DISCOUNTING AND DISTRIBUTIONAL CONSIDERATIONS IN THE CONTEXT OF GLOBAL WARMING

The economics of global warming is reviewed with special emphasis on h ow the cost depends on the discount rate and on how costs in poor and rich regions are aggregated into a global cost estimate. Both of these factors depend on the assumptions made concerning the underlying util ity and welfare functions. It is common to aggregate welfare gains and losses across generations and countries as if the utility of money we re constant, but it is not. If we assume that a CO2-equivalent doublin g implies costs equal to 1.5% of the income in both high and low incom e countries, a pure rate of time preference equal to zero, and a utili ty function which is logarithmic in income, then the marginal cost of CO2 emissions is estimated at 260-590 USD/ton C for a time horizon in the range 300-1000 years, an estimate which is large enough to justify significant reductions of CO2 emissions on purely economic grounds. T he estimate is approximately 50-100-times larger than the estimate mad e by Nordhaus in his DICE model and the difference is almost completel y due to the choice of discount rate and the weight given to the costs in the developing world as well as a more accurate model of the carbo n cycle, Finally, the sensitivity of the marginal cost estimate with r espect to several parameters is analyzed.