Dr. Michael Schymura

Executive Summary

Intertemporal valuation is the fulcrum of climate policy economics: costs are paid today, while the benefits (or avoided damages) arrive across decades and centuries. This essay distills the paper’s core argument: many common defenses of pure time discounting are ethically thin — but there are deeper reasons why “equal treatment of infinitely many generations” can fail once we also demand protection of the present or coherent egalitarian evaluation.

Debate

Stern vs. Nordhaus

Ethics vs. market rates

Key move

Axiomatic lens

What can coexist?

Result

Equity conflict

Not “equity vs efficiency”

Present

Future

Fig 1. The Intertemporal Balance

01. Context: Intertemporal valuation is not neutral

Cost-benefit analysis began as an engineering tool (Dupuit’s bridge problem) and evolved into the default language of long-horizon climate policy. The move from projects with bounded beneficiaries to planetary systems with impacts spanning centuries turns one parameter into a moral hinge: how we value welfare across time.

The Stern Review reignited this fault line by adopting a very low pure time preference rate. Critics argued this smuggles ethics into economics; supporters replied that intergenerational decisions are irreducibly ethical because future generations cannot bargain.

02. Normative vs. positive: what is a discount rate “about”?

The descriptive camp anchors discounting in observed market rates and revealed preferences. The prescriptive camp argues that markets reveal how the present trades with itself — not how the present should trade with the unborn. The paper’s stance is simple: once “third parties” (future generations) are in the picture, ethics is not an optional add-on.

Market reality

“Use market rates” is coherent for individual savings decisions — but intergenerational welfare is a social choice problem without bargaining.

Ethical ideal

Impartiality across people implies impartiality across time — unless you can justify why a person counts less merely because they are later.

03. Framework: welfare streams and the discounting functional

The paper sets up an infinite sequence of generational well-being levels, $c_t$, and evaluates consumption paths through an intertemporal social welfare functional. The canonical case is discounted utilitarianism.

Canonical form

W(c₁, c₂, ...) = ∑_{t=1}^∞ δᵗ⁻¹ · u(cₜ)

where δ = 1/(1+ρ)

u(c) = (c¹⁻ⁿ)/(1-η)

The key conceptual move: in many practical settings, “pure time preference” and “inequality aversion” interact and can even substitute for each other in shaping intergenerational burdens.

04. Less convincing reasons for discounting

A. Observed behavior

Discounting as a description of how people behave is not, by itself, a moral justification for how society ought to treat people across time. Intergenerational policy affects passive third parties who cannot participate in markets.

B. Preventing over-saving

A common defense of $\rho > 0$ is that it protects the present from being sacrificed for the future. The paper’s counterpoint is subtle: the same protection can be achieved by adjusting inequality aversion, rather than “time discrimination.”

Parameter Interchangeability Lab

Inequality Aversion (η)1.5

Higher η means we care more about equality (and thus less about the richer future).

Growth Rate (g)2.0%

Assumed annual consumption growth rate.

Implied Pure Time Preference (ρ)

1.00%

To keep the Social Discount Rate at 4%, you need this level of pure impatience.

Formula: ρ = r - η·g

C. “Plausible axioms” (continuity, completeness)

Technical axioms can smuggle discounting in through the back door (e.g. myopic topologies). When axioms embed unequal treatment, the conclusion becomes circular.

05. More convincing reasons: ethical dilemmas, not market mimicry

A. Extinction risk

If future generations might not exist, expected welfare naturally weights later utility by survival probabilities. This is more ethically forceful than “impatience,” though the risk calibration is inherently speculative.

B. Egalitarian Equivalence (EE)

EE formalizes an egalitarian benchmark: every stream has a constant-consumption equivalent that it is indifferent to. This enables comparisons but generates impossibility results: you cannot keep Pareto efficiency, egalitarian equivalence, and finite anonymity all at once.

The Intergenerational Trilemma

You can typically satisfy only two.

Anonymity

Treating all generations equally, regardless of time.

Pareto

Efficiency: if everyone is better off, the path is better.

Protection

Protecting the present from infinite sacrifice.

Conflict: Infinite horizons make it mathematically impossible to fully satisfy strict Anonymity and strong Protection of the Present simultaneously without violating Pareto or Continuity.

C. Protection of the Present (POP)

POP is an explicitly equity-oriented demand that prevents the present generation from being driven to near-zero consumption by infinitary aggregation. But POP clashes with strict anonymity in infinite horizons.

Table: ethical standing (from the paper)

Justification	Verdict	Reasoning
Observed behavior	Rejected	Naturalistic fallacy; ignores future “third parties”.
Preventing over-saving	Rejected	Can be handled via $\eta$ rather than $\rho$.
Standard axioms	Rejected	Often implicitly assumes discounting in the topology.
Extinction risk	Plausible	Expected utility weighting by survival probabilities.
Egalitarian equivalence	Strong	Reveals incompatibility between anonymity and coherent egalitarian comparison.
Protection of the present	Strong	Justifies mechanisms that prevent impoverishing the present generation.

06. Synthesis: “DU Light” and the equity conflict

The most important conceptual takeaway is that the fight is not “equity vs. efficiency” — it is an internal conflict between equity norms. If you demand strict anonymity (equal treatment) and also demand protection of the present or egalitarian-equivalent evaluation, something has to give.

The paper’s compromise language (“DU Light”) reflects a pragmatic stance: allow a very small discounting motivated by extinction risk, but keep the ethical reasoning explicit — shifting attention toward transparent parameter choices rather than pretending the question is purely positive.

07. Conclusion

Discounting is not a technical footnote. It encodes a stance on intergenerational justice. Many standard justifications collapse under ethical scrutiny, but the impossibility results show why the question refuses to go away: infinite horizons amplify tensions between different fairness principles.

References

This page is based on the SSRN paper below and a curated selection of references cited within it.

Buchholz, W. & Schymura, M. (2013).

How Can Pure Social Discounting be Ethically Justified? ZEW Discussion Paper No. 13-008.

DOI SSRN

Aldy, J. et al. (2010). Designing Climate Mitigation Policy. Journal of Economic Literature.
Asheim, G.B. (2010). Intergenerational Equity. Annual Review of Economics.
Basu, K. & Mitra, T. (2003). Aggregating Infinite Utility Streams with Intergenerational Equity. Econometrica.
Broome, J. (1994). Discounting the future. Philosophy and Public Affairs.
Nordhaus, W. (2007). Review of the Stern Review. Journal of Economic Literature.
Roemer, J. (2011). The Ethics of Intertemporal Distribution in a Warming Planet. Environmental and Resource Economics.
Stern, N. (2006). The Economics of Climate Change: The Stern Review.

Full reference list is in the source draft: content/essay-inputs/Schymura - Social Discounting.md.

How Can Pure Social DiscountingBe Ethically Justified?