the Stern Review.<ref>{{Cite web |title=The Economics of Climate Change: The Stern Review |url=https://www.lse.ac.uk/GranthamInstitute/publication/the-economics-of-climate-change-the-stern-review/ |access-date=2024-11-18 |website=Grantham Research Institute on climate change and the environment |language=en-GB}}</ref> It was a report commissioned by the UK government in 2006 on the state of climate change. Major finding of the report is that urgent action is needed to avert the worst impacts of climate change; much more urgent than previously thought. This is due to his estimation of the discount rate. In the report, Stern sets the Ramsey parameters to <math>\delta = .1%</math>, <math>\eta = 1</math> and <math>g=1.3%</math> , meaning <math>r=1.4%</math> . With a discount rate this low, meaning future generations are almost equally as valued, this means that society needs to drastically reduce consumption.

There was push back against this idea, most notably from economist William Nordhaus. He wrote several papers reviewing the Stern Report and the assumptions in it. He argues that the near zero rate of time preference (<math>\delta = .1%</math>) is critical to the recommendations made. Furthermore, he says that a higher discount rate is consistence with market interest rates.<ref>{{Cite journal |last=Nordhaus |first=William D. |date=September 2007 |title=A Review of the Stern Review on the Economics of Climate Change |url=https://www.aeaweb.org/articles?id=10.1257/jel.45.3.686 |journal=Journal of Economic Literature |language=en |volume=45 |issue=3 |pages=686–702 |doi=10.1257/jel.45.3.686 |issn=0022-0515|url-access=subscription }}</ref>

There is no consensus still on the climate discount rate that should be used. Considerations from experts span morality, interest rates, consumer preferences, intergenerational equity, and global equity. At the country level, the revealed environmental discount rates can span from 1%-10%.<ref>{{Cite journal |last1=Drupp |first1=Moritz A. |last2=Freeman |first2=Mark C. |last3=Groom |first3=Ben |last4=Nesje |first4=Frikk |date=2018 |title=Discounting Disentangled |url=https://www.jstor.org/stable/26529055 |journal=American Economic Journal: Economic Policy |volume=10 |issue=4 |pages=109–134 |doi=10.1257/pol.20160240 |jstor=26529055 |issn=1945-7731|hdl=10852/70804 |hdl-access=free }}</ref>