Avoiding path dependence of distributional weights: Lessons from climate change economic assessment
AbstractIn some cost benefit analysis (CBA) applications, as for example valuation of climate change damages, distributional weights are used to account for diminishing utility of marginal income. This is usually done by intratemporal distributional weights, which are combined with discounting to account for intertemporal equity and efficiency. Here, I show that this approach may introduce some inconsistencies in terms of path dependence. In short, this inconsistency means that regional economic growth is double counted. This is because income weighting is performed both through the discount rate and through the distributional weights, so that growth shows up twice in the weighting process. Using the PAGE2002 model it is found that the inconsistency problem in the original model erases the influence of distributional weights on the social cost of carbon dioxide (SCCO2), compared to a standard CBA approach. The proposed alternative approaches yield about 20-40% higher values of SCCO2 than the old approach.
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Bibliographic InfoPaper provided by Örebro University, School of Business in its series Working Papers with number 2012:8.
Length: 20 pages
Date of creation: 21 May 2012
Date of revision: 16 Aug 2012
Contact details of provider:
Postal: Örebro University School of Business, SE - 701 82 ÖREBRO, Sweden
Phone: 019-30 30 00
Fax: 019-33 25 46
Web page: http://www.oru.se/Institutioner/Handelshogskolan-vid-Orebro-universitet/
More information through EDIRC
Distributional weights; Equity weights; Discounting; Cost benefit analysis; Marginal utility; Integrated assessment model; PAGE2002; Social cost of carbon; Climate change;
Find related papers by JEL classification:
- C69 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Other
- H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
- H43 - Public Economics - - Publicly Provided Goods - - - Project Evaluation; Social Discount Rate
- Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters
This paper has been announced in the following NEP Reports:
- NEP-ALL-2012-05-29 (All new papers)
- NEP-ENE-2012-05-29 (Energy Economics)
- NEP-ENV-2012-05-29 (Environmental Economics)
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