Classwork 10

Dynamic Efficiency, Discounting, and the SCC

Author

Byeong-Hak Choe

Published

October 24, 2025

Modified

November 15, 2025

1) Multiple-Choice

Q1

Why do we discount future outcomes?

  1. Future generations matter less
  2. Resources today have opportunity cost (consume/save/invest)
  3. We can’t measure the future
  4. Future values are always smaller

Option (b) is correct.
We discount because resources today have opportunity costs — we can consume, save, or invest them.
Discounting is about opportunity cost, not about valuing future people less.

Q2

Which example is dynamically inefficient?

  1. Investing in flood barriers with decades of protection
  2. Overharvesting a fishery, cutting future yields
  3. Planting trees that mature over 20 years
  4. Funding early education with long-run gains

Option (b) is correct.
Overharvesting boosts present consumption but harms future yields — a failure of intertemporal efficiency.

Q3

If the discount rate is very high, which project becomes least attractive?

  1. Long-term benefit projects
  2. Short-term payoff projects
  3. Projects with immediate costs
  4. Any project with public funding

Option (a) is correct.
High discount rates heavily shrink far‐future benefits, making long-run projects look unattractive.

Q4

Project A pays mostly now; Project B pays more but in 20 years. What determines which looks “efficient”?

  1. The project titles
  2. Whether costs are public or private
  3. The chosen discount rate
  4. The number of stakeholders

Option (c) is correct.
The discount rate converts future outcomes into present value. Small changes can flip which project looks better.

Q5

A climate policy looks good at 1% but not at 7%. What does that reveal?

  1. It has only short-term benefits
  2. Its value is driven by long-term benefits
  3. Costs are far in the future
  4. It’s unethical

Option (b) is correct.
Sensitivity to discounting reveals that most benefits occur far in the future.

Q6

Which approach gives more weight to future generations?

  1. Ethical / Prescriptive
  2. Market-Based / Descriptive
  3. They’re identical
  4. Neither

Option (a) is correct.
Ethical/prescriptive approaches often use lower discount rates, giving more weight to future generations.

Q7

Town sea wall: costly now, prevents big losses later. With a high discount rate, the town will likely…

  1. Build now
  2. Delay or skip building
  3. Build it twice as tall
  4. Ban waterfront living

Option (b) is correct.
High discount rates downplay future avoided damages, making prevention look less worthwhile.

Q8

If policymakers ignored discounting entirely, they would tend to…

  1. Overinvest in very long-term projects
  2. Underinvest in very long-term projects
  3. Make no difference
  4. Always choose the cheaper project

Option (a) is correct.
Treating all future benefits as equal to today’s inflates the value of distant payoffs.

Q9

Which statement best captures dynamic efficiency?

  1. Choose the cheapest project now
  2. Maximize benefits this year only
  3. Maximize total net benefits across time
  4. Always delay decisions

Option (c) is correct.
Dynamic efficiency balances present and future to maximize total intertemporal net benefits.

Q10

A lower social discount rate (e.g., 1–2%) generally…

  1. Devalues future outcomes
  2. Treats future as irrelevant
  3. Always rejects climate projects
  4. Gives more weight to long-run benefits

Option (d) is correct.
Lower discount rates shrink future benefits less, increasing support for long-horizon projects.



2) Short-Answer

  • Why is it difficult to agree on a single “right” discount rate, and how does this choice reflect ethical judgments about future generations?

It is difficult to agree on a single “right” discount rate because it depends on how we value the future relative to the present.
- A low discount rate gives more weight to future generations, implying a strong ethical commitment to long-term sustainability.
- A high discount rate prioritizes current economic activity, reflecting the view that future generations will be richer and better equipped to handle costs.
Thus, the discount rate is not just a technical input — it embodies ethical judgments about intergenerational responsibility.

  • How should economists and policymakers balance economic efficiency with intergenerational fairness when evaluating climate policies?

Economists seek efficiency by maximizing total net benefits, but fairness asks who gains and who bears the costs.
- Policies that are efficient may still be inequitable if they burden poorer or future populations.
- Balancing both requires tools like distributional weighting, targeted transfers, or progressive climate investments that ensure efficiency gains do not come at the expense of justice.
The goal is a path that is both dynamically efficient and socially fair across generations.

  • Should the Social Cost of Carbon (SCC) reflect global climate damages or only domestic ones? What are the ethical and policy implications of each approach?

Climate change is a global externality — emissions anywhere affect people everywhere.
- A global SCC captures worldwide damages and supports international cooperation and shared responsibility.
- A domestic SCC focuses only on national impacts, aligning with legal and political mandates for domestic cost-benefit analysis.
Ethically, a global SCC recognizes that the U.S. benefits from collective mitigation, while politically, a domestic SCC may be more acceptable but undervalues global harm.

  • Why might different administrations adopt different SCC values or modeling assumptions? What does this reveal about the role of value judgments and policy priorities in economic analysis?

Different administrations adopt different SCC values because they make different choices about key assumptions — discount rates, damage functions, risk treatment, and whether to count global or domestic-only impacts. These choices reflect how policymakers see the world, not purely scientific facts.

1. Normative Value Judgments (What We Choose to Care About)

  • Discount rate:

    • Low rate → future generations matter greatly
    • High rate → present benefits prioritized

  • Global vs. domestic damages: reveals whether the administration values global welfare or national-only impacts.

  • Risk tolerance: some administrations hedge against catastrophic “tail risks”; others downplay them.

These assumptions are ethical choices, not just technical inputs.

2. Policy Priorities and Ideological Views

  • Administrations focused on climate action → tend to choose assumptions producing a higher SCC.
  • Administrations focused on deregulation or short-term growth → often adopt lower SCC values.

SCC choices become a reflection of policy philosophy.

3. Distrust in Science & Selective Use of Evidence

Some administrations exhibit distrust of climate science or highlight uncertainty to weaken climate policy:

  • Emphasizing model uncertainty to justify a very low SCC
  • Ignoring evidence that uncertainty actually argues for a higher SCC

Others embrace mainstream science and choose assumptions aligned with consensus projections.

4. Willful Ignorance

A low SCC can reflect willful ignorance, including:

  • Downplaying well-documented climate risks
  • Ignoring non-market damages (ecosystems, mortality, migration)
  • Selecting narrow or outdated models to minimize the number

This is not scientific disagreement — it is a strategic choice to overlook inconvenient evidence.

5. Industry Pressure & Regulatory Strategy

  • A low SCC weakens justification for environmental regulations.
  • Helps ease compliance costs for fossil-fuel or industrial sectors.
  • Fits political strategies aimed at deregulation.

Conversely, a high SCC supports stricter emissions rules.

6. Political Signaling & Public Messaging

SCC values carry symbolic meaning:

  • High SCC → signals seriousness about climate action
  • Low SCC → signals skepticism about regulation or climate risks

The SCC becomes both a technical figure and a political message.

7. What This Reveals About Economic Analysis

All of this shows that economic analysis is:

  • Not purely objective
  • Shaped by value judgments, priorities, and beliefs about risk
  • Guided by assumptions about whose welfare counts and how much the future matters

Economists can estimate models, but the final SCC value ultimately depends on:

  • Ethical choices
  • Worldviews
  • Policy preferences
  • How much weight we place on uncertain but catastrophic risks

In short:
The SCC is both an economic calculation and a moral-political statement. Differences across administrations reveal how deeply value judgments influence climate economics.

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