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Discounting investments in mitigation and adaptation: a dynamic stochastic general equilibrium approach of climate change

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  • Rob Aalbers

    (CPB Netherlands Bureau for Economic Policy Analysis)

Abstract

We use a dynamic stochastic general equilibrium model to determine efficient discount rates for climate (mitigation and adaptation) and non-climate investment in the face of climate change. Our main result is that the non-diversifiable risk in the economy may be related to both shocks in aggregate wealth and shocks in global average temperature. Therefore, both aggregate wealth and global average temperature will carry a risk premium reflecting their contribution to the total amount of non-diversifiable risk. We characterize both climate and non-climate investments by means of a contingent claim and show that climate and non-climate investments will in general be discounted at different rates. We discuss the conditions under which the discount rates of climate investments will be lower than the discount rate of non-climate investments. September 2013: There is an updated version of this paper availlable, read CPB Discussion Paper 257.

Suggested Citation

  • Rob Aalbers, 2009. "Discounting investments in mitigation and adaptation: a dynamic stochastic general equilibrium approach of climate change," CPB Discussion Paper 126, CPB Netherlands Bureau for Economic Policy Analysis.
    • Handle: RePEc:cpb:discus:126
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    References listed on IDEAS

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    Cited by:

    1. Heuson, Clemens & Gawel, Erik & Gebhardt, Oliver & Hansjürgens, Bernd & Lehmann, Paul & Meyer, Volker & Schwarze, Reimund, 2012. "Ökonomische Grundfragen der Klimaanpassung: Umrisse eines neuen Forschungsprogramms," UFZ Reports 02/2012, Helmholtz Centre for Environmental Research (UFZ).
    2. Dietz, Simon & Gollier, Christian & Kessler, Louise, 2018. "The climate beta," Journal of Environmental Economics and Management, Elsevier, vol. 87(C), pages 258-274.
    3. Carel Eijgenraam & Ruud Brekelmans & Dick den Hertog & Kees Roos, 2017. "Optimal Strategies for Flood Prevention," Management Science, INFORMS, vol. 63(5), pages 1644-1656, May.
    4. Heuson, Clemens & Gawel, Erik & Gebhardt, Oliver & Hansjürgens, Bernd & Lehmann, Paul & Meyer, Volker & Schwarze, Reimund, 2012. "Fundamental questions on the economics of climate adaptation: Outlines of a new research programme," UFZ Reports 05/2012, Helmholtz Centre for Environmental Research (UFZ).

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    More about this item

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • H43 - Public Economics - - Publicly Provided Goods - - - Project Evaluation; Social Discount Rate
    • Q5 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics
    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming

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