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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 Group Munich.
  • Handle: RePEc:ces:ceswps:_2761
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    File URL: http://www.cesifo-group.de/DocDL/cesifo1_wp2761.pdf
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    References listed on IDEAS

    as
    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.
    2. 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.
    3. 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.
    4. 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.
    5. Karp, Larry, 2005. "Global warming and hyperbolic discounting," Journal of Public Economics, Elsevier, vol. 89(2-3), pages 261-282, February.
    6. 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.
    7. 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.
    8. Armon Rezai & Duncan Foley & Lance Taylor, 2012. "Global warming and economic externalities," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 49(2), pages 329-351, February.
    9. 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.
    Full references (including those not matched with items on IDEAS)

    Citations

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    Cited by:

    1. Millner, Antony, 2013. "On welfare frameworks and catastrophic climate risks," Journal of Environmental Economics and Management, Elsevier, vol. 65(2), pages 310-325.
    2. 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.
    3. 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.
    4. 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.
    5. 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.
    6. 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.

    More about this item

    Keywords

    climate change; discounting; intergenerational conflict; catastrophic risk; hyperbolic discounting;

    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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