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Ecological Discounting

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  • Gollier, Christian

Abstract

Which rates should we use to discount costs and benefits of different natures at different time horizons? We answer this question by considering a representative agent consuming two goods whose availability evolves over time in a stochastic way. We extend the Ramsey rule by taking into account the degree of substitutability between the two goods and of the uncertainty surrounding the economic and environmental growths. The rate at which environmental impacts should be discounted is in general different from the one at which monetary benefits should be discounted. We provide arguments in favor of an ecological discount rate smaller than the economic discount rate. In particular, we show that, under certainty and Cobb-Douglas preferences, the difference between the economic and the ecological discount rates equals the difference between the economic and the ecological growth rates. Using data about the link between biodiversity and economic development, I estimate that the rate at which changes in biodiversity should be discounted is 1.5%, whereas changes in consumption should be discounted at 3.2%.

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Paper provided by Toulouse School of Economics (TSE) in its series TSE Working Papers with number 09-062.

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Date of creation: Jul 2009
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Publication status: Published in Journal of Economic Theory, vol.�145, n°2, mars 2010, p.�812-829.
Handle: RePEc:tse:wpaper:21927

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  1. Louis Eeckhoudt & Harris Schlesinger, 2005. "Putting Risk in its Proper Place," CESifo Working Paper Series 1462, CESifo Group Munich.
  2. Louis Eeckhoudt & Béatrice Rey & Harris Schlesinger, 2007. "A Good Sign for Multivariate Risk Taking," Management Science, INFORMS, vol. 53(1), pages 117-124, January.
  3. Thomas Sterner & U. Martin Persson, 2008. "An Even Sterner Review: Introducing Relative Prices into the Discounting Debate," Review of Environmental Economics and Policy, Association of Environmental and Resource Economists, vol. 2(1), pages 61-76, Winter.
  4. Gollier, Christian, 2002. "Time Horizon and the Discount Rate," Journal of Economic Theory, Elsevier, vol. 107(2), pages 463-473, December.
  5. Christian Gollier, 2005. "The Consumption-Based Determinants of the Term Structure of Discount Rates," CESifo Working Paper Series 1375, CESifo Group Munich.
  6. Ekaterini Panopoulou & Ben Groom & Phoebe Koundouri & Theologos Pantelidis, 2004. "An Econometric Approach To Estimating Long-Run Discount Rates," Royal Economic Society Annual Conference 2004 70, Royal Economic Society.
  7. Traeger, Christian P, 2007. "Sustainability, limited substitutability and non-constant social discount rates," CUDARE Working Paper Series 1045, University of California at Berkeley, Department of Agricultural and Resource Economics and Policy.
  8. Narayana R. Kocherlakota, 1996. "The Equity Premium: It's Still a Puzzle," Journal of Economic Literature, American Economic Association, vol. 34(1), pages 42-71, March.
  9. Rothschild, Michael & Stiglitz, Joseph E., 1970. "Increasing risk: I. A definition," Journal of Economic Theory, Elsevier, vol. 2(3), pages 225-243, September.
  10. Kimball, Miles S, 1993. "Standard Risk Aversion," Econometrica, Econometric Society, vol. 61(3), pages 589-611, May.
  11. Daniel L. Millimet & John A. List & Thanasis Stengos, 2003. "The Environmental Kuznets Curve: Real Progress or Misspecified Models?," The Review of Economics and Statistics, MIT Press, vol. 85(4), pages 1038-1047, November.
  12. Martin L. Weitzman, 2007. "Subjective Expectations and Asset-Return Puzzles," American Economic Review, American Economic Association, vol. 97(4), pages 1102-1130, September.
  13. Weikard, Hans-Peter & Zhu, Xueqin, 2005. "Discounting and environmental quality: When should dual rates be used?," Economic Modelling, Elsevier, vol. 22(5), pages 868-878, September.
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Cited by:
  1. Jianli Wang & Pu Gong, 2013. "Labor supply with stochastic wage rate and non-labor income uncertainty," Journal of Economics, Springer, vol. 109(1), pages 41-55, May.
  2. Gollier, Christian, 2013. "A theory of rational short-termism with uncertain betas," TSE Working Papers 13-389, Toulouse School of Economics (TSE).
  3. Gollier, Christian, 2012. "Asset pricing with uncertain betas: A long-term perspective," TSE Working Papers 12-354, Toulouse School of Economics (TSE).
  4. Kögel, Tomas, 2009. "On the Relation between Dual-Rate Discounting and Substitutability," Economics Discussion Papers 2009-10, Kiel Institute for the World Economy.
  5. Elyès Jouini & Clotilde Napp & Diego Nocetti, 2013. "On Multivariate Prudence," Post-Print halshs-00635558, HAL.
  6. Joachim Fuenfgelt & Stefan Baumgaertner, 2012. "A utilitarian notion of responsibility for sustainability," Working Paper Series in Economics 234, University of Lüneburg, Institute of Economics.
  7. Stefan Baumgaertner & Alexandra M. Klein & Denise Thiel & Klara Winkler, 2013. "Ramsey discounting of ecosystem services," Working Paper Series in Economics 281, University of Lüneburg, Institute of Economics.
  8. Defrancesco, Edi & Gatto, Paola & Rosato, Paolo, 2014. "A ‘component-based’ approach to discounting for natural resource damage assessment," Ecological Economics, Elsevier, vol. 99(C), pages 1-9.
  9. M. Gallastegui & M. González-Eguino & I. Galarraga, 2012. "Cost effectiveness of a combination of instruments for global warming: a quantitative approach for Spain," SERIEs, Spanish Economic Association, vol. 3(1), pages 111-132, March.
  10. Christoph Heinzel, 2014. "Term structure of discount rates under multivariate s-ordered consumption growth," Working Papers SMART - LERECO 14-01, INRA UMR SMART.
  11. Boyarchenko, Svetlana & Levendorskii, Sergei, 2010. "Discounting when income is stochastic and climate change policies," MPRA Paper 27998, University Library of Munich, Germany.
  12. Johansson-Stenman, Olof & Sterner, Thomas, 2013. "Discounting and Relative Consumption," Working Papers in Economics 559, University of Gothenburg, Department of Economics.

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