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

TL;DR

This paper examines how stochastic discount rates and financing strategies influence intergenerational equity in climate change mitigation, proposing model extensions that promote more equitable distribution of costs across generations.

Contribution

It introduces model extensions that mitigate intergenerational inequality by incorporating stochastic discount rates and nonlinear financing costs, applicable across integrated assessment models.

Findings

Stochastic discount rates increase intergenerational inequality.

Financing strategies can improve equitable cost distribution.

Modified models can limit costs to 3% of GDP.

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.