Intergenerational Equitable Climate Change Mitigation: Negative Effects of Stochastic Interest Rates; Positive Effects of Financing

Abstract

Climate mitigation decisions today affect future generations, raising questions of intergenerational equity. Integrated assessment models (IAMs) rely on discounting to evaluate long-term policy costs and benefits. Using the DICE model, we quantify how optimal pathways distribute abatement and damage costs across cohorts. Unconstrained optimization creates intergenerational inequality, with future generations bearing higher costs relative to GDP. Extending the model with stochastic discount rates, we show that discount-rate uncertainty significantly amplifies this inequality. We consider two independent extensions: the financing of abatement costs and the modeling of nonlinear financing costs under large damages. Both extensions can materially improve intergenerational equity by distributing mitigation efforts more evenly. As an illustration, we present a modified DICE model whose optimal pathway limits generational costs to 3 % of GDP, leading to more equitable effort sharing. Our proposed model extensions are model-agnostic, applicable across IAMs, and compatible with alternative intergenerational equity metrics.