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Climate Change, Catastrophic Risk and the Relative Unimporartance of Discounting

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Author Info

  • Nævdal , Eric

    ()
    (Ragnar Frisch Centre for Economic Research)

  • Vislie, Jon

    ()
    (Dept. of Economics, University of Oslo)

Abstract

Discounting in the presence of catastrophic risk is a hotly debated issue, in particular with respect to climate change. Many scientists and laymen concerned with potentially catastrophic impacts feel that if an increase in the discount rate drastically increases the likelihood of catastrophic outcomes, this discredits economic cost-benefit calculations. This paper argues that this intuition is sound and that if cost-benefit calculations are done within a model that encompasses the type of catastrophic risk that these scientists worry about, the resulting stabilization target will only be slightly influenced by the discount rate. This is shown within a stylized model of a risk neutral decision maker facing a problem with a catastrophic threshold with unknown location.

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File URL: https://www.sv.uio.no/econ/english/research/unpublished-works/working-papers/pdf-files/2008/Memo-28-2008.pdf
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Bibliographic Info

Paper provided by Oslo University, Department of Economics in its series Memorandum with number 28/2008.

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Length: 12 pages
Date of creation: 01 Nov 2008
Date of revision:
Handle: RePEc:hhs:osloec:2008_028

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Postal: Department of Economics, University of Oslo, P.O Box 1095 Blindern, N-0317 Oslo, Norway
Phone: 22 85 51 27
Fax: 22 85 50 35
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Web page: http://www.oekonomi.uio.no/indexe.html
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Keywords: climate change; discounting; catastrophic risk; optimal control;

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References

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  1. Naevdal, Eric, 2006. "Dynamic optimisation in the presence of threshold effects when the location of the threshold is uncertain - with an application to a possible disintegration of the Western Antarctic Ice Sheet," Journal of Economic Dynamics and Control, Elsevier, vol. 30(7), pages 1131-1158, July.
  2. Tsur, Yacov & Zemel, Amos, 1996. "Accounting for global warming risks: Resource management under event uncertainty," Journal of Economic Dynamics and Control, Elsevier, vol. 20(6-7), pages 1289-1305.
  3. Martin L. Weitzman, 2007. "A Review of the Stern Review on the Economics of Climate Change," Journal of Economic Literature, American Economic Association, vol. 45(3), pages 703-724, September.
  4. William D. Nordhaus, 2007. "A Review of the Stern Review on the Economics of Climate Change," Journal of Economic Literature, American Economic Association, vol. 45(3), pages 686-702, September.
  5. Tsur, Yacov & Zemel, Amos, 1998. "Pollution control in an uncertain environment," Journal of Economic Dynamics and Control, Elsevier, vol. 22(6), pages 967-975, June.
  6. Naevdal, Eric & Oppenheimer, Michael, 2007. "The economics of the thermohaline circulation--A problem with multiple thresholds of unknown locations," Resource and Energy Economics, Elsevier, vol. 29(4), pages 262-283, November.
  7. Partha Dasgupta, 2008. "Discounting climate change," Journal of Risk and Uncertainty, Springer, vol. 37(2), pages 141-169, December.
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Cited by:
  1. Snorre Kverndokk & Eric Nævdal & Linda Nøstbakken, 2013. "The Trade-off between Intra- and Intergenerational Equity in Climate Policy," CESifo Working Paper Series 4285, CESifo Group Munich.

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