Intergenerational Equitable Climate Change Mitigation: Negative Effects of Stochastic Interest Rates; Positive Effects of Financing

Paper: arXiv 2312.07614

Authors: Christian P. Fries, Lennart Quante

Abstract

Climate mitigation decisions today affect future generations, raising questions of intergenerational equity. Integrated assessment models (IAMs) rely on discounting to evaluate long-term policy costs and benefits. Using the DICE model, we quantify how optimal pathways distribute abatement and damage costs across cohorts. Unconstrained optimization creates intergenerational inequality, with future generations bearing higher costs relative to GDP. Extending the model with stochastic discount rates, we show that discount-rate uncertainty significantly amplifies this inequality. We consider two independent extensions: the financing of abatement costs and the modeling of nonlinear financing costs under large damages. Both extensions can materially improve intergenerational equity by distributing mitigation efforts more evenly. As an illustration, we present a modified DICE model whose optimal pathway limits generational costs to 3 % of GDP, leading to more equitable effort sharing. Our proposed model extensions are model-agnostic, applicable across IAMs, and compatible with alternative intergenerational equity metrics.

Complexity vs Empirical Score

• Math Complexity: 6.0/10
• Empirical Rigor: 5.5/10
• Quadrant: Holy Grail — high math complexity, high empirical rigor

Why this score: The paper provides a thoughtful theoretical and numerical extension to the standard DICE framework by introducing stochastic discount rates and mitigation financing constraints. While it relies primarily on integrated assessment simulation rather than deep empirical backtesting, the methodology offers valuable and novel insights for long-term climate policy and generational equity.

Research Flowchart

  flowchart TD
    A[Goal: Achieve Intergenerational Equity in Climate Mitigation] --> B[Input: DICE Model & Baseline Policy Pathways]
    B --> C[Step 1: Quantify Cohort Cost Distribution via Discounting]
    C --> D[Step 2: Add Stochastic Discount Rates]
    D --> E[Outcome 1: Uncertainty Amplifies Intergenerational Cost Inequality]
    C --> F[Step 3: Introduce Abatement Financing & Nonlinear Damage Costs]
    F --> G[Outcome 2: Equitable Effort Sharing capped at 3% GDP per Cohort]