Climate change and overlapping generations

This paper examines the interplay between discounting and the distribution of welfare between generations in formulating climate change response strategies. The analysis shows that one can understand Nordhaus's (1994) standard representative agent model for climate policy analysis as a reduced form of an overlapping generations model that embodies more realistic demographic assumptions. In this setting, alternative Pareto efficient allocations may be supported as competitive equilibria given appropriate sets of income transfers between generations. Numerical simulations establish that increased intergenerational transfers entail reduced monetary discount rates and increased rates of greenhouse gas emissions abatement. Short-run policy choices are highly sensitive to normative judgments concerning the relative weight attached to the welfare of future generations.