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The rate of time preference

Implications for the greenhouse debate

Alan S Manne
Department of Operations Research, Stanford University, Stanford, CA 94305, USA

If one adopts a real annual discount rate of 5% or more - and there are no significant climate impacts for half a century - these impacts have a present value that is virtually negligible. Within a cost-benefit framework, it then becomes exceedingly difficult to justify any near-term actions other than no-regrets policies. In the greenhouse debate, it is important to draw a clear distinction between prescriptive and descriptive reasoning. A philosopher or an economist may counsel a low or a zero rate of time preference, but this advice does not provide a good description of the collective outcome of individual choices. In particular, it implies an unrealistically rapid increase in the rate of savings and investment.

Keywords: Climate change; Discounting; Optimal growth

 

 

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