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Sacrifice, Discounting and Climate Policy: Five Questions

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  • Larry S. Karp

Abstract

I offer a selective review of discounting and climate policy. Analytic and numerical models show that different assumptions greatly change the degree to which decisions about climate policy depend on the discount rate. I discuss a claim that standard models exaggerate the current generation’s sacrifices needed to internalize climate damages. This claim, if correct, affects the role of discounting. I argue that the assertion that the risk of catastrophic damage overwhelms discounting is unfounded. I show that the claim that we “view the world in perspective” implies hyperbolic rather than constant discounting.

Suggested Citation

  • Larry S. Karp, 2009. "Sacrifice, Discounting and Climate Policy: Five Questions," CESifo Working Paper Series 2761, CESifo.
    • Handle: RePEc:ces:ceswps:_2761
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    1. Fujii, Tomoki & Karp, Larry, 2008. "Numerical analysis of non-constant pure rate of time preference: A model of climate policy," Journal of Environmental Economics and Management, Elsevier, vol. 56(1), pages 83-101, July.
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    6. Armon Rezai & Duncan K. Foley & Lance Taylor, 2016. "Global Warming and Economic Externalities," Studies in Economic Theory, in: Graciela Chichilnisky & Armon Rezai (ed.), The Economics of the Global Environment, pages 447-470, Springer.
    7. Minh Ha-Duong & Nicolas Treich, 2004. "Risk Aversion, Intergenerational Equity and Climate Change," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 28(2), pages 195-207, June.
    8. Karp, Larry & Tsur, Yacov, 2011. "Time perspective and climate change policy," Journal of Environmental Economics and Management, Elsevier, vol. 62(1), pages 1-14, July.
    9. Martin L. Weitzman, 2009. "On Modeling and Interpreting the Economics of Catastrophic Climate Change," The Review of Economics and Statistics, MIT Press, vol. 91(1), pages 1-19, February.
    10. Karp, Larry, 2005. "Global warming and hyperbolic discounting," Journal of Public Economics, Elsevier, vol. 89(2-3), pages 261-282, February.
    11. Traeger, Christian P., 2008. "Sustainability, Limited Substitutability and Non-Constant Social Discount Rates," Department of Agricultural & Resource Economics, UC Berkeley, Working Paper Series qt10d7d7n4, Department of Agricultural & Resource Economics, UC Berkeley.
    12. Traeger, Christian P., 2009. "The Social Discount Rate under Intertemporal Risk Aversion and Ambiguity," CUDARE Working Papers 55785, University of California, Berkeley, Department of Agricultural and Resource Economics.
    13. Karp, Larry & Tsur, Yacov, 2011. "Time perspective and climate change policy," Journal of Environmental Economics and Management, Elsevier, vol. 62(1), pages 1-14, July.
    14. 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.
    15. Traeger, Christian P., 2011. "Sustainability, limited substitutability, and non-constant social discount rates," Journal of Environmental Economics and Management, Elsevier, vol. 62(2), pages 215-228, September.
    16. 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.
    17. -, 2009. "The economics of climate change," Sede Subregional de la CEPAL para el Caribe (Estudios e Investigaciones) 38679, Naciones Unidas Comisión Económica para América Latina y el Caribe (CEPAL).
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    Cited by:

    1. Duncan Foley & Lance Taylor, 2013. "The Social Cost of Carbon Emissions," SCEPA policy note series. 2013-2, Schwartz Center for Economic Policy Analysis (SCEPA), The New School.
    2. Foley, Duncan K. & Rezai, Armon & Taylor, Lance, 2013. "The social cost of carbon emissions: Seven propositions," Economics Letters, Elsevier, vol. 121(1), pages 90-97.
    3. Millner, Antony, 2013. "On welfare frameworks and catastrophic climate risks," Journal of Environmental Economics and Management, Elsevier, vol. 65(2), pages 310-325.
    4. Hwang, In Chang, 2014. "Fat-tailed uncertainty and the learning-effect," MPRA Paper 53671, University Library of Munich, Germany.
    5. W. Botzen & Jeroen Bergh, 2014. "Specifications of Social Welfare in Economic Studies of Climate Policy: Overview of Criteria and Related Policy Insights," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 58(1), pages 1-33, May.
    6. Horowitz, John & Lange, Andreas, 2014. "Cost–benefit analysis under uncertainty — A note on Weitzman's dismal theorem," Energy Economics, Elsevier, vol. 42(C), pages 201-203.
    7. Stergios Athanassoglou & Anastasios Xepapadeas, 2011. "Pollution control: when, and how, to be precautious," DEOS Working Papers 1112, Athens University of Economics and Business.
    8. Ikefuji, Masako & Laeven, Roger J.A. & Magnus, Jan R. & Muris, Chris, 2015. "Expected utility and catastrophic consumption risk," Insurance: Mathematics and Economics, Elsevier, vol. 64(C), pages 306-312.
    9. Andrea Rampa, 2020. "Climate change, catastrophes and Dismal Theorem: a critical review [Klimawandel, Katastrophen und das „Dismal Theorem“: eine kritische Überprüfung]," Review of Regional Research: Jahrbuch für Regionalwissenschaft, Springer;Gesellschaft für Regionalforschung (GfR), vol. 40(2), pages 113-136, October.
    10. In Hwang & Frédéric Reynès & Richard Tol, 2013. "Climate Policy Under Fat-Tailed Risk: An Application of Dice," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 56(3), pages 415-436, November.
    11. Karp, Larry & Tsur, Yacov, 2008. "Time perspective and climate change policy," Department of Agricultural & Resource Economics, UC Berkeley, Working Paper Series qt04k4b21g, Department of Agricultural & Resource Economics, UC Berkeley.
    12. Hwang, In Chang & Tol, Richard S.J. & Hofkes, Marjan W., 2016. "Fat-tailed risk about climate change and climate policy," Energy Policy, Elsevier, vol. 89(C), pages 25-35.
    13. Karp, Larry & Tsur, Yacov, 2011. "Time perspective and climate change policy," Journal of Environmental Economics and Management, Elsevier, vol. 62(1), pages 1-14, July.
    14. Armon Rezai, 2011. "The Opportunity Cost of Climate Policy: A Question of Reference," Scandinavian Journal of Economics, Wiley Blackwell, vol. 113(4), pages 885-903, December.

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    More about this item

    Keywords

    climate change; discounting; intergenerational conflict; catastrophic risk; hyperbolic discounting;
    All these keywords.

    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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