Discount rates, equity weights and the social cost of carbon

Abstract

Equity weighting has been proposed as a way of allowing welfare equivalents to be included in the social cost of carbon since a dollar to a poor person is worth more than a dollar to a rich one. Here we use the PAGE2002 integrated assessment model to show that the social cost of carbon is higher without equity weights (an elasticity of marginal utility with respect to income of 0) than with them. This might seem counter-intuitive, but it comes about because of the logical link between equity weights and discount rates; as the elasticity goes from 0 to − 0.5 to − 1.0, the social rate of time preference rises, and the drop in present values that results far outweighs the small increase in impacts that equity weights bring.