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Discounting the Future: the Case of Climate Change

  • Ekeland, Ivar
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    According to the Stern Report on climate change, the course of the next fifty years is set: present policies will impact only in the very long term, fifty to two hundred years from now. There is no market for interest rates, so far into the future, and economists must find other ways to set interest rates in a coherent way. This paper reviews some of the methods which have been used. We start with the classical Ramsey model of economic growth, which remains a central reference in the current debate, and we study the determinants of the interest rate in that framework. We then adapt the model (and the results) to take into account various concerns, namely (a) the existence of the environment as a distinct, non-producible good, (b) uncertainty on the parameters or on the model (c) intergenerational equity.

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    File URL: http://basepub.dauphine.fr/xmlui/bitstream/123456789/3682/1/Cahier27_Ekeland.pdf
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    Paper provided by Paris Dauphine University in its series Economics Papers from University Paris Dauphine with number 123456789/3682.

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    Date of creation: 2010
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    Publication status: Published in Cahiers de la Chaire Finance et Développement Durable, 2010
    Handle: RePEc:dau:papers:123456789/3682
    Contact details of provider: Web page: http://www.dauphine.fr/en/welcome.html

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    1. Robert J. Barro, 2012. "Inflation and Economic Growth," CEMA Working Papers 568, China Economics and Management Academy, Central University of Finance and Economics.
    2. Karp, Larry S, 2004. "Global warming and hyperbolic discounting," CUDARE Working Paper Series 0934R, University of California at Berkeley, Department of Agricultural and Resource Economics and Policy.
    3. Martin L. Weitzman, 1998. "Gamma Discounting," Harvard Institute of Economic Research Working Papers 1843, Harvard - Institute of Economic Research.
    4. Kamihigashi, Takashi, 2001. "Necessity of Transversality Conditions for Infinite Horizon Problems," Econometrica, Econometric Society, vol. 69(4), pages 995-1012, July.
    5. Roger Guesnerie, 2004. "Calcul économique et développement durable," DELTA Working Papers 2004-02, DELTA (Ecole normale supérieure).
    6. Karp, Larry, 2004. "Non-constant discounting in continuous time," CUDARE Working Paper Series 0969, University of California at Berkeley, Department of Agricultural and Resource Economics and Policy.
    7. William D. Nordhaus, 1992. "Lethal Model 2: The Limits to Growth Revisited," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 23(2), pages 1-60.
    8. Michel, P., 1980. "On the Transversality Condition in Infinite Horizon Optimal Problems," Cahiers de recherche 8024, Universite de Montreal, Departement de sciences economiques.
    9. Gierlinger, Johannes & Gollier, Christian, 2008. "Socially Efficient Discounting under Ambiguity Aversion," IDEI Working Papers 561, Institut d'Économie Industrielle (IDEI), Toulouse.
    10. Robert J. Barro, 1999. "Ramsey Meets Laibson In The Neoclassical Growth Model," The Quarterly Journal of Economics, MIT Press, vol. 114(4), pages 1125-1152, November.
    11. 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.
    12. Nordhaus, William D, 1991. "To Slow or Not to Slow: The Economics of the Greenhouse Effect," Economic Journal, Royal Economic Society, vol. 101(407), pages 920-37, July.
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