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Modified Ramsey Discounting for Climate Change

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  • Tol, Richard S. J.

Abstract

The Ramsey rule for the consumption rate of discount assumes a transfer of money of a (representative) agent at one point in time to the same agent at another point in time. Climate policy (implicitly) transfers money not just over time but also between agents. I propose three alternative modifications of the Ramsey rule to account for this. Taking the Ramsey rule as given, I derive an intuitively clear but ad hoc modification. Using the assumptions underlying the Ramsey rule, I derive a consistent but more elaborate modification. If the discount rate is differentiated by victim, the consistent modified Ramsey rule is simpler and identical to regional equity weights. I apply the modified Ramsey rules to estimates of the marginal damage costs of carbon dioxide emissions. The results confirm that optimal climate policy has differentiated carbon taxes. Results also show that the standard Ramsey rule drastically underestimates the social cost of carbon.

Suggested Citation

  • Tol, Richard S. J., 2011. "Modified Ramsey Discounting for Climate Change," Papers WP368, Economic and Social Research Institute (ESRI).
  • Handle: RePEc:esr:wpaper:wp368
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    References listed on IDEAS

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    1. Richard Tol, 2002. "Estimates of the Damage Costs of Climate Change, Part II. Dynamic Estimates," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 21(2), pages 135-160, February.
    2. Anthoff, David & Tol, Richard S.J., 2010. "On international equity weights and national decision making on climate change," Journal of Environmental Economics and Management, Elsevier, vol. 60(1), pages 14-20, July.
    3. Marc Fleurbaey & Stéphane Zuber, 2012. "Climate policies deserve a negative discount rate," Working Papers halshs-00728193, HAL.
    4. Martin L. Weitzman, 2009. "On Modeling and Interpreting the Economics of Catastrophic Climate Change," The Review of Economics and Statistics, MIT Press, vol. 91(1), pages 1-19, February.
    5. Frances Ruane & Xiaoheng Zhang, 2007. "Location Choices of the Pharmaceutical Industry in Europe after 1992," The Institute for International Integration Studies Discussion Paper Series iiisdp220, IIIS.
    6. Schelling, Thomas C, 1992. "Some Economics of Global Warming," American Economic Review, American Economic Association, vol. 82(1), pages 1-14, March.
    7. Richard Tol, 1999. "Spatial and Temporal Efficiency in Climate Policy: Applications of FUND," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 14(1), pages 33-49, July.
    8. Anthoff, David & Hepburn, Cameron & Tol, Richard S.J., 2009. "Equity weighting and the marginal damage costs of climate change," Ecological Economics, Elsevier, vol. 68(3), pages 836-849, January.
    9. Fankhauser, Samuel & Tol, Richard S.J. & Pearce, David W., 1998. "Extensions and alternatives to climate change impact valuation: on the critique of IPCC Working Group III's impact estimates," Environment and Development Economics, Cambridge University Press, vol. 3(01), pages 59-81, February.
    10. Richard Tol, 2002. "Estimates of the Damage Costs of Climate Change. Part 1: Benchmark Estimates," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 21(1), pages 47-73, January.
    11. Richard S. J. Tol, 2009. "The Economic Effects of Climate Change," Journal of Economic Perspectives, American Economic Association, vol. 23(2), pages 29-51, Spring.
    12. Tol, Richard S. J., 2001. "Equitable cost-benefit analysis of climate change policies," Ecological Economics, Elsevier, vol. 36(1), pages 71-85, January.
    13. Seán Lyons & Karen Mayor & Richard S.J. Tol, 2008. "Environmental Accounts for the Republic of Ireland: 1990-2005," Papers WP223, Economic and Social Research Institute (ESRI).
    14. Kristen A. Sheeran, 2006. "Who Should Abate Carbon Emissions? A Note," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 35(2), pages 89-98, October.
    15. Christian Gollier, 2010. "Discounting, Inequalities and Economic Convergence," CESifo Working Paper Series 3262, CESifo Group Munich.
    16. 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.
    17. David Pearce & Ben Groom & Cameron Hepburn & Phoebe Koundouri, 2003. "Valuing the Future," World Economics, World Economics, 1 Ivory Square, Plantation Wharf, London, United Kingdom, SW11 3UE, vol. 4(2), pages 121-141, April.
    18. 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.
    19. Nicholas Stern, 2008. "The Economics of Climate Change," American Economic Review, American Economic Association, vol. 98(2), pages 1-37, May.
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    Cited by:

    1. Yingying Lu & David I. Stern, 2016. "Substitutability and the Cost of Climate Mitigation Policy," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 64(1), pages 81-107, May.
    2. Basurto, Saul, 2016. "A Mexican Ricardian analysis: land rental prices or net revenues?," 90th Annual Conference, April 4-6, 2016, Warwick University, Coventry, UK 236362, Agricultural Economics Society.
    3. Cherp, Aleh & Vinichenko, Vadim & Jewell, Jessica & Suzuki, Masahiro & Antal, Miklós, 2017. "Comparing electricity transitions: A historical analysis of nuclear, wind and solar power in Germany and Japan," Energy Policy, Elsevier, vol. 101(C), pages 612-628.
    4. Vally Koubi & Sebastian Stoll & Gabriele Spilker, 2016. "Perceptions of environmental change and migration decisions," Climatic Change, Springer, vol. 138(3), pages 439-451, October.
    5. Mark van de Logt, 2016. "?The Most Dangerous Man on the Planet\," Proceedings of International Academic Conferences 3505987, International Institute of Social and Economic Sciences.
    6. repec:eee:rensus:v:74:y:2017:i:c:p:824-834 is not listed on IDEAS
    7. Moritz Bohland & Jana Lippelt & Ana Maria Montoya Gómez & Thomas Ruppert & Marie-Theres von Schickfus, 2015. "Kurz zum Klima: Im Vorfeld der Weltklimakonferenz in Paris," ifo Schnelldienst, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, vol. 68(22), pages 56-63, November.

    More about this item

    Keywords

    Climate change/discount rate/equity/Ramsey rule/Social cost of carbon;

    JEL classification:

    • H43 - Public Economics - - Publicly Provided Goods - - - Project Evaluation; Social Discount Rate
    • D63 - Microeconomics - - Welfare Economics - - - Equity, Justice, Inequality, and Other Normative Criteria and Measurement
    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming

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