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Thematic Guide to Integrated Assessment Modeling
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Discounting
Because integrated assessment models concern human behavior and the valuation of consequences over a long future period, how people evaluate future changes relative to present ones is crucial in conducting assessments. This tradeoff is normally formulated as a discount rate, a constant rate per year at which people discount future gains or losses relative to present gains or losses. In a classical economic formulation, this rate is determined in the markets for savings and investment, in which people decide how to allocate their present incomes between consumption today and investment to yield future consumption. At equilibrium, people are assumed to invest up to the point where the marginal productivity of capital and the marginal rate of time-preference are equal. This rate is the discount rate.Integrated assessment raises several crucial issues in discounting, both concerning the appropriate discount rate and whether the standard constant-rate formulation, which implies exponentially declining concern with consequences in the future, is appropriate. Basic questions include 1) whether social or public-good concerns call for a public discount rate different from that determined in markets for savings and investment; 2) whether the character of risk and uncertainty that bears on potential future consequences related to climate change calls for a different rate or formulation; and 3) whether when considering the very long term, the exponential formulation of discounting is appropriate, or whether an alternative in which gains or losses to people beyond an individual's planning horizon (the lifetime of our children or grandchildren) are regarded as equal to each other, reflecting a kind of generalized degree of benevolence to people remote in time or in space (Schelling 1994).
In formal integrated assessment modeling of climate change, the choice of an approach to discounting, and of a discount rate, crucially affects the optimal decisions. The manner of effect depends on the form of model employed. Basic results include the following: 1) Outcomes beyond the year 2100 are completely inconsequential to present-period decision-making unless very low discount rates are used; 2) The full significance of concern for the future can only be reflected in modeling approaches that optimize dynamically across time, in which higher concern for the future might lead to substantial changes in behavior today equivalent to sudden increases in the savings rate; and 3) Present rates of saving and investment in the United States and elsewhere do not provide strong evidence for low discount rates.
The next section is Resolution.
