Final Report Summary - LONG-TERM RISKS (Evaluation and management of collective long-term risks) How do our moral responsibilities towards future generations translate into practical rules to evaluate public policies and private investments with long lasting impacts? This question is particularly crucial in the case of climate change, for which prominent economists have been debating about the rate to be used to discount distant climate impacts in order to compute the socially desirable price of carbon. Many of my works during the period dealt with exactly that question. If we assume in line with most of the literature that long term climate benefits of mitigation are unrelated to economic growth, then there are strong arguments to use a very small (around 1-2%) discount rate for distant climate benefits, yielding a relatively large social price of carbon. I argue that the economic achievement of distant generations is so uncertain that prudence justifies such a long-termism in the valuation of our mitigation efforts. This result is perfectly in line with the modern theory of finance adapted to include ingredients such as, for example, an uncertain trend of economic growth, economic catastrophes occurring with an uncertain frequency, intragenerational inequalities, and a collective aversion to ambiguity. However, it happens that fighting climate change generates benefits to future generations that are positively correlated with their level of economic development. This implies that mitigation does not hedge the global risk that future generations face. This justifies adding a positive risk premium to the risk free discount rate. I show that this risk premium must have an increasing term structure. My conclusion at this stage of this research is that expected climate benefits should be discounted at a rate somewhere between 4 and 5%. However, this result is quite sensitive to the calibration of fundamental uncertainties affecting the distant future, such as the frequency of global catastrophes, the long-term trend of growth, or the plausibility of the economic convergence and of the reduction of inequalities around the world.
