Discounting and Sustainability in Applied IAMs

Abstract

Since the potential climate change caused by antropogenic greenhouse gas (GHG) emissions has been recognized as a major environmental problem, a number of applied Integrated Assessment Models (IAMs) have been developed to advise policy makers as to the optimal GHG emissions reduction levels and the supporting prices of present GHG emissions, e.g. CETA (Peck and Teisberg, 1992), DICE (Nordhaus, 1994), MERGE (Manne and Richels, 1995), MERGE-II (Manne et al., 1995) and RICE (Nordhaus and Yang, 1996). Most of the IAMs are of the dynastic, or Ramsey (1928), type, in which there is a central planner who maximizes a welfare measure that aggregates utilities over generations. The calculated allocation of goods thus follows from the rules for the welfare distribution over generations. In an alternative so-called overlapping generations (OLG) framework, the dynamic allocation is primarily determined by the distribution of property rights over generations. There has been much analysis of the dynastic model, and the analysis has led to much debate on the use of different welfare functions (Azar and Sterner, 1996). In this paper, we will argue that the dynastic mechanism of welfare distribution is unrealistic and misleading. Its prevalent use in IAMs has led to unnecessary controversies between researchers who advocate efficient and those who advocate sustainable resource use.