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Abstract

There is a need for a rigorous presentation of the determinants of saving rates in models used to evaluate climate change policy. This report provides a detailed investigation of the implications of Stern’s parameter choices for saving. This is done firstly in standard neoclassical growth theory and then in Nordhaus’s dynamic integrated model of climate and the economy (DICE), a widely used climate policy model that is based on neoclassical growth theory. 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 used by several critics of the Stern Review. This report shows that in DICE, for the utility function used in the Stern Review, optimal saving rates do not exceed 32 per cent. When using Stern’s revised value for the elasticity of the marginal utility of consumption, this falls to 25 per cent.

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