We augment a conventional climate-economy model with a Diamond overlapping generations structure to assess the intergenerational impacts of climate change and climate policies. Efficient outcomes involve the usual marginal condition: the carbon price equals the sum of discounted future marginal damage costs. We introduce an intergenerational bargain which picks out a particular efficient point, as the choice of discount rate does, but which leaves all generations better off. This is achieved by intergenerational transfers compensating for past mitigation. We calibrate our model to the DICE model. Discounted welfare maximisation under market-derived discount rates or under zero discounting leave early generations worse off. The Pareto-improving bargain involves substantial mitigation, with carbon prices roughly twice as high as under welfare maximisation with market-derived discount rates. The Pareto-improving allocations involve ‘pure rate of preference for earlier generations’ of about 1% per year.

Joint work with David von Below, Francis Dennig