Properties of the Social Discount Rate and Intertemporal Negative Externality in the Utility or Production Function

Abstract

This study examines the role of the social discount rate, as applied to the efficient allocation of carbon dioxide (CO 2 ) emissions, which provokes serious intertemporal negative externalities such as global warming. Two approaches exist in introducing the intertemporal negative externality brought about by such emissions into economic theory. One is the utility-function approach, and the other is the production-function approach. The former is well-suited to the case in which climate change directly threatens the living standard of human, for example, through a drastic degradation of the environment. The latter approach becomes relevant to case in which global warming is expected to lead to productivity stagnation particular to the additional costs of adaptation.