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Discount rates, equity weights and the social cost of carbon

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  • Hope, Chris

Abstract

Equity weighting has been proposed as a way of allowing welfare equivalents to be included in the social cost of carbon since a dollar to a poor person is worth more than a dollar to a rich one. Here we use the PAGE2002 integrated assessment model to show that the social cost of carbon is higher without equity weights (an elasticity of marginal utility with respect to income of 0) than with them. This might seem counter-intuitive, but it comes about because of the logical link between equity weights and discount rates; as the elasticity goes from 0 to - 0.5 to - 1.0, the social rate of time preference rises, and the drop in present values that results far outweighs the small increase in impacts that equity weights bring.

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Bibliographic Info

Article provided by Elsevier in its journal Energy Economics.

Volume (Year): 30 (2008)
Issue (Month): 3 (May)
Pages: 1011-1019

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Handle: RePEc:eee:eneeco:v:30:y:2008:i:3:p:1011-1019

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Web page: http://www.elsevier.com/locate/eneco

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References

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  1. Plambeck, Erica L & Hope, Chris, 1996. "PAGE95 : An updated valuation of the impacts of global warming," Energy Policy, Elsevier, vol. 24(9), pages 783-793, September.
  2. Richard S. J. Tol, 1999. "The Marginal Costs of Greenhouse Gas Emissions," The Energy Journal, International Association for Energy Economics, vol. 0(Number 1), pages 61-81.
  3. Tol, Richard S. J., 2005. "The marginal damage costs of carbon dioxide emissions: an assessment of the uncertainties," Energy Policy, Elsevier, vol. 33(16), pages 2064-2074, November.
  4. David Pearce, 2003. "The Social Cost of Carbon and its Policy Implications," Oxford Review of Economic Policy, Oxford University Press, vol. 19(3), pages 362-384.
  5. Azar, Christian & Sterner, Thomas, 1996. "Discounting and distributional considerations in the context of global warming," Ecological Economics, Elsevier, vol. 19(2), pages 169-184, November.
  6. Tol, Richard S. J., 2002. "Welfare specifications and optimal control of climate change: an application of fund," Energy Economics, Elsevier, vol. 24(4), pages 367-376, July.
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Citations

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Cited by:
  1. Anthoff, David & Rose, Steven & Tol, Richard S. J. & Waldhoff, Stephanie, 2011. "Regional and sectoral estimates of the social cost of carbon: An application of FUND," Economics Discussion Papers 2011-18, Kiel Institute for the World Economy.
  2. Anthoff, David & Tol, Richard S. J. & Yohe, Gary W., 2009. "Discounting for Climate Change," Economics Discussion Papers 2009-15, Kiel Institute for the World Economy.
  3. Pycroft, Jonathan & Vergano, Lucia & Hope, Chris & Paci, Daniele & Ciscar, Juan Carlos, 2011. "A tale of tails: Uncertainty and the social cost of carbon dioxide," Economics - The Open-Access, Open-Assessment E-Journal, Kiel Institute for the World Economy, vol. 5(22), pages 1-29.
  4. Richard S. J. Tol, 2010. "The Economic Impact of Climate Change," Perspektiven der Wirtschaftspolitik, Verein für Socialpolitik, vol. 11(s1), pages 13-37, 05.
  5. Hourcade, Jean-Charles & Ambrosi, Philippe & Dumas, Patrice, 2009. "Beyond the Stern Review: Lessons from a risky venture at the limits of the cost-benefit analysis," Ecological Economics, Elsevier, vol. 68(10), pages 2479-2484, August.
  6. Simon Dietz, 2009. "High impact, low probability? An empirical analysis of risk in the economics of climate change," Grantham Research Institute on Climate Change and the Environment Working Papers 9, Grantham Research Institute on Climate Change and the Environment.
  7. Hope, Chris W., 2011. "The social cost of CO2 from the PAGE09 model," Economics Discussion Papers 2011-39, Kiel Institute for the World Economy.
  8. Kopp, Robert E. & Golub, Alexander & Keohane, Nathaniel O. & Onda, Chikara, 2012. "The influence of the specification of climate change damages on the social cost of carbon," Economics - The Open-Access, Open-Assessment E-Journal, Kiel Institute for the World Economy, vol. 6(13), pages 1-40.
  9. Simon Dietz, 2011. "High impact, low probability? An empirical analysis of risk in the economics of climate change," Climatic Change, Springer, vol. 108(3), pages 519-541, October.
  10. Simon Dietz, 2009. "High impact, low probability? An empirical analysis of risk in the economics of climate change," LSE Research Online Documents on Economics 37612, London School of Economics and Political Science, LSE Library.
  11. Marshall, Liz & Kelly, Alexia, 2010. "The Time Value of Carbon and Carbon Storage: Clarifying the terms and the policy implications of the debate," MPRA Paper 27326, University Library of Munich, Germany.
  12. Tol, Richard S.J., 2013. "Targets for global climate policy: An overview," Journal of Economic Dynamics and Control, Elsevier, vol. 37(5), pages 911-928.
  13. Richard S. J. Tol, 2009. "The Economic Effects of Climate Change," Journal of Economic Perspectives, American Economic Association, vol. 23(2), pages 29-51, Spring.
  14. Anthoff, David & Tol, Richard S. J., 2011. "The Uncertainty about the Social Cost of Carbon: A Decomposition Analysis Using FUND," Papers WP404, Economic and Social Research Institute (ESRI).
  15. Richard S.J. Tol, 2013. "Bootstraps for Meta-Analysis with an Application to the Impact of Climate Change," Working Paper Series 6413, Department of Economics, University of Sussex.
  16. Elizabeth Stanton, 2011. "Negishi welfare weights in integrated assessment models: the mathematics of global inequality," Climatic Change, Springer, vol. 107(3), pages 417-432, August.
  17. Chris Hope, 2013. "Critical issues for the calculation of the social cost of CO 2: why the estimates from PAGE09 are higher than those from PAGE2002," Climatic Change, Springer, vol. 117(3), pages 531-543, April.

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