Discounting The Global Climate When Technological Change is Endogenous
AbstractThere are two polar views on the issue of discounting. One is to focus on intergenerational equity which means discounting utilities at low rates. Alternatively, the focus is on efficiency where the choice of the discount rate should imply rates of return that are similar to those that prevail in the capital markets. This paper analyses how different discount rates affect greenhouse gas abatement and endogenous technological change. Starting point is a simple analytical model where we show that higher discount rates cannot result in smaller stocks of atmospheric carbon. However, we cannot rule out the paradoxical result that a higher discount rate may lead to a higher knowledge stock. Therefore an Integrated Assessment Model is set up to take a closer look into the time pattern of emissions. Surprisingly, low discount rates lead to a sharp increase in emissions during the beginning of the time horizon, which, however, is overcompensated through higher efforts in greenhouse gas mitigation during the rest of the time horizon. Furthermore, at low discount rates, the potential to save energy through technological innovation is utilized faster and more pronounced than with higher discount rates.
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Date of creation: Mar 2006
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Integrated Assessment; discount rate; endogenous technological change; climate change;
Find related papers by JEL classification:
- Q40 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - General
- O13 - Economic Development, Technological Change, and Growth - - Economic Development - - - Agriculture; Natural Resources; Environment; Other Primary Products
This paper has been announced in the following NEP Reports:
- NEP-ALL-2006-04-01 (All new papers)
- NEP-ENE-2006-04-01 (Energy Economics)
- NEP-ENV-2006-04-01 (Environmental Economics)
- NEP-FMK-2006-04-01 (Financial Markets)
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