IF lecture 3

A rate used to calculate the present value of costs and benefits that occur in the future.

A method of evaluating projects with costs and benefits spread across different periods.

The value of a future cost or benefit in today's terms.

Even small changes in the SDR can significantly affect the calculated present value.

The principle of fairness in considering the well-being of future generations when evaluating long-term projects.

The process of transforming future costs and benefits into current values.

The practice of assessing the worth of projects that involve costs and benefits occurring at different times.

It emphasizes the importance of considering the long-term consequences of decisions, particularly for future generations.

The Stern Review argued for a SDR of 1.4%, advocating for strong, immediate action on climate change.

Nordhaus proposed a SDR of 4.5%, suggesting a more lenient approach to climate change mitigation.

The difference in SDR values between economists and policymakers.

A perspective that considers ethical and societal norms when determining the SDR.

A perspective that uses economic data and market factors to determine the SDR.

Reflecting a consensus among experts on the appropriate SDR, bridging the gap between different viewpoints.

The relationship between academic and policymaking perspectives on the SDR, influencing policy decisions.

The rate at which society is willing to trade off consumption today for consumption tomorrow. It considers the preference for immediate gratification versus long-term gains.

A measure representing the social cost of public investment compared to the social cost of public funding. It weighs the opportunity cost of investing in the future against the cost of raising funds.

In a perfect market, the two approaches should ideally converge. This means that the social cost of investment equals the social cost of funding.

A theoretical framework for assessing the social value of projects that affect future generations.

A mathematical formula used to calculate the present value of future benefits, taking into account future generations' well-being.

The mathematical function used to represent how much value is placed on consumption.

A type of utility function where the same percentage change in consumption always leads to the same percentage change in happiness.

The rate at which consumption is expected to grow over time.

A measure of how responsive people are to changes in prices.

A value that represents how much society is willing to pay to benefit future generations.

The Social Discount Rate (SDR) is a crucial parameter used to assess the value of future benefits in relation to present sacrifices for climate change mitigation. It reflects how society discounts the welfare of future generations compared to the current generation.

The SDR is controversial, with different perspectives on its appropriate value and calculation. Some argue for a lower SDR, emphasizing the need for immediate action on climate change mitigation, while others advocate for a higher SDR, highlighting the potential benefits of delayed action.

The Stern Review advocates for a lower SDR, suggesting that future generations deserve a significant weight in our decisions today. It suggests that a substantial sacrifice today is justified for a future benefit.

Nordhaus's view on the SDR is more lenient towards climate change, suggesting that a lower SDR may not be necessary. He believes immediate action may not be critical, as market interest rates and savings rates influence the value of future benefits.

The Simple Ramsey Rule is one approach to calculating the SDR. It considers factors like the rate of time preference, the rate of economic growth, and the elasticity of substitution.

The SDR's derivation can be extended to incorporate uncertainties, risks, inequality, and the limited substitutability of non-market goods. It's a complex process involving various economic and ethical considerations.

Alternative approaches to the SDR include market price approaches, which use market data to estimate the value of future benefits. Another approach is based on societal criteria, reflecting collective values and priorities.

The SDR remains a critical issue in climate change economics, influencing policy choices and resource allocation for mitigation and adaptation. It raises ethical questions about intergenerational fairness and the weight we assign to future generations.

The pure time discount factor (δ) reflects our inherent preference for present benefits over future ones. This factor represents our patience or how much weight we give to future utility.

The ethical debate surrounding the Social Discount Rate (SDR) centers on how to calibrate the pure time discount factor (δ). Debates involve how we balance individual preferences, intergenerational fairness, and potential extinction risks.

The Stern Review advocates for a high SDR of 1.4%, emphasizing strong, immediate action on climate change. They believe it's crucial to prioritize future generations' well-being, even if it means significant costs today.

Nordhaus proposes a lower SDR of 4.5%, suggesting a more lenient approach to climate change mitigation. He argues for a balance between present and future needs, considering the economic costs of immediate action.

The difference in SDR values proposed by Stern and Nordhaus highlights the ongoing debate among economists and policymakers. There is no consensus on how much weight to give to future generations' well-being.

The SDR plays a crucial role in evaluating long-term projects, such as climate change policies. It determines how heavily future costs and benefits are discounted, influencing the overall assessment of a project's effectiveness.