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Siblings, not triplets: social preferences for risk, inequality and time in discounting climate change

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  • Helgeson, Jennifer
  • Dietz, Simon
  • Atkinson, Giles D.
  • Hepburn, Cameron
  • Sælen, Håkon

Abstract

Arguments about the appropriate discount rate often start by assuming a Utilitarian social welfare function with isoelastic utility, in which the consumption discount rate is a function of the (constant) elasticity of marginal utility along with the (much discussed) utility discount rate. In this model, the elasticity of marginal utility simultaneously reflects preferences for intertemporal substitution, aversion to risk, and aversion to (spatial) inequality. While these three concepts are necessarily identical in the standard model, this need not be so: well-known models already enable risk to be separated from intertemporal substitution. Separating the three concepts might have important implications for the appropriate discount rate, and hence also for long-term policy. This paper investigates these issues in the context of climate-change economics, by surveying the attitudes of over 3000 people to risk, income inequality over space and income inequality over time. The results suggest that individuals do not see the three concepts as identical, and indeed that preferences over risk, inequality and time are only weakly correlated. As such, relying on empirical evidence of risk or inequality preferences may not necessarily be an appropriate guide to specifying the elasticity of intertemporal substitution. --

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Bibliographic Info

Article provided by Kiel Institute for the World Economy in its journal Economics: The Open-Access, Open-Assessment E-Journal.

Volume (Year): 3 (2009)
Issue (Month): 26 ()
Pages: 1-28

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Handle: RePEc:zbw:ifweej:7611

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Keywords: Climate change; discounting; risk aversion; intertemporal substitution; inequality aversion; intergenerational equity;

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Cited by:
  1. Richard S. J. Tol, 2010. "The Economic Impact of Climate Change," Perspektiven der Wirtschaftspolitik, Verein für Socialpolitik, vol. 11(s1), pages 13-37, 05.
  2. Kousky, Carolyn & Kopp, Robert E. & Cooke, Roger, 2011. "Risk premia and the social cost of carbon: A review," Economics Discussion Papers 2011-19, Kiel Institute for the World Economy.
  3. 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.
  4. BRECHET, Thierry & THENIE, Julien & ZEIMES, Thibaut & ZUBER, Stéphane, . "The benefits of cooperation under uncertainty: the case of climate change," CORE Discussion Papers RP -2435, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  5. Richard S.J. Tol, 2009. "International inequity aversion and the social cost of carbon," Working Papers FNU-178, Research unit Sustainability and Global Change, Hamburg University, revised Nov 2009.
  6. 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, vol. 56(1), pages 73-84, September.
  7. Dietz, Simon & Hepburn, Cameron, 2013. "Benefit–cost analysis of non-marginal climate and energy projects," Energy Economics, Elsevier, vol. 40(C), pages 61-71.
  8. Kopp, Robert E. & Golub, Alexander & Keohane, Nathaniel O. & Onda, Chikara, 2011. "The influence of the specification of climate change damages on the social cost of carbon," Economics Discussion Papers 2011-22, Kiel Institute for the World Economy.
  9. 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.

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