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The social discount rate under a stochastic A2 scenario

Author

Listed:
  • Rob Aalbers

    () (CPB Netherlands Bureau for Economic Policy Analysis)

  • Marjon Ruijter

    (CPB Netherlands Bureau for Economic Policy Analysis)

  • Kees Oosterlee

    (CWI)

Abstract

Using a general equilibrium model in which both capital productivity and temperature are uncertain, we show that the social discount rate (SDR) will decline from 1% in 2010 to 0.6% in 2300 under the conventional, quadratic specification of the damage function, and to -2.0% under the reactive specification of the damage function. Moreover, interaction between economic and climate risks further lowers this estimate of the SDR by 0.9%. Surprisingly, the decline of the SDR never starts before 2100. We attribute this to the slow response of the earth's climate to increases in radiative forcing, thus highlighting the critical importance of properly taking into account the long-term dynamics of the climate system for the SDR. Interestingly, a substantial part of the decrease in the SDR under the reactive specification can be attributed to the presence of a term premium in long-run bonds.

Suggested Citation

  • Rob Aalbers & Marjon Ruijter & Kees Oosterlee, 2014. "The social discount rate under a stochastic A2 scenario," CPB Discussion Paper 296, CPB Netherlands Bureau for Economic Policy Analysis.
  • Handle: RePEc:cpb:discus:296
    as

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    References listed on IDEAS

    as
    1. Nicola Bruti-Liberati, 2007. "Numerical Solution of Stochastic Differential Equations with Jumps in Finance," PhD Thesis, Finance Discipline Group, UTS Business School, University of Technology, Sydney, number 1, january-d.
    2. Fang, Fang & Oosterlee, Kees, 2008. "A Novel Pricing Method For European Options Based On Fourier-Cosine Series Expansions," MPRA Paper 9319, University Library of Munich, Germany.
    3. Fang, Fang & Oosterlee, Kees, 2008. "Pricing Early-Exercise and Discrete Barrier Options by Fourier-Cosine Series Expansions," MPRA Paper 9248, University Library of Munich, Germany.
    4. Jaume Masoliver & Miquel Montero & Josep Perello & John Geanakoplos, 2013. "Uncertain Growth and the Value of the Future," Cowles Foundation Discussion Papers 1930, Cowles Foundation for Research in Economics, Yale University.
    5. Yongyang Cai & Kenneth L. Judd & Thomas S. Lontzek, 2013. "The Social Cost of Stochastic and Irreversible Climate Change," NBER Working Papers 18704, National Bureau of Economic Research, Inc.
    6. Gollier, Christian, 2016. "Gamma discounters are short-termist," Journal of Public Economics, Elsevier, vol. 142(C), pages 83-90.
    7. repec:hrv:faseco:33373344 is not listed on IDEAS
    Full references (including those not matched with items on IDEAS)

    More about this item

    JEL classification:

    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • H43 - Public Economics - - Publicly Provided Goods - - - Project Evaluation; Social Discount Rate
    • Q51 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Valuation of Environmental Effects
    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming

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