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Discounting and Uncertainty in Climate Change Policy Analysis

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  • Richard B. Howarth

Abstract

Economic studies of climate change commonly discount the future at a rate equal to the long-run return on corporate stocks. Stock market returns, however, are dominated by a risk premium, while climate change mitigation measures would reduce important risks to future welfare. Drawing on the theory of investment behavior under uncertainty, this paper argues that the benefits of climate stabilization policies should be discounted at a rate equal to the annual return on risk-free financial assets, which attains an empirical value between 0 and 2.6%. In addition, expected benefits must be adjusted to account for the value of risk abatement.

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Bibliographic Info

Article provided by University of Wisconsin Press in its journal Land Economics.

Volume (Year): 79 (2003)
Issue (Month): 3 ()
Pages: 369-381

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Handle: RePEc:uwp:landec:v:79:y:2003:i:3:p:369-381

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Web page: http://le.uwpress.org/

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Cited by:
  1. Kousky, Carolyn & Kopp, Robert E. & Cooke, Roger, 2011. "Risk premia and the social cost of carbon: A review," Economics Discussion Papers, Kiel Institute for the World Economy 2011-19, Kiel Institute for the World Economy.
  2. Camilla Froyn, 2005. "Decision Criteria, Scientific Uncertainty, and the Globalwarming Controversy," Mitigation and Adaptation Strategies for Global Change, Springer, Springer, vol. 10(2), pages 183-211, April.
  3. Richard B. Howarth, 2004. "Against High Interest Rates," Rensselaer Working Papers in Economics, Rensselaer Polytechnic Institute, Department of Economics 0404, Rensselaer Polytechnic Institute, Department of Economics.
  4. Hof, Andries F. & van Vuuren, Detlef P. & den Elzen, Michel G.J., 2010. "A quantitative minimax regret approach to climate change: Does discounting still matter?," Ecological Economics, Elsevier, Elsevier, vol. 70(1), pages 43-51, November.
  5. Brekke, Kjell Arne & Johansson-Stenman, Olof, 2008. "The Behavioural Economics of Climate Change," Working Papers in Economics, University of Gothenburg, Department of Economics 305, University of Gothenburg, Department of Economics.
  6. Frank Ackerman & Ian J. Finlayson, . "06-07 “The Economics of Inaction on Climate Change: A Sensitivity Analysis”," GDAE Working Papers, GDAE, Tufts University 06-07, GDAE, Tufts University.
  7. Maria Sandsmark & Haakon Vennemo, 2007. "A portfolio approach to climate investments: CAPM and endogenous risk," Environmental & Resource Economics, European Association of Environmental and Resource Economists, European Association of Environmental and Resource Economists, vol. 37(4), pages 681-695, August.
  8. Johansson-Stenman, Olof, 2010. "Health Investments Under Risk And Ambiguity," Working Papers in Economics, University of Gothenburg, Department of Economics 443, University of Gothenburg, Department of Economics.
  9. Gutrich, John & Howarth, Richard B., 2007. "Carbon sequestration and the optimal management of New Hampshire timber stands," Ecological Economics, Elsevier, Elsevier, vol. 62(3-4), pages 441-450, May.
  10. Andries Hof & Chris Hope & Jason Lowe & Michael Mastrandrea & Malte Meinshausen & Detlef Vuuren, 2012. "The benefits of climate change mitigation in integrated assessment models: the role of the carbon cycle and climate component," Climatic Change, Springer, Springer, vol. 113(3), pages 897-917, August.
  11. Venkatachalam, L., 2008. "Behavioral economics for environmental policy," Ecological Economics, Elsevier, Elsevier, vol. 67(4), pages 640-645, November.
  12. Liu, Liqun, 2012. "Inferring the rate of pure time preference under uncertainty," Ecological Economics, Elsevier, Elsevier, vol. 74(C), pages 27-33.
  13. Elisabeth Gsottbauer & Jeroen Bergh, 2011. "Environmental Policy Theory Given Bounded Rationality and Other-regarding Preferences," Environmental & Resource Economics, European Association of Environmental and Resource Economists, European Association of Environmental and Resource Economists, vol. 49(2), pages 263-304, June.
  14. Kousky, Carolyn & Kopp, Robert E. & Cooke, Roger M., 2011. "Risk premia and the social cost of carbon: A review," Economics - The Open-Access, Open-Assessment E-Journal, Kiel Institute for the World Economy, Kiel Institute for the World Economy, vol. 5(21), pages 1-24.
  15. Frank Ackerman & Elizabeth Stanton & Ramón Bueno, 2013. "Epstein–Zin Utility in DICE: Is Risk Aversion Irrelevant to Climate Policy?," Environmental & Resource Economics, European Association of Environmental and Resource Economists, European Association of Environmental and Resource Economists, vol. 56(1), pages 73-84, September.
  16. W. Botzen & Jeroen Bergh, 2014. "Specifications of Social Welfare in Economic Studies of Climate Policy: Overview of Criteria and Related Policy Insights," Environmental & Resource Economics, European Association of Environmental and Resource Economists, European Association of Environmental and Resource Economists, vol. 58(1), pages 1-33, May.

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