The Impacts and Costs of Climate Change Page: 35

The Impacts and Costs of Climate Change
Discount Scheme 0% 1% 3% Greenbook Weitzman
PRTP PRTP PRTP declining declining
Euro/tCO2 20.8 4.2 -0.7 7.4 7.2
Figure 8. Modelled Costs of Climate Change with Different Pure Rate of Time Preference and
declining discount rate schemes (no equity weighting)
25
20
15
10
5

U
-5

I I
0% PRTP discount 1% PRTP discount 3% PRTP discount Weitzman declining
rate rate rate

Greenbook
declining

Source: FUND. Version 2.8. Pure rate of time preference. Time horizon 2300.
There is no equity adjustment, it is assumed that costs and benefits can be traded off, coverage of market and non-
market impacts is partial, and socially contingent effects and climate system major events are. They are presented
only as an illustration of the effects of discount rate. Including these other effects would have a large effect on the
above values. The model parameter shown is the 'Best Guess' estimate. This is the model author's 'best guess' for all
parameters. The best guess for climate sensitivity is 2.5 degrees Celsius equilibrium warming for a doubling of the
atmospheric concentration of CO2. Recent evidence suggests that the probability of higher climate sensitivity may
have increased - see Report of the Steering Committee, International Symposium on Stabilisation of Greenhouse
Gases, Hadley Centre, Met Office, 2-5 Feb 2005.
The reason why this switch occurs with the PRTP rate can be shown with the pattern of the impacts
over time from FUND - shown below at 0% pure rate of time preference. It can be seen that in the
short-term, to 2040, the model finds there are net benefits at an aggregate level. The use of a higher
discount rate therefore puts greater importance to these short-term effects, relative to the economic
dis-benefits in later years. The results refer only to the subset of impacts quantified (including the
omission of socially contingent and major events). They do not include any equity weighting, and the
model assumes full trade-offs between categories and regions42, although the coverage of impacts is by
no means complete
42 This is consistent with the general assumptions in cost-benefit analysis. A different perspective, i.e. one based on strong
sustainability, would not consider this assumption valid.

AEA Technology Environment, August 2005

I

35