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Discounting for Climate Change

Author

Listed:
  • Anthoff, David

    (ESRI)

  • Tol, Richard S. J.

    (ESRI)

  • Yohe, Gary W.

    (Wesleyan University, CT, USA)

Abstract

It is well-known that the discount rate is crucially important for estimating the social cost of carbon, a standard indicator for the seriousness of climate change and desirable level of climate policy. The Ramsey equation for the discount rate has three components: the pure rate of time preference, a measure of relative risk aversion, and the rate of growth of per capita consumption. Much of the attention on the appropriate discount rate for long-term environmental problems has focussed on the role played by the pure rate of time preference in this formulation. We show that the other two elements are numerically just as important in considerations of anthropogenic climate change. The elasticity of the marginal utility with respect to consumption is particularly important because it assumes three roles: consumption smoothing over time, risk aversion, and inequity aversion. Given the large uncertainties about climate change and widely asymmetric impacts, the assumed rates of risk and inequity aversion can be expected to play significant roles. The consumption growth rate plays four roles. It is one of the determinants of the discount rate, and one of the drivers of emissions and hence climate change. We find that the impacts of climate change grow slower than income, so that the effective discount rate is higher than the real discount rate. The differential growth rate between rich and poor countries determines the time evolution of the size of the equity weights. As there are a number of crucial but uncertain parameters, it is no surprise that one can obtain almost any estimate of the social cost of carbon. We even show that, for a low pure rate of time preference, the estimate of the social cost of carbon is indeed arbitrary ? as one can exclude neither large positive nor large negative impacts in the very long run. However, if we probabilistically constrain the parameters to values that are implied by observed behaviour, we find that the social cost of carbon, corrected for uncertainty and inequity, is 61 US dollar per metric tonne of carbon.

Suggested Citation

  • Anthoff, David & Tol, Richard S. J. & Yohe, Gary W., 2009. "Discounting for Climate Change," Papers WP276, Economic and Social Research Institute (ESRI).
  • Handle: RePEc:esr:wpaper:wp276
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    References listed on IDEAS

    as
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    1. repec:wsi:ccexxx:v:01:y:2010:i:01:n:s2010007810000029 is not listed on IDEAS
    2. repec:eee:ecolec:v:143:y:2018:i:c:p:253-275 is not listed on IDEAS
    3. Philippe Aghion & Antoine Dechezleprêtre & David Hémous & Ralf Martin & John Van Reenen, 2016. "Carbon Taxes, Path Dependency, and Directed Technical Change: Evidence from the Auto Industry," Journal of Political Economy, University of Chicago Press, vol. 124(1), pages 1-51.
    4. Steve Newbold & Charles Griffiths & Christopher C. Moore & Ann Wolverton & Elizabeth Kopits, 2010. "The "Social Cost of Carbon" Made Simple," NCEE Working Paper Series 201007, National Center for Environmental Economics, U.S. Environmental Protection Agency, revised Aug 2010.
    5. Richard S J Tol, 2018. "The Economic Impacts of Climate Change," Review of Environmental Economics and Policy, Association of Environmental and Resource Economists, vol. 12(1), pages 4-25.
    6. David Anthoff & Johannes Emmerling, 2016. "Inequality and the Social Cost of Carbon," Working Papers 2016.54, Fondazione Eni Enrico Mattei.
    7. Narita, Daiju & Tol, Richard S. J. & Anthoff, David, 2009. "International Climate Policy and Regional Welfare Weights," Papers WP332, Economic and Social Research Institute (ESRI).
    8. Simon Dietz & David Maddison, 2009. "New Frontiers in the Economics of Climate Change," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 43(3), pages 295-306, July.
    9. Tol, Richard S.J., 2013. "Targets for global climate policy: An overview," Journal of Economic Dynamics and Control, Elsevier, vol. 37(5), pages 911-928.
    10. Richard S. J. Tol, 2010. "International Inequity Aversion And The Social Cost Of Carbon," Climate Change Economics (CCE), World Scientific Publishing Co. Pte. Ltd., vol. 1(01), pages 21-32.
    11. Fabio Sferra & Massimo Tavoni, 2013. "Endogenous Participation in a Partial Climate Agreement with Open Entry: A Numerical Assessment," Working Papers 2013.60, Fondazione Eni Enrico Mattei.
    12. Andy Reisinger, 2011. "Interdisciplinarity: are we there yet?," Climatic Change, Springer, vol. 108(1), pages 23-30, September.
    13. John Whitehead & Ben Poulter & Christopher Dumas & Okmyung Bin, 2009. "Measuring the economic effects of sea level rise on shore fishing," Mitigation and Adaptation Strategies for Global Change, Springer, vol. 14(8), pages 777-792, December.

    More about this item

    Keywords

    Climate change/income elasticity/inequity aversion/pure time preference/risk aversion/Social cost of carbon/time horizon/uncertainty/policy/growth;

    JEL classification:

    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming

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