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* The current version of this paper was prepared with the support of the Australian Department of Climate Change and the Environmental Economics Research Hub at the Australian National University. Earlier versions were submitted to the London School of Economics and Political Science in partial completion of the MSc in Environment and Development, and to the 2009 annual conference of the Australian Agricultural and Resource Economics Society (AARES). The author is extremely grateful to Simon Dietz and the Commonwealth Scholarship Commission for supervision and funding of the MSc, respectively, and to Steve Hatfield-Dodds, Frank Jotzo, Jack Pezzey, Matthew Skellern, Daniel Veryard, and participants in seminars at the AARES conference, the Department of Climate Change and the Reserve Bank of Australia for helpful comments. All remaining errors are the author’s. The views expressed are those of the author and do not necessarily reflect those of the Australian Government or the Australian Department of Climate Change.
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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