December 4, 2014
The social discount rate under a stochastic A2 scenario
Using a general equilibrium model in which both capital productivity and temperature are uncertain, we show that the social discount rate (SDR) will decline from 1% in 2010 to 0.6% in 2300 under the conventional, quadratic specification of the damage function, and to -2.0% under the reactive specification of the damage function.
Moreover, interaction between economic and climate risks further lowers this estimate of the SDR by 0.9%. Surprisingly, the decline of the SDR never starts before 2100. We attribute this to the slow response of the earth's climate to increases in radiative forcing, thus highlighting the critical importance of properly taking into account the long-term dynamics of the climate system for the SDR. Interestingly, a substantial part of the decrease in the SDR under the reactive specification can be attributed to the presence of a term premium in long-run bonds.
