@article{Smith:47619,
      recid = {47619},
      author = {Smith, Kathryn},
      title = {Saving the World but Saving Too Much? Time Preference and  Productivity in Climate Policy Modelling},
      address = {2009},
      number = {420-2016-26651},
      pages = {58},
      year = {2009},
      abstract = {Discounting the distant future has periodically been a  controversial topic in welfare
economics but the evaluation  of climate change policy and particularly the Stern
Review  have given the debate a new relevance. The parameters in a  standard social
welfare function that determine the path  for the discount rate are also important in
determining the  time path of saving, and several prominent economists have  criticised
the values used in the Review specifically  because they imply excessively high optimal
saving rates,  from either a positive or normative perspective. The fact  that near-zero
rates of pure time preference do not  necessarily lead to absurdly high saving rates has
been  known for some time. However, in the context of climate  change policy, this point
has been made using inappropriate  models or specific numerical examples with a  rather
arbitrary value for the rate of growth of total  factor productivity (TFP). Given the
attention that the  ‘unreasonable saving rates’ debate has received in the  climate change
literature, there is a role for a rigorous  presentation of the determinants of saving rates in
models  used to evaluate climate change policy, using values for  TFP growth informed
by recent historical experience. I show  that both in theory and practice, optimal saving
rates in  the presence of near-zero pure time preference are far from  the near-100 per
cent ones obtained from simpler models. In  the widely used Dynamic Integrated model
of Climate and the  Economy (DICE) model, optimal rates are close to 30 per  cent for a
range of values of the elasticity of marginal  utility of consumption, and for Stern’s
revised central  value for that parameter they do not exceed 31 per cent.  While the role
of TFP growth in lowering optimal saving  rates in the presence of near-zero rates of
pure time  preference may have been overplayed in some previous work,  TFP growth is
a key determinant of output and hence  emissions and climate damage, so working with
realistic  values of TFP growth remains crucial.},
      url = {http://ageconsearch.umn.edu/record/47619},
      doi = {https://doi.org/10.22004/ag.econ.47619},
}