The Effects of Ageing and an Environmental Trust Fund in an Overlapping Generations Model on Carbon Emission Reductions
Most currently employed Integrated Assessment Models for climate change are of a dynastic nature. They employ the Ramsey rule linking the interest rate, economic growth, and the rate of pure time preference. This paper argues that, although a dynastic framework might be convenient for economic analysis, it is restrictive and can be misleading. Overlapping Generations models, which do not employ the Ramsey rule, are more flexible and may give results different from those derived from dynastic models. With the Integrated Assessment Model ALICE 2.0, it is shown how various assumptions on demographic change and public institutions can affect the interest rate, thereby influencing the efficient greenhouse gas emission reductions. It is concluded that dynastic Integrated Assessment Models are in many respects inappropriate for providing policy makers with quantitative figures about the costs of carbon dioxide emissions and their desirable reduction levels.