Dynamic Efficiency
Slides (html) [link]Required reading
- Read Keohane and Olmstead (KO) Chapter 2 pp 30-34
- Read the New York Times “Climate Change FAQ”
Response questions
- What do you think the most important damages of unmitigated climate change are? (list 1-2) Do you think these effects will primarily be felt now or more so in the future?
- What are some of the main costs of mitigating climate change? If serious climate change is to be avoided, will these costs largely be paid now or in the future?
Additional material
- CRS videos on Discounting and Net Present Value Analysis
- BH Chapter 15 - Discounting on canvas
- For a more technical summary of current climate science, see the IPCC’s recently released Sixth Assessment Report. NY Times summary here.
- MIT Climate Science and Climate Risk Primer. Older, pdf verion here
Key Points
- When benefits and costs span time, we need to put them in present value terms in order to compute net benefits.
- You should be comfortable using the present value formula, translating benefits and costs occurring at different times into comparable units.
- For government policy, it is not obvious what the appropriate discount rate is. Ramsey (1928) provides a transparent formula.
- Climate change is a good example of a policy problem where the choice of discount rate matters a lot. This is because CO2 is a stock pollutant.