Climate Policies Deserve a Negative Discount Rate

Eric A. Posner and David Weisbach advocate discounting the future impacts of climate policies at the market rate of return in order to take account of opportunity costs; however, they suggest that the desirable amount of investment may have to be decided on ethical grounds. We argue that deriving the discount rate from a social welfare objective is preferable to the market rate because it both accounts for opportunity costs and suitably determines the amount of investment in climate policies that is desirable for future generations. Moreover, extending Martin Weitzman\u27s and Christian Gollier\u27s results on discounting under uncertainty, we show that for evaluating the long-run impacts of climate policies, a negative discount rate may be justified. This is due to the uncertainty of future growth and the fact that such policies have greater returns in bad climate scenarios. The distributive impact of such policies also justifies a low discount rate if the poorest populations are the most vulnerable to climate change. Finally, we argue in favor of going beyond classical utilitarian calculus in order to better incorporate prioritiZation of the worst off into the evaluation of climate policies