An Even Sterner Review: Introducing Relative Prices into the Discounting Debate
AbstractThe Stern Review has had a major influence on the policy discussion on climate change. One reason is that the report has raised the estimated cost of unmitigated climate damages by an order of magnitude compared to most earlier estimates, leading to a call for strong and urgent action on climate change. Not surprisingly, severe criticism has been levied against the report by authors who think that these results hinge mainly on the use of a discount rate that is too low. Here we discuss the Ramsey rule for the discount rates and its implications for the economics of climate change. While we find no strong objections to the discounting assumptions adopted in the Stern Review, our main point is that the conclusions reached in the review can be justified on other grounds than by using a low discount rate. We argue that nonmarket damages from climate change are probably underestimated and that future scarcities that will be induced by the changing composition of the economy and climate change should lead to rising relative prices for certain goods and services, raising the estimated damage of climate change and counteracting the effect of discounting. We build our analysis on earlier research (Hoel and Sterner 2007) that has shown that the Ramsey discounting formula is somewhat modified in a two-sector economy with differential growth rates. Most importantly, such a model is characterized by changing relative prices, something that has major implications for a correct valuation of future climate damages. We introduce these results into a slightly modified version of the DICE model (Nordhaus 1994) and find that taking relative prices into account can have as large an effect on economically warranted abatement levels as can a low discount rate.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
Bibliographic InfoArticle provided by Association of Environmental and Resource Economists in its journal Review of Environmental Economics and Policy.
Volume (Year): 2 (2008)
Issue (Month): 1 (Winter)
Contact details of provider:
Postal: Oxford University Press, Great Clarendon Street, Oxford OX2 6DP, UK
Fax: 01865 267 985
Web page: http://reep.oxfordjournals.org/
More information through EDIRC
Other versions of this item:
- Sterner, Thomas & Persson, U. Martin, 2007. "An Even Sterner Review: Introducing Relative Prices into the Discounting Debate," Discussion Papers, Resources For the Future dp-07-37, Resources For the Future.
- H43 - Public Economics - - Publicly Provided Goods - - - Project Evaluation; Social Discount Rate
- Q32 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Nonrenewable Resources and Conservation - - - Exhaustible Resources and Economic Development
- Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Philibert, Cedric, 1999. "The economics of climate change and the theory of discounting," Energy Policy, Elsevier, Elsevier, vol. 27(15), pages 913-927, December.
- Dasgupta,P. S. & Heal,G. M., 1985. "Economic Theory and Exhaustible Resources," Cambridge Books, Cambridge University Press, Cambridge University Press, number 9780521297615.
- Nordhaus, William D., 1993.
"Rolling the 'DICE': an optimal transition path for controlling greenhouse gases,"
Resource and Energy Economics, Elsevier,
Elsevier, vol. 15(1), pages 27-50, March.
- William D. Nordhaus, 1992. "Rolling the 'Dice': An Optimal Transition Path for Controlling Greenhouse Gases," Cowles Foundation Discussion Papers, Cowles Foundation for Research in Economics, Yale University 1019, Cowles Foundation for Research in Economics, Yale University.
- Richard Tol, 1999. "Spatial and Temporal Efficiency in Climate Policy: Applications of FUND," Environmental & Resource Economics, European Association of Environmental and Resource Economists, European Association of Environmental and Resource Economists, vol. 14(1), pages 33-49, July.
- Mirrlees, J. A. & Stern, N. H., 1972. "Fairly good plans," Journal of Economic Theory, Elsevier, Elsevier, vol. 4(2), pages 268-288, April.
- Christian Gollier, 2007. "Comment intégrer le risque dans le calcul économique ?," Revue d'économie politique, Dalloz, Dalloz, vol. 0(2), pages 209-223.
- Manne, Alan & Mendelsohn, Robert & Richels, Richard, 1995. "MERGE : A model for evaluating regional and global effects of GHG reduction policies," Energy Policy, Elsevier, Elsevier, vol. 23(1), pages 17-34, January.
- Azar, Christian & Sterner, Thomas, 1996. "Discounting and distributional considerations in the context of global warming," Ecological Economics, Elsevier, Elsevier, vol. 19(2), pages 169-184, November.
- Gerlagh, Reyer & van der Zwaan, B. C. C., 2002. "Long-Term Substitutability between Environmental and Man-Made Goods," Journal of Environmental Economics and Management, Elsevier, vol. 44(2), pages 329-345, September.
Blog mentionsAs found by EconAcademics.org, the blog aggregator for Economics research:
RePEc Biblio mentionsAs found on the RePEc Biblio, the curated bibliography for Economics:
- > Environmental and Natural Resource Economics > Climate economics > Discounting, equity, uncertainty
This item has more than 25 citations. To prevent cluttering this page, these citations are listed on a separate page. reading list or among the top items on IDEAS.Access and download statisticsgeneral information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Oxford University Press) or (Christopher F. Baum).
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.