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Discounting and relative prices in assessing future environmental damages

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Author Info

  • Hoel, Michael

    ()
    (Department of Economics, University of Oslo)

  • Sterner, Thomas

    ()
    (Department of Economics, School of Business, Economics and Law, Göteborg University)

Abstract

Environmentalists are often upset at the effect of discounting costs of future environmental damage, e.g. due to climate change. An often overlooked message is that we should discount costs but also take into account the increase in the relative price of the ecosystem service endangered. The effect of discounting would thus be counteracted, and if the rate of price rise of the item was fast enough it might even be reversed. The scarcity that leads to rising relative prices for the environmental good will also have direct effects on the discount rate itself. The magnitude of these effects depends on properties of the economy’s technology and on social preferences. We develop a simple model of the economy that illustrates how changes in crucial technology and preference parameters may affect both the discount rate and the rate of change of values of environmental goods. The combined effect of discounting and the change of values of environmental goods is more likely to be low, or even negative, the lower is the growth rate of environmental quality (or the larger its decline rate) and the lower is the elasticity of substitution between environmental quality and produced goods.

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File URL: http://hdl.handle.net/2077/2722
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Bibliographic Info

Paper provided by University of Gothenburg, Department of Economics in its series Working Papers in Economics with number 199.

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Length: 23 pages
Date of creation: 16 Mar 2006
Date of revision:
Publication status: Published in Climatic Change, 2007, pages 265-280.
Handle: RePEc:hhs:gunwpe:0199

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Postal: Department of Economics, School of Business, Economics and Law, University of Gothenburg, Box 640, SE 405 30 GÖTEBORG, Sweden
Phone: 031-773 10 00
Web page: http://www.handels.gu.se/econ/
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Keywords: Discounting; future costs; scarcity; environment; climate change;

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References

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  1. Weitzman, M.L., 1993. "On the 'Environmental' Discount Rate," Harvard Institute of Economic Research Working Papers 1625, Harvard - Institute of Economic Research.
  2. Horowitz, John K., 1996. "Environmental policy under a non-market discount rate," Ecological Economics, Elsevier, vol. 16(1), pages 73-78, January.
  3. 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.
  4. Weitzman, Martin L., 1998. "Why the Far-Distant Future Should Be Discounted at Its Lowest Possible Rate," Journal of Environmental Economics and Management, Elsevier, vol. 36(3), pages 201-208, November.
  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. Schelling, Thomas C, 1995. "Intergenerational discounting," Energy Policy, Elsevier, vol. 23(4-5), pages 395-401.
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Cited by:
  1. Di Vita, Giuseppe, 2008. "Is the discount rate relevant in explaining the Environmental Kuznets Curve?," Journal of Policy Modeling, Elsevier, vol. 30(2), pages 191-207.
  2. Dieter Helm, 2007. "Climate change: Sustainable growth, markets, and institutions," Human Development Occasional Papers (1992-2007) HDOCPA-2007-05, Human Development Report Office (HDRO), United Nations Development Programme (UNDP).

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