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The Choice of the Social Discount Rate: A Democratic Approach

Democracy
Climate Change
Decision Making
Normative Theory
Masakazu Ogami
University of Zurich
Masakazu Ogami
University of Zurich

Abstract

This paper aims to discuss the potential role of the deliberative mini-public, a group of randomly selected citizens, in choosing the social discount rate (SDR). The SDR is used to convert costs and benefits occurring in different periods to present values, making it possible to compare them. In the context of climate-change policymaking, the SDR enables today’s society to weigh the costs and the future benefits from climate policies to mitigate climate change. A larger SDR means that future damages from global warming look smaller, which allows the current generation to make fewer emission reductions. Accordingly, the difference in the value of the SDR leads to significantly different policy recommendations. For instance, according to the recent estimation by William Nordhaus, the economically optimal climate path is to bring global emissions of carbon dioxide (CO2) to a peak by around 2050 and achieve the decarbonization of the economy only in the next century if an SDR of about 5% is employed. On the other hand, the optimal climate path is to reduce global emissions of CO2 to net zero before 2050 if an SDR of around 1% is adopted. The latter climate path is compatible with the global temperature target of the Paris Agreement because, according to the Intergovernmental Panel on Climate Change, the world needs to reach net-zero emissions of CO2 by around 2050 to limit global warming to 1.5 degrees Celsius compared to pre-industrial levels. How should the SDR be chosen? There are two main traditions for choosing it: the “prescriptive approach” and the “descriptive approach.” The prescriptive approach is that an SDR is selected while considering intergenerational equity. The prescriptive approach generally yields an SDR of around 1%. On the other hand, advocates of the descriptive approach set the SDR (nearly) equal to the market rate of return on capital because, according to them, the market rate of return reflects current people’s willingness to save for the future. The descriptive approach generally yields an SDR of around 5%. In this way, there is an (apparent) incompatibility between the prescriptive and descriptive approaches. Concerning the choice of the SDR, the prescriptive approach takes intergenerational equity into account, whereas the primary focus of the descriptive approach is to respond to the current generation’s preferences. Against this background, I will propose a novel approach, which I will call the democratic approach, to choosing the SDR. The democratic approach is that the SDR is chosen in the deliberative mini-public, such as a citizens’ assembly. To justify the democratic approach, I will show that this approach is compatible with both prescriptive and descriptive approaches. To be more precise, I will demonstrate that mini-publics enable citizens to choose an SDR while considering intergenerational equity. Furthermore, I will argue that there is no good reason for advocates of the descriptive approach to refuse the use of mini-publics in choosing the SDR.