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Discounting And Climate Change Policy

Author

Listed:
  • Karp, Larry S.
  • Tsur, Yacov

Abstract

A constant social discount rate cannot reflect both a reasonable opportunity cost of public funds and an ethically defensible concern for generations in the distant future. We use a model of hyperbolic discounting that achieves both goals. We imbed this discounting model in a simple climate change model to calculate constant equivalent discount rates" and plausible levels of expenditure to control climate change. We compare these results to discounting assumptions and policy recommendations in the Stern Review on Climate Change.

Suggested Citation

  • Karp, Larry S. & Tsur, Yacov, 2007. "Discounting And Climate Change Policy," Discussion Papers 7149, Hebrew University of Jerusalem, Department of Agricultural Economics and Management.
  • Handle: RePEc:ags:huaedp:7149
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    File URL: http://purl.umn.edu/7149
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    References listed on IDEAS

    as
    1. Karp, Larry & Tsur, Yacov, 2007. "Climate Policy When the Distant Future Matters: Catastrophic Events with Hyperbolic Discounting," Department of Agricultural & Resource Economics, UC Berkeley, Working Paper Series qt99n7v1bp, Department of Agricultural & Resource Economics, UC Berkeley.
    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. Karp, Larry, 2005. "Global warming and hyperbolic discounting," Journal of Public Economics, Elsevier, vol. 89(2-3), pages 261-282, February.
    4. Cropper, Maureen L & Aydede, Sema K & Portney, Paul R, 1994. "Preferences for Life Saving Programs: How the Public Discounts Time and Age," Journal of Risk and Uncertainty, Springer, vol. 8(3), pages 243-265, May.
    5. Robert J. Barro, 1999. "Ramsey Meets Laibson in the Neoclassical Growth Model," The Quarterly Journal of Economics, Oxford University Press, vol. 114(4), pages 1125-1152.
    6. Weitzman, Martin L., 1998. "Why the Far-Distant Future Should Be Discounted at Its Lowest Possible Rate," Journal of Environmental Economics and Management, Elsevier, vol. 36(3), pages 201-208, November.
    7. William D. Nordhaus, 2006. "The "Stern Review" on the Economics of Climate Change," NBER Working Papers 12741, National Bureau of Economic Research, Inc.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    discounting; climate change modeling; Stern Review; Markov Perfect Equilibria; Environmental Economics and Policy; C61; C73; D63; D99; Q54;

    JEL classification:

    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • C73 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Stochastic and Dynamic Games; Evolutionary Games
    • D63 - Microeconomics - - Welfare Economics - - - Equity, Justice, Inequality, and Other Normative Criteria and Measurement
    • D99 - Microeconomics - - Micro-Based Behavioral Economics - - - Other
    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming

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