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Discounting The Global Climate When Technological Change is Endogenous

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  • Gunter Stephan
  • Georg Müller-Fürstenberger
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    Abstract

    There 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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    Bibliographic Info

    Paper provided by Universitaet Bern, Departement Volkswirtschaft in its series Diskussionsschriften with number dp0603.

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    Date of creation: Mar 2006
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    Handle: RePEc:ube:dpvwib:dp0603

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    Keywords: Integrated Assessment; discount rate; endogenous technological change; climate change;

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    1. Jones, Charles I, 1995. "R&D-Based Models of Economic Growth," Journal of Political Economy, University of Chicago Press, vol. 103(4), pages 759-84, August.
    2. David Pearce & Ben Groom & Cameron Hepburn & Phoebe Koundouri, 2003. "Valuing the Future," World Economics, World Economics, Economic & Financial Publishing, 1 Ivory Square, Plantation Wharf, London, United Kingdom, SW11 3UE, vol. 4(2), pages 121-141, April.
    3. Stephan, Gunter & Muller-Furstenberger, Georg, 1998. "Discounting and the Economic Costs of Altruism in Greenhouse Gas Abatement," Kyklos, Wiley Blackwell, vol. 51(3), pages 321-38.
    4. Reyer Gerlagh & Bob van der Zwaan & Marjan Hofkes & Ger Klaassen, 2004. "Impacts of CO 2-Taxes in an Economy with Niche Markets and Learning-by-Doing," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 28(3), pages 367-394, July.
    5. Burmeister, Edwin & Turnovsky, Stephen J, 1972. "Capital Deepening Response in an Economy with Heterogeneous Capital Goods," American Economic Review, American Economic Association, vol. 62(5), pages 842-53, December.
    6. Tjalling C. Koopmans, 1963. "On the Concept of Optimal Economic Growth," Cowles Foundation Discussion Papers 163, Cowles Foundation for Research in Economics, Yale University.
    7. Kenneth J. Arrow, 1996. "Discounting, Morality, and Gaming," Working Papers 97004, Stanford University, Department of Economics.
    8. Dieter Bräuninger, 2003. "Demographics and Pension Reforms in the Major Central and Eastern European Countries," World Economics, World Economics, Economic & Financial Publishing, 1 Ivory Square, Plantation Wharf, London, United Kingdom, SW11 3UE, vol. 4(1), pages 117-132, January.
    9. Goulder, Lawrence H. & Mathai, Koshy, 2000. "Optimal CO2 Abatement in the Presence of Induced Technological Change," Journal of Environmental Economics and Management, Elsevier, vol. 39(1), pages 1-38, January.
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    Cited by:
    1. Muller-Furstenberger, Georg & Stephan, Gunter, 2007. "Integrated assessment of global climate change with learning-by-doing and energy-related research and development," Energy Policy, Elsevier, vol. 35(11), pages 5298-5309, November.

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