Abstract
Recent discussion of climate change focuses on the trade-off between present and future consumption and hence correctly emphasizes the discount rate. Stern (2007) favours immediate and strong actions of environmental protection, but this has been questioned as the discount rate used is much lower than the market or commonly used rates. Focussed only on consumption trade-off, the use of these higher discount rates completely reverses the need for strong actions. However, an even more important problem has been largely neglected. This is the avoidance of catastrophes that may threaten the extinction of the human species. But “we lack a usable economic framework for dealing with these kinds of ... extreme disasters’ (Weitzman, J Econ Lit 45(3):703–724, 2007, p. 723). To analyse this, the comparison of marginal utility with total utility is needed. As happiness studies suggest a low ratio of marginal to total utility and as scientific and technological advances (especially in brain stimulation and genetic engineering) may dramatically increase future welfare, immediate and actions stronger than proposed by Stern may be justified despite high discount rates on future consumption, as discount rates on future utility/welfare should be much lower.
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I am grateful to my research assistant Mr. Fwu-chang Yan for help with the numerical simulation and for verifying the mathematical derivation. I am also grateful to seminar commentators at Australian National University and Monash University and to two anonymous referees for helpful suggestions.
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Ng, YK. Consumption tradeoff vs. catastrophes avoidance: implications of some recent results in happiness studies on the economics of climate change. Climatic Change 105, 109–127 (2011). https://doi.org/10.1007/s10584-010-9880-z
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DOI: https://doi.org/10.1007/s10584-010-9880-z