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Ramsey discounting calls for subtracting climate damages from economic growth rates

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  • J. Paul Kelleher
  • Gernot Wagner
Abstract
The Ramsey equation ties the utility discount rate and the elasticity of marginal utility of consumption together with per capita consumption growth rates to calculate consumption discount rates. For many applications, per capita consumption growth rates can be approximated with per capita output growth rates. That approximation does not work for climate change, which drives an ever-increasing and increasingly uncertain wedge between output and consumption growth. NAS (2017), in a central recommendation and illustrative example, conflates the two. The correct, consumption-based discounting method generally decreases consumption discount rates and, thus, increases the resulting Social Cost of Carbon Dioxide (SC-CO2).

Suggested Citation

  • J. Paul Kelleher & Gernot Wagner, 2019. "Ramsey discounting calls for subtracting climate damages from economic growth rates," Applied Economics Letters, Taylor & Francis Journals, vol. 26(1), pages 79-82, January.
    • Handle: RePEc:taf:apeclt:v:26:y:2019:i:1:p:79-82
    DOI: 10.1080/13504851.2018.1438581
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    Cited by:

    1. David Anthoff & Richard S. J. Tol, 2022. "Testing the Dismal Theorem," Journal of the Association of Environmental and Resource Economists, University of Chicago Press, vol. 9(5), pages 885-920.
    2. Richard S.J. Tol, 2020. "Kernel density decomposition with an application to the social cost of carbon," Working Paper Series 0720, Department of Economics, University of Sussex Business School.

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